We own the Rock
The Treasury has this morning massively it is providing for Northern Rock.
The Rock feared that there would be demands for huge repayment of loans it has received from financial institutions, when they fall due on December 31 and January 1.
And there is a risk of further lumpy demands for cash from lenders and depositors in the coming weeks.
So today the Treasury has provided reassurance to those wholesale lenders, by saying that they will not suffer losses if they leave their cash in place.
It means that most of the Rock's balance sheet is now covered by government guarantees.
In a technical sense, it means that the gross exposure of the taxpayer is more than £100bn.
Or to put it another way, the public sector is now directly or indirectly funding all of the Rock's mortgage lending.
The important point is that there is no economic difference for the Treasury between providing a direct loan through the Bank of England or providing a guarantee against losses to someone else who has provided a loan.
So in order to calculate the financial exposure of the public sector to the Rock, you have to add together the £26bn of tax-payer backed loans actually made to the troubled bank and the commercial loans and deposits that are now subject to a Treasury guarantee.
And on the basis of the put out this morning by the Treasury, more-or-less the entirety of the Rock's business has been underwritten by all of us.
But don't be too alarmed.
It doesn't mean we're at risk of losing £100bn.
Most of the Rock's lending is underpinned by assets, in the form of the houses owned by its customers.
Even so, today's announcement by the Treasury shows how high the stakes have become.
To many it will look like nationalisation.
But funnily enough the Treasury has provided the additional guarantees to increase the chances that the Rock can avoid formal nationalisation.
Without the stability that this extension of the government protection should bring to the Rock's finances, the bank could have collapsed early in the New Year.
The chancellor is tiding the Rock over, to facilitate a last-ditch attempt in January to steer the bank into the embrace of one of its putative rescuers.
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"But don't be too alarmed.
It doesn't mean we're at risk of losing £100bn."
No, more like £50bn. That's the value of NR's assets that will be wiped out by the house price correction, which has already started.
"But don't be too alarmed.
It doesn't mean we're at risk of losing £100bn."
True to some extent, but there is a huge reason to be worried - namely the effects on monetary and fiscal policy of the exposure of public funds. NR's lending was so reckless (up to 120% of house value) that Govt policy (the BoE is not independent as 7 of the 9 on the MPC owe theior positions to the Treasury and have failed to keep rates at a proepr level for 5 years already) will now be driven by the need to keep house prices up to maintain the value of the security against which the loans were given. Int rates will be cut again, just fuelling inflation and debt, when a steady position and gentle fall in house prices is required to put the economy back on the level. Savers will lsioe as inflation takes off, while first-time buyers will be unable to buy or, if they can, will have less for current consumption.
This wretched bank should have been allowed to go to the wall.
The increased government guarantee does not mean that funding pressures will relent on possible bidders - only an easing of overall credit market environment can do that. (And as Robert says is what the government is relying on. I think this is misplaced - but then as the government has no other options than nationalisation, what could they do?)
Furthermore it suggests that NR is in more trouble than just approx £25 billion of BoE lending can relieve. Nor does it mean that lenders will be happy to lend to NR - for example would the government guarantee cover the full interest payments and over what term would the guarantee cover? Surely not beyond the February limit on State aid. So anyone with a longer term loan coming up for renewal probably wont want to lend long. This should make NR's borrowings even more short term than before.
Keith
"No, more like £50bn"
Even if the housing market corrected by 50% (unlikely), then the loss would only be £50bn if all NRs mortgages were 100% LTV (not the case), and all their mortgagees lost their jobs and couldn't pay the mortgage anymore (very unlikely).
A more reasonable guess might be £5-£10bn as a worst case?
From reading a number of Mr Pestons articles it would appear that he does have a grasp of finance and economics, and some good sources to provide him with 'sccops'.
But why oh why does he persist in writing in a style more suited more lurid tabloids than a reputable new provider.
Providing a guarantee is a contingent liability ,not a loan, and so i would argue that although northern rock is reciving support this is not the same as the govenment funding it as no further money has changed hands and might never do so.
I do wish Mr P would stick to reporting the news rather than trying to create it
I should like to wish young Robert Peston a very happy Christmas ~ but this year I have sent the turkey to Northern Tim Rock.
There is no big difference between providing these guarantees, and providing the equity injection that would shield the private loans from most of the losses that might happen. What is critical now is that the government must insist that any private equity "rescue package" takes on responsibility for all the liabilities and exits the public money from day one, or else we will all be subsidising a pretty major free ride for the new owners. If this is not the case, and liquidiation is not an option, the public needs to take actual ownership and find the exit somewhere down the line.
Is this effective nationalisation?
It seems to be in all but name. If we are guarnteeing all of the loans then surely the best option would be to bring in outside managers to ensure that
1) the viable parts of the business are protected to ensure that they may be sold on at the best possible price and to ensure that the business remains viable in some sort or other.
2) the damage to the UK finances are contained within Northern Rock and it is not allowed to spread elsewhere.
3) We do the very best to get the taxpayers guarantees repaid over a reasonable period of time.
4) as many of the jobs can be protected.
Surely any idea of the bank remaining as a viable entity outside of government hands has now gone.
The financial world has effectively demanded its money back and no one is going to be able to get £ 100 billion or whatever is required to refinance the loans in one organisation.
Deeper....and deeper...and deeper!!
Keith (post1) is right, these "assets" underpinning the Rock's loans are depreciating assets.
I believe that clown Applegarth introduced 100%+ mortgages, i.e roll up all your borrowing into one ( were 125% mortgages on offer ??)
I can see no way that the Taxpayers are going to get out of this without taking a serious hit.
The Rock should be nationalised now, giving the shareholders absolutely nothing.It should then be run down in an orderly manner, i.e disposing of the mortgages etc etc
Talk about throwing good money after bad! ...
Alistair Darling equals Nick Leeson mutiplied by about a thousand.
'underpinned by assets, in the form of houses owned by their customers '
Nay, nay and thrice nay.
The assets are the morgages not the houses and those are owned by the bank not the bank's customers.
If the bank wished to call on those assets it could only do so by fore-closing those morgages and selling on the houses. Can anyone see a situation in which The Treasury or the BoE allowing such a thing?
Given such a course of action is beyond the pale politically does it not mean that in political terms, NR has no assets to call upon? And with no assets there is no value? If I were an institutional lender to NR I would make appoint of calling on that guarantee and move my money on to somewhere both more profitable and less subject to extraordinary uncertainties.
It's all a a bit 'emperor's new clothes'. I just wonder how many out there in the markets will see it that way and act accordingly.
This is surely just warming us up to the inevitable nationalisation early in 2008. By indicating now that the Rock is 100% dependent on government guarantees the move to immediate nationalisation after administration (to take out the shareholders' absurd posturing on non-existent share value) will be accepted as reflecting reality. This is not the least worst option quoted this week but the only basis on which government funding can continue over the years required to work out the loan book in an orderly way.
It's nationalised in all but name so the government may as well come out and say it.
Sorry shareholders but it looks like you are going to get nothing!
The best scenario for UK taxpayers and NR employees is to nationalise it and incorporate NR into National Savings and the Post Office.
Administering the savings accounts in post offices would increase footfall considerably in post offices to keep many post offices open and the increased income from the savers would help keep the post office viable in many areas.
Keep the mortgage adminstration centre open to continue to run NR's mortgage book and incorporate the Post office mortgages into the NR book.
A long term solution for employment and to ensure that our money is safe.
De facto nationalisation, kicking a few whinging capitalists in the teeth, and the potential to own a new generation of council houses all in one go. Genius!!
Welcome to Economic Fascism - maybe we've all underestimated Gordon Brown?
Oh please...that's enough about Northern Rock now. It's all so unbelievably tedious.
#1 Nonsense!
NR's average loan to value ratio is around 60%, so a massive house price fall would be required to result in any significant losses at all, and then only in the event of a 'fire sale', which would be an inappropriate response to the present situation when a cyclical correction will inevitably come round in due course.
In past periods of falling house prices, most of the minority of people in the UK who ended up with negative equity - no matter who their lender was - still paid their mortgage and simply rode out the storm. This time will be no different and the shortage of accommodation in this country to meet future population growth will ensure that a downturn is shortlived.
De facto nationalisation, kicking a few whinging capitalists in the teeth, and the potential to own a new generation of council houses all in one go. Genius!!
Welcome to Economic Fascism - maybe we've all underestimated Gordon Brown?
Oh to be a UK bank.You make mistakes and the Government throws money and guarantees at you.If you are a normal business,you're on your own,if you make mistakes!
"We own the Rock"
You're just taking the pee now. Like the wind up merchant who finally can't keepo his face stright anymore.
I look forward to your christmas day blog on the rock, and all the armchair financial whizzes responses.
Northern Rock is underwater. Rocks do not float. It is sinking and Darling is holding onto it, with the country's chequebook in his pocket.
Close it down ASAP, and sell off its assets and book of loans in an auction. My calcs on the numbers are this: £100 bn book value of Rock's loans. Overstated at the boomtime, and now sliding; more likely to be worth only £60-70bn (max). These are such intangible assets their monetary value cannot be realised at all. That value of mortgages equals +100,000s of people's homes. Are the Gov, or Rock buyers going to repossess that many houses, and if these were all put up for sale at the same time, house prices would dive even further. What a hash, the NR company is dead, and the banking sector determined to crash no matter how much money gov or banks plough in, so Gov and central banks stop putting the money in.
Stop digging Darling!
Put NR out of its misery and take the lot in hand. Shareholders will lose the lot and quite a few of your MP mates will probably lose their cushy seats.
Get someone to run the bank in an orderely manner as you can and salvage what you can for the taxpayer. Sell the lot when the massive dust cloud over the whole banking system settles. Then RETIRE
Robert Peston wrote:
"The important point is that there is no economic difference for the Treasury between providing a direct loan through the Bank of England or providing a guarantee against losses to someone else who has provided a loan."
Point of information, Mr Peston: it will make a HUGE economic difference if the BofE provide the £100bn funding (as opposed to just guaranteeing it). By providing that £100bn of funding, it means that whichever sources were previously providing it now have it in their possession, and I dare say that an extra £100bn sloshing around the system would make a big difference. After all, the police couldn't receive a £14m backdated pay increase for fear of the effect that small amount would have on inflation...
Today's announcement looks like an attempt to encourage wholesale lenders to lend to Northern Rock, possibly as a way of replacing the current £25bn emergency BofE loans. If so, this might be sufficient to take the political pressure off, and we might see a proper market solution play itself out.
So the financial sector have been selling each other dodgy financial instruments, paying each other huge bonuses, and now, when the scam has been exposed, the taxpayer has to pay to clean up the mess. This is absolutely outrageous. I work as a software engineer in the electronics sector, and we can't get away with this kind of behaviour. I am no socialist, but I would like to see an emergency super-tax levied on all companies in the financial sector, and on all employees earning over £40000 (say) in the financial sector to pay for any losses incurred to pay for this. The shareholders of NR should also lose their entire holdings without compensation.
Clowns & Jokers!
How come the BoE is now using public money to guarantee commercial lending in Northern Rock, when it is clear that the bank has already in effect failed and should be wound up. If the Tresury in the form of available BoE loans has £100B spare then it would do much better to keep this in reserve to help out the millions of home owners who face the prospect of negative equity, home repossessions and personnel debt misery, even personal bankrupcy, and the inevitable unemployment rise brought about by the rash lending policies of banks like the Northern Rock and most of the other UK banks that have seen house inflation and debt levels spiral out of control, fuelled by thier actions. Frankly, if this is their idea of economic competence then Gordon Brown & Alistair Darling need a rather rapid re-education in basic maths. House prices in the UK are over inflated and need to be allowed to gently readjust downwards, by keeping those institutions that recklessly borrowed to fuel the bubble harmfree the government is likely to create a very hard landing, leading to a deep and lasting recession.
Therefore Mr Brown, I have a bit of free advise:-
Remove all the corporate guarantees that the BoE have given Northern Rock immediately and let the banks that lent the money loose their money.
Either nationalize NRK and then liquidate it to get back the rest of the £26B of our money or let it fail on it's own and only give personal guarantees to individual depositors.
Sack Mervyn King and the rest of the BoE board for putting such a huge amount of our money at risk - oh! and without any huge payouts for thier incompetence.
Sack Alistair Darling as Chancellor for letting this all happen.
And finally when things are a lot more stable, quietly resign youself as your reputation is now Shot!
I've got my eyes on a wonderful British car builder that's liable to be taken over by an Indian one..
If I pretend it's a bank do you think Alistair Darling will give me the money to buy it?
While the prospects of selling Norther Rock as a going concern are diminishing by the day, it seems that the so-called 'Chancellor' (we all know who the real one is!)is pouring in taxpayers' money as fast as he can. Why can he not see that NR should go bust, the mortgage book (and any other assets) be sold to pay creditors and everyone go on their merry way? It wouldn't bring down the banking system as NR is a very minor player, depositors' funds are underwritten (by us mug taxpayers, of course) and the problem would be solved. The only losers would be shareholders - but that's the risk shareholders take - we are constantly warned that share prices can go down as well as up. It would also be a salutary lesson to bankers whose business models don't stand up to sufficient scrutiny or, in the City boys' jargon', 'stress test'.
If NR sinks, it would be a footnote in a dusty history of banking, no more, no less,and teh fuss would be over. I suspect some political input: NR is in Labour heartland country. If it had been the Cheltenham and Gloucester, for example, where they weigh the Tory vote rather than count it, it would have gone to the wall back in September and Gordon Brown wouldn't have been able to wipe the smile off his expensive new teeth!
Robert, you imply that most of the Rock's balance sheet is now guaranteed, and an earlier headline on the website said 'all institutional investors are guaranteed'.
What about subordinated bond holders?
I have always wanted to own a building society. Well done the Govt.
Some findings on Northern Rock you all should think about:-
-Mortgage loans of over 90% of the purchase price have gone up to £16Bn,from 2.7Bn in 3 years.
-Loans have exceeded value on nearly 2500 homes to a value of £263 million,3 years ago it was just £13 million on 158 homes.
-10,000 Northern Rock customers are a month or more in arrears(worth nearly 1.2Bn).In 2003 it was only 2500 in arrears worth £i68.8 million.
-In 2003 Northern Rock repossessed 80 homes,by the end of September this year they have repossessed 912.
-Over 70% of Northern Rocks mortgage portfolio is owned by an offshore company in Jersey.
This should make you worried about what the government has got itself into.
If you look at the NR website and their current remortgage deals in place for current mortgage holders you will see that already there has been a consdierable tightening in NR's stance re mortgages.
For a person with a £ 100,000 loan on a property worth £ 120,000 with 20 years remaining on their mortgage is looking at an APR of approx 8% on a new deal.
The best two year deal has a 3.5% application fee (£3,500 on our £100,000 loan). When people come off their current deals they will be stuck with the Standard Variable Rate or one of these deals. If you look at the application fees there are some very high figures involved.
If they move elsewhere to another lender then the remortgaging will repay the loan to NR. I can see the following scenario over 2 to 3 years.
Most of the current deals will end resulting in one of two options.
a) The good quality risks will probably get better deal elsewhere and their mortgages will be repaid greatly reducing the amount outstanding on NR's books. If the mortgage book is as good as some say then most of the mortgages on their current book will either be off the NR books or at much more profitable rate to NR.
b) For the high percentage mortgagees these customers they will be stuck paying SVR as they will struggle to get a remortgage deal elsewhere.
If this is managed properly by people who know what they are doing, so that rules out not only the current board but also Alistair Darling & Gordon Brown, the whole NR issue can be safely resolved at little cost to the UK taxpayer within 3 to 5 years.
John Thomas - no, you are incorrect - the NR may hold the mortgage but it can't force you to sell your house to recover it's money.
It will sell on the mortgage debts to some other company instead who will then become your mortgage provider, in effect.
#13 Ian Harris -
"The best scenario for UK taxpayers and NR employees is to nationalise it and incorporate NR into National Savings and the Post Office."
Full marks Mr Harris, I really think that is one of the most sensible suggestions I have seen in a long time. It would go a long way to solving both NR's and PO's difficulties at the same time.
#16, surely that depends on how the average is distributed. For example, if 60% of the book is at 100% LTV, and 40% at near zero, price falls are putting more than half of the mortgage holders in negative equity as we speak. Clearly that is unlikely to be the distribution, but it is also unlikely that we're talking about a uniform 60% LTV across the book, specially with the existence of 100% plus mortgages.
#16 - you are misinformed
Why is no one mentioning that over £50Bn of the mortgage assets are already secured against other lending (securitized). This type of lending has precedence against the Government unsecured lending - so all this talk of 60% LTV etc is immaterial. A small downturn in the housing market (say 10%) would have a great impact on the rocks mortgage book.
Northern Rock also specialised in some very high LTV products - up to 120%.
Not that secure eh!
Surely this is a good idea in the short term, as it may mean the the BoE need not to lend it any more money as financial companies would find it a less risky investment. This could only go well or very very wrong.
"But don't be too alarmed.
It doesn't mean we're at risk of losing £100bn."
I feel we should be alarmed. The competance of the Treasury and the BOE seems stretched by normal business. Now they have this on top. It looks more and more likely that tax payers will end up over the long term with a substantial bill even it the civil servants involved can manage this situation to the best of their (limited) abilities.
US banks have already written off around $100 billion and are about to write off something like another $100 billion+, the US FHLBs loaned over $90 billion over the last quarter against US mortgages, the FED has dropped its deposit rate by a percent already with more to come, Swiss banks appear to have written off around 10 billion Swiss francs, the UK central bank is covering the Rock for £100 billion... and now the combined central banks are going to lend another $550 billion at highly preferential rates to any "deposit-bearing institution", presumably with a bit of paper it claims is a debt of some sort?!!! Will they take CDOs, credit swaps...? Why not my backdoor mat? It's probably worth more! Not to mention the monolines, the US "Municipal" bond insurers who appear to need an undisclosed capital injection of billions. Will they be covering defaulting bonds sold to Australian and other municipalities? And that was just before breakfast!
This doesn't look like an ordinary cyclical recession to me and I've lived through three at least. They must be scared out of their tiny little minds. Of what?
"But don't be too alarmed.
It doesn't mean we're at risk of losing £100bn."
I feel we should be alarmed. The competance of the Treasury and the BOE seems stretched by normal business. Now they have this on top. It looks more and more likely that tax payers will end up over the long term with a substantial bill even it the civil servants involved can manage this situation to the best of their (limited) abilities.
Dose NR actually have any assets left? What is the state of its balance sheet? I wonder because the 'Granite' "charitable" trust based in Jersey seemed to be the beneficial owner of most of NR's assets last time I looked. What recourse does NR have over the assets sold to 'Granite'? I guess the answer is none - I hope I am wrong, but maybe I am not.
This whole business is an artificial nonsense. Who on earth let it happen? Who was in control? Obviously nobody! In the end the Treasury Mandarins are responsible. Our poor politicians simply do not understand - their staff should and if they do not, then they must go and go now. It is simply not a viable way for the civil servants to carry on to make obvious mistakes and massive errors of judgement and advice to Ministers and be immune from the repercussions. (The are many other disasters stacked up at the door of the Treasury such as the Private Public Partnership / Private Finance Initiative nonsense - twenty years of errors!)
As for NR. Close it NOW, TODAY. Put the legislation through parliament before Christmas. Stop it trading TODAY. Liquidate it. Manage the remaining assets 'professionally' (i.e. not through the Treasury / FSA or BOE) to recoup our investment.
#13 Ian Harris -
"The best scenario for UK taxpayers and NR employees is to nationalise it and incorporate NR into National Savings and the Post Office."
Full marks Mr Harris, I really think that is one of the most sensible suggestions I have seen in a long time. It would go a long way to solving both NR's and PO's difficulties at the same time.
"18. Charles wrote:
Oh to be a UK bank.You make mistakes and the Government throws money and guarantees at you."
Indeed. Clearly banking is the business to be in. 30% profits when you're inflating everything in sight. The government guaranteeing that you can't lose when you mess it all up and things start to deflate.
3 words, soft budget constraint,
Does what is going on at the moment, viz, the 'nationalisation' of NR and the massive injections of cash into the interbank markets, mean that as of now, maintaining a housing bubble is more important than controlling inflation? if so why?
Follow the money.
Who has actually gained from this debacle? Whose loans have been repaid with BoE guaranteed loans? Who has not lost their shirts?
Had any SWFs bought some of Granite's offerings?
The housing market was pumped up so somebody will have made profits there.
Who is about to profit?
Re #2 and #9 - why do people keep perpetuating this story about NR and 100%+ loans? Most FIs would be prepared to give a secured loan and an unsecured loan to the same person, providing they passed credit scoring and could afford it. This is what NR was doing.
Looking at the 2007 Govt Accounts ( Source ONS website), it looks like total public sector net assets at the end of 2006 are worth about £900 billion.
In light of this asset base aren't £ 100 billion of loans & guarantees for one mortage lender completely disproportionate?
What happens if there were to be another Northern Rock? At some point all these Govt guarantees must just stop being credible to the market - surely? Or am I missing something?
This just gets better and better...
And what if there is another Northern Rock in the not too distant future? Will the government expose another 100bn of tax payer's money?
#2 had it right. We are cutting interest rates at a time when they should be stable or even raised. Next year we are going to get bumper inflation and ever increasing levels of debt. The levels of credit card and mortgage debt are just not sustainable - people have been living beyond their means for far too long.
The Western economies are built on a foundation of debt-fuelled consumerism. That is a house of cards that will only take a slight puff of wind to blow over.
2008 could be the year the UK economy goes bang - taking us one step closer to Labour's dream of making Britain a socialist banana republic.
"a banana republic also typically has large wealth and income inequities, poor infrastructure, poor schools, a backward economy, low capital spending, a reliance on foreign capital and money printing, budget deficits, and a weakening currency."
Does that sound familiar?
Generalissimo Gordon must be very pleased with himself.
It must be Christmas !! -Roll up Roll up ye financial institutions. Go forth with recklessness in the sure knowledge that everything you do is guarenteed by Her Majesty's Government and the poor deluded civilians of UK Plc. Risk is to be banished forthwith from the kingdom - hurrah!!
It makes you proud to be British- not!
Does what is going on at the moment, viz, the 'nationalisation' of NR and the massive injections of cash into the interbank markets, mean that as of now, maintaining a housing bubble is more important than controlling inflation? if so why?
SimpleStu (point 11) makes so many lurid and unsubstantiatable points.
The book value of Northern Rock's loans will only slide if borrowers default in significant numbers, and there is no sign that this is happening. I suspect SS is confusing the value of the assets on which the loans are secured with the loans themselves.
Secondly, why would the government or Northern Rock want to repossess all the properties on which the mortgages are secured? If the loans are being serviced they can continue to be so, even if they are bought by another company.
If the bank is allowed to crash then possibly (presumably) these loans will become due immediately. Now that would be a disaster.
Has the Treasury lost the run of itself? What happened to much vaunted denials of moral hazard? It is incredible that the liabilities of a private company can be underwritten on an incrementally increasing basis. The ECB has 'made available' €500bn to help out banks stranded on deserted liquidity islands. Simple maths indicates that the ECB could only guarantee five NRs on today's figures. If a few dozen were to appear, would the ECB follow the Treasury? The likelihood is that several banks will have to fold in the next two quarters. Unlimited credit is recipe for careless management of investment portfolios. It is possible that governments will have to raise taxes over the next two years to cover central bank largesse. The worst scenario is that interest rates fall but credit confidence still remains low while inflation rises. The central banks then have a serious recessionary condtion on their hands. Stop guaranteeing liabilites to the banking sector. It will be as productive as threading water through a needle in the long term. The Treasury/BOE have made a total bags of things.
Surely the Rock is paying interest on its loan and that interest is going to the treasury, or am I wrong on this point?
The treasury is not receiving anything in return for the guarantee.
NR's assets are sound and the guarantees given by the BoE will never be called upon.
The only issue for the BoE (and the bidders battling it out to agree a "rescue plan") is whether BoE takes a hit on its loans -- and even then, we're talking about the interest and not the principal. In other words, BoE won't profit from its involvement but it won't make a loss (beyond interest on the loan) either.
Wouldn't it have been cheaper for the government to have guaranteed the savers deposits at the outset, forced a firesale of some of NR's assets to reimburse it for the above, then tell the company's shareholders and institutional bondholders to take a running jump?
After all, no shareholder or bondholder should be investing in any company if they do not know the risks and do not accept that they may lose all of their investment. At the moment the gov is propping up a failing company for the benefit of not just the savers but also all those who have had their snouts in the trough for the past few years
What a mess, so now the taxpayer is taking the liability without taking the control!
Time to nationalise NR and run the business down preferably by increasing the mortgage rates so people move their mortgages of their own accord.
Surely this last instalment in the NR saga is the most absurd. Only a fool would guarantee loans to a mortgage company when the first signs of a house price down turn are visible. NR is failed company, it should no longer be trading. I am beginning to wonder if this is Labour's ERM moment.
#11 John Thomas
Redeeming mortgages is not the only way a bank can recover cash.
Mortgages can be sold like any other asset. If you have a mortgage with NR then they own an obligation by you to pay interest to them for 25 years (or whatever term). They can sell the right to receive that income to another bank, and that would be the ultimate solution. In an ideal world, if they sold all their mortgages to, say, NatWest then they would have liberated enough capital to pay off all their borrowings and return their depositors all their money.
The big uncertainty at the moment is what is the true value of their mortgages. In the current disfunctional mortgage market caused by the US sub-prime scandal, there are few out their willing to speculate on the qualitly of NR's mortgage book.
NR themselves have stated that they have an excellent loan book with low loan to value ratios secured on good assets. Only a detailed look at their loan book would tell a buyer whether this was the case, or whether they have been lending 5 times incomes representing 125% of a property's value.
This is what is taking so much time. Nobody is going to want to pay for a pig in a poke!
The gov has invited Goldman Sachs to look into Rocks. I wonder have they invited China (their investment trust) to invest in the UK banking industry? They have not long ago invest a few billion dollars in BlackStone for 10% stakes. Surely, taking control of a bank in the UK would be interesting for them.
So the story continues from bad to worse.
The only conclusion one can draw is that nobody is in charge.
Next, we will discover that The Treasury team who are supposed to be resolving this shambles have already concluded that nothing can be done.
Eventually when all the king's horses and all the king's men cannot put The Rock together again we will discover that nobody will be responsible either.
I am not sure whether I want to laugh or cry.
I have to agree with the people who say NR should have been allowed to go to the wall. Yes, protect the innocent private depositors, but not the shareholders and commercial lenders who should know better. NRs business model was under stress over a year ago and this was common knowledge. Darling / Brown and NR looks just like British Leyland in the 70s to me. As before, Labour are wrecking my country.
There is a lot of nonsense talked about NR. The gov is offering guarantees for lenders to the Rock to leave their money there. It is of no consequence in the real world. Only if NR collapses will the guarantees be called on. And the gov is ensuring that it will not. If the housing market collapses NR will be the least of our concerns; but there again people will mostly sit tight and ride it out and the gov will have to do the same.
The offer of guarantees increases the prospect of the Rock being sold on.
Surely banks always lend out far more than they borrow, so there ought to be plenty of assets to cover the deposits.
Doesn't it get your GOAT?
The Greatest of All Time (GOAT) book was Mohammed Ali's life. A term highjacked by New Labour egos and spin 'Our Greatest Chancellor'(Blair & Brown) and now a Government of All Talents.
Rather a Government of All Toads, Taxes and Tallons!
The seeds of this crisis were sown by Gordon Brown in 1987 wrecking millions of pensions and savers plans along with small businesses.
'As you sow, so shall you reap!'
From the disastrous sale of Gold Reserves - no longer required - to the Iraq debacle - our brave troops broken - The Massive Wastage on unreformed NHS and unfunded Civil Servants Pensions and Billions of Debt.
Northern Rock was built on Sand just like New Labour's hype with Goats! Over-borrowing cannot be solved by an over-borrowed untrusted Government.
I think that the government need to stop puting our money into Northern Rock. Why should reckless, greedy bankers be bailed out by the government when they have clearly not done their job properly in the first place. I think it's a disgrace that the government have paid taxpayers money out to a failing business. I thought we allowed the free market economy to dictate whether businesses go under or not.
What I'm especially concerned about is that Northern Rock is the bank we know about but how many banks were employing the same sort of lending practices as Northern Rock? We cant bail them all out if they start going under.
Underwriting the NR loans means a bonanza for the banks that lend to them. Premium interest rates with little or no risk to the capital. This is as close to free money as we're likely to see.
Bad news for the other banks who need to rollover loans in the marketplace and don't benefit from the same guarantees.
Keith
Shame the government didn't feel the same way about bailing out MG Rover in 2005. The billions they have made available to Northern Rock would have kept MG Rover going for years and years. Shows that manufacturing is not considered to be important to the economy.
Has it ever been mentioned that when the bank of england is repaid, the tax payer will benefit from the cripling interest rates the 'lender of last resort' imposes.
Is it only me who can see the tax payer may actually benefit from this.
It is speculation from people like Peston, or Pest as i prefer to call him, that has magnified the issue that the bank is facing. Why does everyone forget the good work they do and the staff they employ.
Pest is not just on the side of the consumer, we need to remember he is a journalist, and likes to put a spin on things.
I hope there is a take over shortly, as this continued bad press is lowering the value of the company further - meaning the bank of england may be less likely to recoup funds.
Applegarth has now gone, why can't people start backing this local UK based company.
For two days we here nothing from Bob then low and behold 18/12 We own the rock following 4/12 Rock undermined by mkts 5/12 Rock and Nationalisation 7/12 Rock in the Zone 13/12 Rock and the Central banks 14/12 Rock Judgement day delayed. You really don't have anything else to talk about do you? Dull as dish water this topic. Let NRock run its course whatever that may be and let the staff face the future without the constant speculation [and it is that]. I agree with number 5 as well you're more akin to CNN than the ³ÉÈË¿ìÊÖ. Report the news dont try and make it.
Chris Morris just wrote "why can't people start backing this local UK based company"?
Er... I thought we all were. £2000 each at the last count.
A rudderless ship with a flawed model putting mindblowing amounts of taxpayers' money at risk... and that's just the Treasury.
Amazing how much bad news of flooding out of Westminster this week now that the government thinks the country's on holiday.
I really do not imagine that I am alone in viewing the Northern Rock as the tip of a monopoly money culture in the world of finance; where the reality is that non-existent money ie. real value is expanded and expanded beyond any rational measures of relating to the real world situation. The House of Cards culture; the hubris, means that the chickens eventually come home to roost. The bigger the organisation and the more ‘legitimate’ in the eyes of the world of finance the longer the day of reckoning can be delayed. Well, it seems the day of reckoning has come. The issue is that if the rest of the financial world acknowledges the real situation with Northern Rock then it could precipitate a swiftly growing avalanche. I wonder just how many boardrooms are thick with sweat and fear as they struggle to cloak the realities of their own situation. Meltdown is…maybe, only one withdrawal, one demand for a payment away.
I don't know about the technical details of banking, but I understood that it was the job of the governor of the Bank of England, and the Chancellor of the Exchequer to prevent this sort of thing happening. They failed, so they should be sacked.
Who would nationalise a failed company. This is what we did 50 years with rail, mines etc.
The taxpayer stands to lose billions.
What safeguards are there?
With this decision put to the British people or even parliament?
Chris Morris (20)
Emergency lending I believe is generally 100 bps over Base, currently so assuming that Northern Rock is borrowing 6.5% they're not doing to bad considering a much larger institution such as Citigroup has had to issue convertible bonds yielding 11% to raise funds. This does not suggest the BOE is making the best use of funds at its disposal.
Who would nationalise a failed company. This is what we did 50 years with rail, mines etc.
The taxpayer stands to lose billions.
What safeguards are there?
With this decision put to the British people or even parliament?
I look forward to the government re-possessing houses on behalf of the taxpayer. Will they dare, or will the taxpayer have to fund a new generation of state dependent home 'owners'?
Guess how many people will leave the UK rather than pay increased taxes and suffer under inflation.
House prices are going to slam into the floor.
I am a little bit confused, the latest guarantees and other actions by the Government, must mean that Northern Rock is likely to be nationalised in some form or another, leaving the shareholders with nil value - what is propping the share price up? Wishful thinking or am I missing something?
If the Rock is nationalised, will we all get a windfall on re-privatisation under the Tories?
Seriously though - NR has handled this crisis very badly indeed from Applegarth's first apologetic radio interview long after time to this request for further govt underwriting. No-one has really done anything wrong here - unlike Barings - but a bit of brave, proactive and positive management and direction might have avoided a run in the first place, whatever the emergency credit position was like.
It does not mean the tax payer is losing his/her money. As far as I can see the amount in my bank account is still the same.
It would be better if the ³ÉÈË¿ìÊÖ would try to find a journalist with some understanding of the workings of the financial industry.
So the NR has assets does it? Just how liquid are these assets? Here we have a bank that is in serious trouble. Its lenders want their money back. So to get their money back the NR could foreclose on all the mortgages they hold. How much money would NR be able to get back? Precious little I would say. 20% of all UK mortgages are handled by NR so millions of houses would suddenly come on the market at once causing a glut of property. Clearly that can't be allowed to happen, so in fact these "assets" are totally illiquid. No significant money can be taken from them. So how CAN the money be recovered? Only by waiting for the mortgages to be repaid - which will take rather a long time. Meanwhile the funding of NR sits on the books of UK PLC and we hope the people that took out mortgages with them remain solvent.
Hmm. 100bln - Nearly 10% of GDP.
Does this not mean every working person in the UK (roughly 30m people) now has to take the risk onto thier balance sheet to the tune of £3400?
So we shore up thier shoddy lending by a massive loan from each of us taxpayers so the big banks cannot lose any money?
Where on earth did you dig up the £100bn from? The trouble at N. Rock is that the dead-heads won't move over, and in fact are considerably slowing down the process of re-organisation.
Will the European Commission or more specifically the Commissioner responsible for Competition within the Union, allow the Government to Nationalise Northern Rock ? There is an ongoing case in Greece, where the Greek Government "pumped" money into Olympic Airways to keep the Airline aloft, and the latter are now required to re-imburse the Greek Government. In the past there have been similar cases e.g. Air France,
Crédit Lyonnais etc.
Any treasurer should be shot for having so much debt maturity concentrated around a year-end, another example of incompetence at this "bank". Darling now has a massive concentration risk of his own. What an idiot!
I think we should be alarmed.
Can the Treasury and the BOE deal competently with managing this complex situation through to a successful (i.e. zero cost) outcome for the taxpayer?
I doubt this very much,its way outside their comfort zone. In the long run it looks like an expensive at best resolution, at worst it might indeed cost a considerable fraction of the £100Bn together with inflation and higher tax consequences.
Robert
There are some intelligent viewersout there. I thought Efan Davies was bad but please just talk naturally , do not use hand gestures and just tell us the facts naturally. I know it is just because you are all sent on a traing course but your great message is being lost as we are distracted by this stupid gesticulating and over simplification. Some of are able to understand the real issues.
Thanks
Sorry i just can not understand why the goverment is putting loads of our tax payers money into any company,if they have made bad decisions its up to them.
So another day another government guarantee for the SS on the rocks. Now we are talking real money and this is a serious punt by Mother B. £50 to 60 billion of our money is now in play and the situation is unresolved. No wonder Ally D has been heard humming 'Yesterday' over his pie and mash. Matters were allegedly not helped by the Christmas card from Lloyds TSB and the warm wishes it contained for 2008. All his troubles are still to come and Tubby Isaacs told me that he is off his nosh sometiing terrible. The prospect of running the UK's fifth largest mortgage lender is bad enough but he has started to grasp that Mother B will need a patsy and his name is one of those prominently in the frame. Mother B is adopting the familiar pose of absence is the best course of action so there will be no lifeline from that direction. Meanwhile there is an ominous silence from Canary Wharf as the penny has dropped that the S in FSA stood for supervision and this is clearly not what has been happenning. Well the band is striking up again and this one has legs. Watch this space.
In the eighties we were told that printing money caused inflation and the Treasury/Bank of England's job was to control money supply to keep inflation down. I don't see the difference between the BoE printing tenners for the Treasury to give away, and its handing out cheap loans to people who have already shown they cannot be trusted with large amounts of money. Indeed, if the BoE will lend money at low rates to banks who don't trust each other as credit risks, why can't it "go direct", put adverts on satellite TV and start its own sub-prime mortgage business?
someone please put Northern Rock out of its misery - enough bungling!
To #31 dave ...me thinks you are not so right and that #57 matt is just about there... except-
5 times income = 125% was common. Actually 5 times still is... house values have only just begun to fall(let's not talk about flats* ...no need to talk ill of the dead!)
In the current climate the only true mark of the value of the loan book is to call in and sell the properties on which the morgages are held. But surely they can't do that?
Oh yes they can.
The bank can call in the loan at any time. In the terms and conditions this usually comes under the heading 'extraordinary circumstances'. Please remember, until the morgage is paid up, in full, the bank will always have the right to call in the loan. Usually it only does this because the morgagee hasn't kept up the payments, however, here we are talking about a bankrupt bank. In a situation where the the true ltv's are unknown, the only known known is the actual market value (sold price) of the property.
*I am an estate agent.
Northern rock was a building society. The members of the building society took the cash to become a bank. The leaders of Northern Rock paid themselves well and planned to be one of the big lenders, decided a new exciting busness model and were the darlings of the city. The leaders of Northern rock led their private company to disaster.
It turns out that the government and Bank of England are to blame and the taxpayer must foot the bill.
I think this is the banking sectors problem, they make huge profits why don't they put their own house in order.
I wonder if this government would have put all this tax payer's money at risk to this ill-managed bank if it had been the 'Southern Rock' based in Tunbridge Wells!
If the reporting of the Rock is tabloidesque then it is for one very good reason. The plot is like something out of Popeye.
Perhaps one more tin of spinach will do the trick, and restore Olive Oil's shattered nerves.
It won't. Globalisation = excess capital = easy credit = euphoria = housing bubbles = western banking crisis = no one having any idea where the floor might be in UK residential property
Post bubble values can collapse by 97 per cent. Last time round in 1992 you could pick up a house in the Isle of Wight at auction for £2000.
Perhaps at story's end Olive Brown and Popeye Darling will find a nice retirement cottage there for 7/6p in socialist seventies money having successfully papered over the cracks of the nation's finances. Or not.
It seems the conflation of a political decision about jobs and small depositers, with a real world shift in the tectonic plates underlying the pricing of risk on loans, may have led to the situation.
Perhaps the politicians thought they could finesse their way out of this...and in the not-so-distant past they would probably have had weeks if not months to manage the developments.
Today in the 24-hour-news-driven-internet things happen so quickly that it is just that the sheer velocity of the 'events, dear boy, events' that has caused the Bank of England, Treasury and the rest to keep making decisions that just seem that bit too slow, too little, or too 'wrong'.
The velocity of fundemental changes seemed, as far as can be seen at present, to have caught out the Northern rock management:What worked well one day just ---stopped --- working the next.
With, apparently, no plan B around ,they seem to have kept using Plan A while trying to think up a Plan B; but the velocity simply left them no time.
Enter the Treasury whose first pass seems to have been "How bad can it be?"... while identifying 'small' depositors and the staff jobs as the priority (and nothing wrong with that).
But in setting a 'solution' that was based on that initial working premise, it seems the speed at which events have continued has all too rapidly answered the "How bad can it be?" questions for them.
The problem is that the answers aren't just bad ...they seem to be outside the set parameters they had for defining 'bad'.
So I suppose I am saying: "It looks like a case of Political Calculation meets unforseen and abrupt step change in the Global Financial situation--- and Political Calculation comes unstuck"
A little like saying --- after the lorry crashes into the school, and not the lampost--- That:
It wasn't really the lorry being parked on the hill itself that caused it, or the handbrake being released as such... it was the leaving the door unlocked, that let the young boy climb in, that released the handbrake that set the lorry rolling.
But, even so, the one thing that caused it to hit the school not the lampost was the driver's desperate, and heroic, attempt to leap back on board as he raced after the rolling truck--- but succeeded only in nudging the steering wheel as he tried to in vain to get to the brake.
Oh!.. and I don't see how any of this can be laid at the door of Robert Peston.
At the risk of overloading the metaphor; it may be that as everyone flees the careering truck, that they see and hear a guy shouting the warning...and mistakenly think it was his lorry, or his boy who released the handbrake...and, whatever!... his fault.
Oh goody, so now we get to share in the downside of Northern Crock's mortgage liabilities without any apparent share in the upside.
Not that there's likely to be much upside since Gordon McBean and his Darling are still tightening the thumbscrews of taxation and monetary inflation against us all.
When is Preston going to leave NR alone I believe his reporting was responsible for the run on it in the first place. What about all the money going to Seb Coe plc and 2012??. I can only hope that Prestons pension fund has a large stake in the hedge fund that holds a large wedge of NR shares. Me yes I'm a small shareholder in NR, so I hope it has a happy ending, for the staff, customers, and shareholders who are real people you know
Please all read comments #68 and #67 and ignore all the other comments and you will have a really good idea of the true story so far.........
Would appear the free market of America has underpinned its citizens from further exposure from greedy bankers .The British Government however has chosen to shore up the banks in the (forlorn) hope that they will protect their customers with competitive interest rates .Surely I can't be right or am I being too cynical ?
I know reporters are to report their minds but christ, this is going way too far.
Its this simple. The taxpayer has not lost a single penny. Even if Northern Rock go bust (which I doubt) they have not lost nothing, they have gained the banks assets and made more money for the economy (probably to line their own back pockets).
37. Pierre Garenne
Yerp. Thats a lovely explantion on money. The TAXPAYER of the UK has not lost a penny, and if they had, it will be replaced (The lost money left in cyberspace for someone to collect). Costing about £3200 per tax payer? Seriously, its costing no one nothing. Taxes go up? Hey, they do all the time and its to fund people like our MP's pay rises and pensions that never get effected. People have to wake up and smell the bloody coffee... Northern Rock has done well compared to the rest of the market and to put the facts straight, Alot of the problem Northern Rock had are hidden with other Banks that are in much more doo doo than NRK - Solution: Make more money, more money (Lots of billions of pounds is sitting in cyberspace getting scooped up by MP's and god knows who). 1929, the stockmarket crash. Multi-millionaires were created and used to wipe someones backend.
Someone said Her Majesty's government?? You wish it was, and so would I. Her Majesty Queen Elizabeth II has no control over the government apart from the Title that has no power (Or I'm sure she would have had this resolved by her own words and mind, and not passing it around the table like the MP's do). Alot of people here in the UK seem to hate our Royals for alot of things, seriously... they should be thanked and always respected by the British Public and that includes those immigrants that disrespects them.
#61, Ray is showing his usual command of finance. Guarantees are not free, essentially you have to set aside the spread between the commercial rate Rock would borrow without the guarantee and the rate it is borrowing at now, discounted to some probability of default. Now 22bn cost sounds high but given the cost of default insurance - ie buying a credit default swap - and the low competence of the Treasury it would surprise me to them getting fleeced.
One should also point out that a large portion of the mortgages are already securitised which means we have no access to them and as far as we are concerned they don't exist. We are closer to shareholders in the sense that in the event of default we are second from last in line to get paid.
We must congratulate Darling on his market timing for entering the credit derivative and high-yield bond trading market[high-yield in the sense the debtor is low credit quality not that we are getting a high yield] just as others are cutting back. What a contrarian!!
Can anyone explain the fact that Northern Rock is still selling mortgages. Surely the mortgage book should be closed immediately and put in to run-off, thereby reducing liabilities week by week, or is the FSA prepared to regulate the treasury as the country's biggest mortgage lender?
Can we please stop all this sensationalist headline grabbing nonsense about the taxpayer is exposed to this, and the taxpayer has lent that.....people are forgetting that the loan the treasury is making to the Rock (taking a solid collateral base by the way) is earning a very attractive interest rate....the tax payer is making money...lets all just calm down, not be hasty, and wait till the credit markets settle a bit, then ensure a takeover goes smoothly....acting too quickly here, will do more harm through shareholder litigation and losses to many stakeholders
#94 "Globalisation = excess capital = easy credit = euphoria = housing bubbles = western banking crisis = no one having any idea where the floor might be in UK residential property". Quite so.
The problem didn't start with the "credit crunch" but with the lending bubble that preceded it. I'm not sure globalisation is the only root cause mind - lack of local regulation is also to blame (eg. failure to clamp down on offshore SIVs, CDOs etc, ignoring house price inflation when setting monetary policy, even going back to allowing the demutualisation of the building societies).
One additional thought. Isn't the recent growth in the banking sector very much part of the bubble itself? So if and when the bubble bursts and house prices fall by say 50% (back in line with long term real prices), then the demand for new loans in money terms will also halve, thus dramatically cutting the banks' turnover and revenue. If so then NR is unlikely to be the only bank to fail.
NOT QUITE A NR QUESTION (EVEN THOUGH SOME TWIT OF A REPORTER ON LAST NIGHTS NEWS WAS SAYING I WOULD BE FORCED TO SELL MY HOME)BUT I ASK THIS. I UNDERTSATND ALL OF THIS TROUBLE IS LINKED TO THE US SUB PRIME CRISIS - THOUSANDS ON LOW RATE FIXED TERM MORTGAGES COME TO AN END AND THEN ON TO MUCH HIGHER FLEXIBLE RATES WHICH THEY CAN'T PAY, DEFAULT ON LOAN, REPOSESSION, HOMELESSNESS TERRABLE KNOCK ON EFFECTS IN REST OF THE ECONOMIES(S). IF THE BANKS COULD SEE THIS COMING WHY DON'T THEY SIMPLY CONTINUE ON THE LOWER RATES ? SURELY GETTING A SMALLER AMOUNT REPAID IS BETTER THAN GETTING NOTHING (AND WORSE) BACK. COULD SOMEONE PLEASE EXPLAIN WHY THEY
GO FOR THE ALL OR NOTHING OPTION ?
The BoE hasn't actually lent any more money than before, but it has assumed a share of the risk (of default) which would normally be bourne by commercial lenders to Northern Rock. This is entirely separate from the emergency lending (at a suitably punitive rate) which was required to keep NR afloat.
While the emergency lending is reasonably similar to a normal commercial transaction, the provision of guarantees exposes the BoE to risk without commensurate reward. Not quite a direct subsidy, but still likely to attract the attention of European Competition Comissioners if it continues.
Keith.
Ref Post No.22 : Yummy Carol Kirkwood....is that your professional name by any chance ??
Please stop posting your inane drivel.
You obviously work for NR, are a shareholder or someother vested interest.
Regarding your last statement;
"and we might see a proper market solution play itself out."
The proper market solution would have been for this turkey to have gone bankrupt exactly the same as any other failed company (which is exactly what it is)
To Tony post 93;
More pertinent; if it was 'Southern Rock' based in the City of London, would the BoE have failed to help in the take over plan by Lloyds TSB in August which would have avoided this mess? Would the 'moral hazard' argument have been allowed to scupper the rescue of a large City institution? Would Robert have reported his 'scoop' with such glee and such irresponsibility if it was one of his City banking chums in trouble?. Think not.
Iain #104,
Your comment ".. the [Treasury loan] is making a very attactive interest rate .. " begs the question, attractive compared to what? Interest rates normally reflect the risk involved, and no one else in the market believes there is *any* interest rate that is attractive on a loan to NR. The loan is therefore cheap.
#104, repeating the same nonsense doesn't make it true.
a) Most of NR's mortages are already securitised. This means they don't belong to NR and are out of reach. They also happen to be the best quality mortgages.
b) The Treasury is a junior subordinate bond-holder. That means we are LAST in line after ALL the other creditors with the exception of the shareholders. So not only does the taxpayer not have access to these "great mortgages", we have to wait for everyone else to get their money back
c) Interest rates should reflect risk. This is how this whole issue came up. If I lend to someone who is a default risk at a slight spread to base then I am not making "more" money I am simply taking on more risk and not being compensated for it. Look at the rate NR is paying. It has got a five year rate for a few bips above the 3-month LIBOR rate ie what AAA rated banks get. So arguably the Treasury is making a loss as it could deploy the capital elsewhere, ie by taxing us less.
The staff of Northern Rock, their wives, husbands & kids would like to take this opportunity to wish Mr Peston and all of our other detractors seasons greetings and best wishes for a peaceful and prosperous 2008.
You know it must be extremely frustrating for everybody employed at NR. The staff are constantly harangued by Joe Public (as if 6,000 people were in on the funding strategy), they suffer daily abuse and negative speculation at the hands of the gutter media, in which I include the ³ÉÈË¿ìÊÖ, and still they turn up, suited and booted to ensure that the processes which enable NR to be the most efficient processor of mortgages in Europe remain intact, the loans are processed and all appropriate controls remain at the forefront of their thinking.
When I say the staff turn up, there are some notable exceptions - but apparently they're stressed out !
There is the ludicrous situation of loans rolling over, commercial banks being happy to renew those loans, but the BoE insisting that NR cannot renew these loans but MUST use funds from BoE - and the ensuing media storm rushes in - but because of Tripartite restrictions NR can say nothing. There is the more ludicrous situation where Mr Peston obtains info from a mole at the FSA, some factually correct, some not - but again NR are restricted from any comment - again a media storm ensues and the result, further damage to the brand.
The loans from the BoE....NR cannot comment when £2bn is loaned in which it has NO interest and still cannot comment when £5bn is loaned in which it has NO interest - where has that money gone do you think ? So again, no comment results in a media storm.
Surely these restictions on any comment whatsoever are hugely damaging and patently unfair - after all, whoever is in receipt of £5bn of funds is not subject to the same media storm as NR.
And as for the constant carping that the current situation has cost every taxpayer close to £2,000, PLEEZE ! That is absolutely laughable and the most lazy sensationalist kind of journalism you could imagine.
More balanced reporting is required and the ability for NR to counter some of the scurrilous inaccuracies that it is currently unable to respond to.
Its definitely not nationalisation... or even a decent investment...
Taking the downside risk, but having no claim on any upside risk...
Indeed with guarantees, there's unlikely to even be any interest coming back...
All of this done after the event, with the best of intentions... i.e retaining confidence in the banking system... but after years of failing to properly regulate the banks (plenty of additional bureaucracy... but nothing in the way of proper regulation).
The thing that worries me most about this problem is that this government have said we shouldn't worry.
#106
please don't worry, you will be fine...
The banks do not go for the all or nothing approach, that is the job of the media. And they are getting much, much worse at it.
On another news bulletin that evening a news anchor asked a BTL association spokesperson, what would happen if all residential property investors were to cash in on their rented out properties. Plainly ridiculous, never going to happen speculation.
Sensationalism and alarmism is what "makes" news. They do have to provide this service 24/7....
Robert
Having read your articles and many of the responses, it seems clear that the key question for evaluating whether the government's involvement in Northern Rock will end in tears is the quality of the Northern Rock loan book.
The defence of the government's involvement offered by quite a lot of people is that the Northern Rock loan book is good quality and the government will get its money back in full sooner or later. (Other people have done an excellent job of demolishing the other, not at all sensible, defence of ‘its only money created by the government so it doesn’t matter’).
The alternative view is that the government's involvement is reckless because the problem at Northern Rock is not simply liquidity but also solvency. The worst-case view is that NR has achieved the rapid growth in its mortgage book at the expense of the quality of its assets, and even with access to funding (as currently provided by the government) it will be unable to manage its existing business without becoming insolvent sooner or later.
The answer to this question can be found by due diligence and stress testing, setting up a variety of scenarios using different assumptions for default rates and the likely rate of recovery from defaulting borrowers (this would involve using different assumptions on the future state of the economy and house prices). However, the quality of any such stress testing depends on the quality of the information on the current situation, which in the case of Northern Rock is crucially dependent on the true state of current arrears, the financial standing of its borrowers (employed, self-employed, self-certified etc.) and its loan-to-value ratios.
I think we can assume that this is the kind of due diligence currently being carried out by the putative "bidders", but the big question is whether the government is carrying out the same kind of exercise.
The most frightening scenario is that the government has committed these huge sums on the basis of a belief that it has no alternative in view of the health of the banking system and because it shares the optimistic view that the Northern Rock balance sheet is solvent.
In the event that one of the bids for Northern Rock does proceed, the bidder and the funding banks it uses will have a pretty clear idea of what degree of priority they need over the government's lending in order to protect their exposure. If the government does not have the same degree of quality analysis and understanding, we are heading for yet another example of the taxpayer being taken to the cleaners when civil servants negotiate with the private sector. Unfortunately, the scale in this case is far greater than any commercial negotiation that the government has fumbled in the past.
As far as I can see, neither opposition politicians nor journalists have really tried to tackle the government on how much it knows about Northern Rock and whether it is doing its own due diligence on at least the same scale as the bidders. I find this both surprising and worrying given the enormous sums involved. Is this perhaps something you could have a go at, Robert?
From the ³ÉÈË¿ìÊÖ today about the £10b auction by the BoE
'The money on offer does not exist before the auction. It's created for the purpose of lending it out to banks and electronically transfers to their accounts. When the banks pay it back it is usually worked into the bank's accounts but can just disappear again.'
Would RP like to explain how this is any way different from the loans to NR and how it is the taxpayer is lending NR £2000 a head but is not doing the same for other banks borrowing from the BoE or other central banks.
Re: #108, getting concerned
Sorry if I upset you. Hope it didn't prevent you from having a nice Christmas.
What ceases to amaze me is that our government appears to be willing to pump limitless money into this failed business (NR) and yet 1 year ago when Farepack went down, because their target market was generally the "working class council tenant types) nothing was done. The cost to save Farepack - £40m, a mere fraction of what has already gone into NR. I think it is scandalous that NR has not been allowed to sink or swim as any other business would.
EXCUSE ME EVERYBODY
I notice the moajority of people "moaning" about the amount of money the government is providing to Northern Rock
Can i just remind everyone to take a look at how much is being injected to the olympic games
THE END!!!!!!!!!!!!!!
One factor you may be interested to know RE: the 125% LTV loans:
They are comprised of a secured loan of 95% and an unsecured loan of 30%. However the value of the unsecured loan cannot exceed £30,000. It is no different to a home owner taking out a mortgage and say a loan of £30,000 to re-decorate at the same time.
The vast majority of UK banks offer similar mortgage deals and if not, they will certainly offer you a personal loan.
Whilst I can agree that this is a factor and a risk, it is not unusual and it is not as risky as people are indicating.
Merry Xmas all, and best wishes to Mr Peston for his apparent plan for world domination by spin and witchcraft!
"Providing a guarantee is a contingent liability ,not a loan, and so i would argue that although northern rock is reciving support this is not the same as the govenment funding it as no further money has changed hands and might never do so."
True only in case of a performance guarantee, not financial guarantee. Financial guaratee is same risk as an actual loan.
Moreover, this guarantee is given to cover exisiting loans earlier taken without such a guarantee. The fact that now such a guarantee is sought by same lenders means that there is emminent possiblilty of the contingent liability chrystalising into actual funded support.
I would argue that in case this guarantee is called and funds actually change hands, it is will be like a default situation on a loan, not just funded support.
In developed nations, bank lending is staple household items, like eggs and fuel. Supply of which need regulation to ease hoarding.
NR, being weak, merely displays the syndrome of a widespread flu (bank lending system failure).
Imagine prices of antiibiotics surging, all supermarkets hoarding inventories (ie speculating). Patients suffer. Surely government should take over and start dispensing antibiotics directly to patients. Not nationalise (shoot) the patients.
Imagine fuel prices surging, petrol kiosks hoarding instead of selling. Public transport fails. Surely government should intervene and sell directly, rather than punish everyone for not storing up antibiotics and fuels.
Banks specialise in lending. When they fail, government lends direct, not letting borrowers fall one by one, so that borrowers specialise on their own business. Lender of last resort.
5 central banks realise this. They focus on the flu, not the syndrome.