Northern Rock
Posted by: Adam Meredith on 16 September 2007
I have never understood high finance - partly, I suspect, because it doesn't really make sense.
Northern Rock has shareholders - it is presumably not a Mutual Society.
BBC's business editor Robert Peston (who appears to talk abject bollocks) is quoted as saying:
"The BBC has also learned that two banks were very interested in acquiring the beleaguered firm.
However, they were concerned about doing such a big deal amid turmoil in money markets and when it was difficult and expensive to raise money from other banks and financial institutions.
Mr Peston said the two interested parties sought guarantees from the Bank of England that it would supply facilities to fund Northern Rock's assets - valued at about £113bn - if that money was impossible to obtain on the market - but that these were refused.
"The Bank did not want to be seen to be bailing out Northern Rock's shareholders and bondholders," he said.
"It feels they need to feel the pain and suffer the losses of their mistake in backing a bank, Northern Rock, whose strategy was flawed."
"It is the banking Catch 22 of our time: Northern Rock can't be sold without a guarantee of funding from the Bank of England, but the Bank is refusing to provide such funding to facilitate a sale."
He added that the Bank now had to decide whether to inject billions of pounds into the firm, or "swallow its pride" and allow public money to facilitate a sale."
What is an asset (valued at about £113bn) - if it needs to be "funded" by the Bank of England to be an asset?
If the Bank of England provides a guarantee of funding to facilitate a sale - there is then (if they're lucky) a sale in which management and shareholders get money. Do they give some/all of this back or do they just get their arses saved by the B of E?
Where do depositors fit in vis-a-vis shareholders? Or are they the same?
Even at its most "prudent" the bank industry relies on a benign lie. There is never enough "money" to give back everything to everyone as each £1 deposited supports, say, £10 of loans. This works fairly well - so long as you don't get a run on the banks - at that moment you begin to understand who has been "funding" inflation and how ill-equipped they are to maintain any stability - once the bubble bursts.
Posted on: 16 September 2007 by Polarbear
quote:
What is an asset (valued at about £113bn) - if it needs to be "funded" by the Bank of England to be an asset?
and there lies the problem Adam. A large part of this "asset" is loans due from other banks. With the uncertainty of sub-prime mortgages in the USA, there is a doubt whether parts of these assets will be repaid. That then has a knock on effect on liquidity ratio's. Banks must cover thier deposits by a certain margin. At the moment there are doubts whether many banks are retaining these liquidity ratos.
Problems arise when a Bank has to repay short term debt and can't maintain liquidity. This is where we are now.
These problems are compounded when depositors demand their money back. That reduces liquidity.
This is exactly what happened in 1987 when the Town and country Building Society collapsed. Back then the Bank of England insisted that a stronger Bank bought them out. The Woolwich duly bought them out.
The Bank of England will bail out Northern Rock if the position gets worse and then request another Bank buy duly buy them out. Its one of the reasons why the Bank of England are there.
As for shareholders and depositors, the shareholders are the owners of the company. The depositors purely have money on deposit with the Bank, they have no voting rights. With Mutuals, the Depositors were the owners of the Bank and did indeed have a vote. That was something they lost when the Bank converted to a limited Company,
Regards
PB
Posted on: 16 September 2007 by u5227470736789439
I don't understand this either, but if my account was with Northern Rock I would be shiffting out of it ASAP.
My feeling is that even if the Bank of England has to cover the depositors interests, it would be a good thing if the bank closed rather soon, and maybe some order would be forced on the remainder in terms of responsible lending.
In that way the shareholders and management would be left with nothing but a lesson in not following greed to its logical conclusion...
My banking is with a Mutual Organisation for very good reasons, as is my Private Pension, and both perform better than similar investements with many organisations having shareholders.
ATB from George
Posted on: 16 September 2007 by Polarbear
quote:
My banking is with a Mutual Organisation for very good reasons, as is my Private Pension, and both perform better than many organisations wiyth shareholders.
Pension Companies face the same problem George. There are strict liquidity conditions to cover pension holders if there was a rush on cash.
Regards
PB
Posted on: 16 September 2007 by u5227470736789439
Dear Nigel.
Do you think it was sensible of me to select my investment houses on the basis of good, and consistent [if not always high-flying] performance, rather than going with shareholder owned, limited companies?
As someone who is mystified by this I reckoned it was a safer, more cautious and conservative [small "c"] way to go. Do you think that is correct?
ATB from George
Posted on: 16 September 2007 by Adam Meredith
quote:
Originally posted by Polarbear:
With the uncertainty of sub-prime mortgages in the USA,
I wonder at the way we allow ourselves to use the internal jargon of the financial wizards' world.
Sub-prime = crap (unless the property market continues to inflate at a sufficient rate to disguise this fact).
Posted on: 16 September 2007 by Polarbear
quote:
Originally posted by GFFJ:
Dear Nigel.
Do you think it was sensible of me to select my investment houses on the basis of good, and consistent [if not always high-flying] performance, rather than going with shareholder owned, limited companies?
As someone who is mystified by this I reckoned it was a safer, more cautious and conservative [small "c"] way to go. Do you think that is correct?
ATB from George
Hi George,
Yes, as Pensions are a long term investment it makes sence to go for a company that has long term stability rather than the boom or bust method.
Regards
PB
Posted on: 16 September 2007 by Polarbear
quote:
Originally posted by Adam Meredith:
quote:
Originally posted by Polarbear:
With the uncertainty of sub-prime mortgages in the USA,
I wonder at the way we allow ourselves to use the internal jargon of the financial wizards' world.
Sub-prime = crap (unless the property market continues to inflate at a sufficient rate to disguise this fact).
maybe because I am a financial wizard Adam
Posted on: 16 September 2007 by Polarbear
Posted on: 16 September 2007 by John Channing
The irony of the current situation is that the action of account holders withdrawing money is probably the biggest threat to Northern Rock's viability.
There is nothing wrong with their basic business model, which is based on borrowing money from other financial instutions to lend to customers as mortgages. This is somewhat different compared with most lenders who fund mortgages through deposits from other customers.
Due to the recent credit crunch, LIBOR has risen sharply and most financial institutions have stopped lending money to each other. In that case the only option is to go to the Bank of England for credit. Northern Rock are not the only bank to have been bailed out recently however, with Barclays also borrowing large sums of money.
John
Posted on: 16 September 2007 by Adam Meredith
quote:
Originally posted by John Channing:
The irony of the current situation is that the action of account holders withdrawing money is probably the biggest threat to Northern Rock's viability.
The problem here is - if everyone else is "panicking" withdrawal of money then becomes rational.
Posted on: 16 September 2007 by fatcat
Quote
sell-off that could see its 100 billion pound ($200 billion) mortgage portfolio divided between the country's other major banks,
So, the counties major banks drop the Northern Rock in the shit by deciding not to lend them money. Then, when the Northern Rock goes bust, they share out the mortgage portfolio.
Nice one.
Posted on: 16 September 2007 by JonR
quote:
The problem here is - if everyone else is "panicking" withdrawal of money then becomes rational.
A vicious circle then, in other words.
So, now what?
Posted on: 16 September 2007 by Polarbear
quote:
Originally posted by Adam Meredith:
quote:
Originally posted by John Channing:
The irony of the current situation is that the action of account holders withdrawing money is probably the biggest threat to Northern Rock's viability.
The problem here is - if everyone else is "panicking" withdrawal of money then becomes rational.
No, becasue Banks must cover depositors money ten fold. There is sufficient moey in the kittie to pay everyones money back.
Posted on: 16 September 2007 by Polarbear
quote:
Originally posted by fatcat:
Quote
sell-off that could see its 100 billion pound ($200 billion) mortgage portfolio divided between the country's other major banks,
So, the counties major banks drop the Northern Rock in the shit by deciding not to lend them money. Then, when the Northern Rock goes bust, they share out the mortgage portfolio.
Nice one.
Spot on, Northern Rock are an innocent casualty here.
Posted on: 16 September 2007 by Steve S1
People moving money from a (now) Bank of England secured line, to lots of other places that are not.
Curious.
Power of the (uninformed) meeja. Scary.
Steve
Posted on: 16 September 2007 by JamieWednesday
Maybe not so innocent.
Northern Rock has for a long time managed a business model slightly different from many other high street banks and building societies, aiming (at least domestically) fair and square at more specialist lending e.g. self cert, high income (and equity) to borrowing ratios at a fairly high percentage of its lending business and historically much of the board's policy has been about 'never mind the quality, feel the width'. It has not necessarily been considered a high risk strategy when, for many years now, borrowing has been easy and cheap (relative to previous UK rates at least). However the chickens have now come home to roost and it is feeling the pain of not following so diverse a strategy as many of its competitors. It is also a reason why they have not been bought out already.
An associated problem though is that it may have knock on effects such that if and as panic spreads, some other companies could feel the squeeze. It would be interesting to know where the £2bn has been put...
Posted on: 16 September 2007 by Adam Meredith
quote:
Originally posted by Polarbear:
No, because Banks must cover depositors money ten fold. There is sufficient money in the kittie to pay everyone's money back.
I thought the "multiplier" allowed banks to lend 10 x (in the old days) what they had on deposit.
Which may be a different way of saying what you say. Also - Northern Rock don't take savings and "leverage" (inflate?) them to make loans.
They borrow money - to lend at a greater interest rate than they are paying = profit (- expenses).
Posted on: 16 September 2007 by Adam Meredith
quote:
Originally posted by Steve S1:
People moving money from a (now) Bank of England secured line, to lots of other places that are not.
Probably quite a few strangely stuffed mattresses.
Posted on: 16 September 2007 by John Channing
quote:
It has not necessarily been considered a high risk strategy when, for many years now, borrowing has been easy and cheap (relative to previous UK rates at least). However the chickens have now come home to roost and it is feeling the pain of not following so diverse a strategy as many of its competitors.
The risks of this strategy are nothing compared with those that have been transferred through the trading of credit derivatives. More worryingly, precisely who is holding this risk at present is still rather opaque and any move to
borrow money tends to set off the alarm bells.
Someone is going to get badly burned, but it is more likely to be one of the investment banks or big hedge funds than a mortgage lender.
John
Posted on: 16 September 2007 by Allan Probin
There was something on the news the other night about the amount of money that is actually protected if a bank/financial institution were to fold. It was something like 100% for the first £3,000, 90% for the next £30,000 and then nothing after that. That's a bit worrying if you were retired, for example, and had your entire savings in there. Actually it's a bit worrying for anyone with more than £3,000 in a savings account.
Posted on: 16 September 2007 by u5227470736789439
Money is a strange thing! It is a token, signifying an agreed value, but of no inherent value itself. A huge edifice of commerce is built on it, but most people never consider that figures on Bank Statements are not inevitably realisable in every situation.
Perhaps this will alert people to certain realities. As I wrote earlier, I would be withdrawing any money I had in Northern Rock forthwith. It would be mine to withdraw so long as they are open. If collapse occured some or much could be lost. I have a suspiscion that the economic situation is far more precarious than we are being told! Fortunately I have nothing to loose from this!
If I won the Lottery I would get a bloody big safe and keep it at home to be honest, and live a very modest life in a nice house somewhere in the countryside!
ATB from George
Posted on: 16 September 2007 by NaimDropper
Best to stick to Southern Rock such as:
"Hold On Loosely" - .38 Special
"Rockin' into the Night" - .38 Special
"Southern Star" - Alabama
"Ramblin Man" - Allman Brothers Band
"Midnight Rider" - Allman Brothers Band
"Jessica" - Allman Brothers Band (won a Grammy in 1995)
"Champagne Jam" - Atlanta Rhythm Section
"Doraville" - Atlanta Rhythm Section
"The Night They Drove Old Dixie Down" - The Band
"Hard to Handle" - Black Crowes
"She Talks to Angels" - Black Crowes
"Train, Train" - Blackfoot
"Turn the Page" - Bob Seger and the Silver Bullet Band
"Jim Dandy" - Black Oak Arkansas
"Devil Went Down to Georgia" - Charlie Daniels Band
"The South's Gonna Do It Again" - Charlie Daniels Band
"Son of the South" - David Allan Coe
"China Grove" - Doobie Brothers
"Black Water" - Doobie Brothers
"Fooled Around and Fell In Love" - Elvin Bishop
"Slow Ride" - Foghat
"Keep Your Hands to Yourself" - Georgia Satellites
"Funk #49" - James Gang
"Sweet Home Alabama" - Lynyrd Skynyrd
etc.
- shamlessly lifted from Wikipedia
David
Posted on: 16 September 2007 by nicnaim
I do not remember customers queing up outside Barclays when they received similar "top up's" from the Bank of England recently.
Before you know it the same people will be clearing the supermarket shelves in case they run out of food!
Baaa Baaa.
Nic
Posted on: 16 September 2007 by naim_nymph
quote:
Originally posted by JamieWednesday:
It would be interesting to know where the £2bn has been put...
Most of it is getting invested in High Street HiFi Shops where past Northen Rock investors are emptying carrier-bags stuffed full of bank notes in exchange for brand new Nain Audio Systems...
It's the leading market trend on a Sound Investment for a great return of interest!..
and this new 'in the black' investment will always balance perfectly to their requirments by twidling this little knob right here, (they'll soon get the nac).
nymph
Posted on: 17 September 2007 by JamieWednesday
Seems like it's heading to National Savings with many people holding the mistaken belief that's money is somehow more 'secure' there...
