"Rock can't be sold"
For all the talk – including by me (see my earlier comment, Rock or Crock) – about how Northern Rock must surely soon find itself under new ownership, I have learned that it cannot be taken over by another bank in the absence of a major policy shift by the Bank of England.
Here is why.
Bankers tell me that Northern Rock spent a good deal of the summer exploring whether any big bank was prepared to acquire it lock, stock and online accounts. It had appointed the leading investment bank, Merrill Lynch, to sound out possible buyers.
There was, I am told, interest in a possible deal from substantial international banks.
But – and here’s the important point – the seizing up of interbank markets proved an insuperable obstacle.
No other bank wanted to take on the responsibility for financing Northern Rock’s total assets of more than £100bn at a time when it is very hard and very expensive to obtain funds from the money markets and banks.
So it was the realisation on the part of Northern Rock’s board last week that selling the bank had become impossible in current market conditions which actually persuaded the board to approach the Bank of England and ask for access to emergency loans.
Plainly, a takeover would have been a less humiliating option. But it just couldn’t be done.
Here’s the great banking Catch 22 of our time.
The Bank of England under its governor, Mervyn King, takes a very purist line to exercising its role as lender of last resort.
It is prepared to bail out a bank like Northern Rock to prevent serious damage to the banking system and the wider economy, although only on condition that the Financial Services Authority deems said cash-strapped bank to be solvent.
However in their words and deeds, King and the Bank of England have made it clear throughout the crisis in credit markets that they are not prepared to make good the losses of those they think have behaved imprudently or injudiciously.
Mervyn King wants to spank banks and other financial institutions, in the hope that they’ll learn from their mistakes.
He is obsessed with moral hazard, and understandably so.
So the emergency lending facility can be used by Northern Rock as an independent bank to stop it from falling over while its worried depositors remove their cash.
But it cannot be used to prevent holders of Northern Rock’s bonds or shares suffering losses that stem from their decision to invest in a bank whose basic business model turned out to flawed.
What follows from that?
Well, the Bank of England would remove the emergency lending facility more-or-less the moment it was taken over by a bigger bank.
If it didn’t do that, the Bank of England could be accused of subsidising the sale of Northern Rock and propping up the value of Northern Rock’s shares and bonds, which is the last thing it wants to do.
But, as Northern Rock found out when looking for a buyer this summer, no bank has the confidence to buy Northern Rock and attempt to refinance its balance sheet on the money markets in the normal way.
The world’s biggest banks are finding it challenging even to fund their own assets in our malfunctioning financial markets. And if they didn’t want to absorb Northern Rock’s very substantial balance sheet just a few days ago, they are going to be even less keen now, after so much cash has been withdrawn by anxious Northern Rock customers from their branch, postal and online accounts.
As I said, 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.
Maybe some kind of compromise, transitional arrangements can be agreed.
The Bank cannot have enjoyed witnessing the damage being wreaked to Northern Rock’s reputation by all those images of anxious and irate customers queuing outside branches.
Northern Rock’s brand is being tainted, possibly beyond repair.
For all the confidence of the Financial Service Authority’s confidence that Northern Rock is solvent, its basic long term commercial viability is being eroded. At some point, what starts as a liquidity crisis risks becoming something worse.
So here is the choice that may confront the Bank of England and the Chancellor of the Exchequer soon.
They could choose to continue along the path they have taken. This could see them injecting many many billions of pounds into Northern Rock for an indefinite period. They would in effect be choosing to enter the mortgage business and Northern Rock would almost be nationalised.
Over time, Northern Rock would probably wither as a business, to the detriment of its many employees.
Or the Bank and Chancellor could grit their teeth, swallow their pride and allow public funds to facilitate a takeover.
I cannot predict which way they will jump. When I interviewed the Chancellor Alistair Darling yesterday, he evinced great confidence in the actions of the Bank.
That said, in all the turmoil and uncertainty, Northern Rock’s share price is probably still heading in a direction that will not amuse its shareholders.
UPDATE 12:15 Withdrawals from Northern Rock are now just under £2bn, following yesterday’s withdrawals. In fact this is a bit less than the authorities – the Financial Services Authority, Bank of England and Treasury – had expected. They had been braced for £2bn on Friday alone. However, they cannot be sure much more will be withdrawn in the coming days, especially from holders of Northern Rock’s postal accounts (there was almost £10bn in these accounts as of June 30).
One piece of good news is that there does not appear to have been a loss of confidence in other mortgage banks or building societies. Much of the money withdrawn by Northern Rock customers has been put into other mortgage banks and former building societies, such as Alliance & Leicester and Bradford & Bingley, as well as the bigger banks. Although the risk of contagion has not been eliminated, so far there is no great sign of it.
I have also learned that Northern Rock was close to selling itself to another big bank before it finally asked for support from the Bank of England. There were two banks very interested in acquiring Northern Rock. They did a detailed investigation of Northern Rock’s business and determined that it was fundamentally sound (as it happens, the FSA has to an extent relied on their investigations in its subsequent determination that Northern Rock is solvent).
However these potential bidders were concerned about doing such a big deal at a time when there is turmoil in money markets, when it is difficult and expensive to raise money from other banks and financial institutions. They therefore sought guarantees from the Bank of England that it would supply facilities to fund Northern Rock’s assets, in the event that money was impossible to obtain on the market.
The Bank refused to provide such guarantees. As I've said, it did not want to be seen to be bailing out Northern Rock’s shareholders and bondholders. 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.
So the bidders walked away. And the Bank decided on a simpler strategy of simply providing emergency loans to Northern Rock as an independent entity.
UPDATE 19:31 The Bank of England tells me that the emergency lending facility would in fact be transferred to any new owner of Northern Rock. However once the facility expires (and the Bank will not give me the expiry date) there is no guarantee it would be extended for the new owner. So most bidding banks will remain nervous about taking on a balance sheet of Northern Rock’s size with the risk hanging over it of needing to refinance a large chunk of loans from the Bank of England at short notice in markets which may remain frozen. So negotiating a takeover of Northern Rock will not be easy. Even so, I detect a desire on the part of the authorities to see Northern Rock under new ownership sooner rather than later, so long as the strictures of good central banking are not thrown out of the window.
UPDATE 21:30 Sorry, I forgot to mention that - as the Sunday Times says today - Lloyds TSB was the bank which came closest to buying Northern Rock, before the Bank of England agreed the emergency facility. Right now, Lloyds TSB is no longer interested in buying the bank, but that could change.
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If the choice is between "almost nationalising" Northern Rock and allowing it to go under then the Government and the Bank of England should have legislation drafted within days. The Chancellor maintains he wishes to stabilise the banking system, but the only way Northern Rock savers will stop withdrawing the cash which the bank requires to survive is if the Chancellor guarantees that no saver will lose money. Doing nothing is not an option for Mr Darling. The longer he delays the worse the crisis will be. The Government has a duty to protect the honest savings of honest citizens. The electorate will not forget if Mr Darling allows a major bank to collapse spreading recession across the economy.
A scorching article, Mr Peston - it is a shame you don't write for the papers - you could be up for 'Scoop of the Year' in the 'What the Papers Say' awards for your work over the past week.
Doesn't the answer lie in your last comment? Northern Rock could not find a buyer at its old price (and its shareholders would not have agreed to a lower one). However, with queues still outside banks and the difficulties of finding a buyer revealed, surely we can expect the share price to fall even further and a buyer to step in once the price has fallen sufficiently.
If the problem is size, then maybe the answer is the piecemeal breakup of the loan book. That would have been against the wishes of the board, as it will wipe out shareholders and any unsecured bond holders. But it would enable the bank of England loan to be repaid. It would probably have a knock on effect on the mortgage market as the loans would not be sold at face value. The sale of over £100 billion of assets at a discount would devalue the rest of the mortgage backed bond market.
I see this morning from Standard & Poor's website that they downgraded Northern Rock to negative on June 27 this year..you can track the fall in the share price from then as those in the know sold their holdings.Currently Northern Rock has an S&P rating of A-1 - so has Bradford & Bingley.Are Mr Bradford and Mr Bingley to go negative shotly too?
The house broker Merrill Lynch are still maintaining as of Friday that Northern Rock's value if they were operating as a closed-book run-off is almost twice that of the current market capitalisation. Any bank that can take over Northern Rock and provide their own liquidity - and some banks have plenty internally (it's not disappeared it's just being hoarded) - will quickly realise that value in their own accounts. There may not be much, if any, of a premium for shareholders, but the attraction of buying a dollar for fifty cents as they say, is considerable especially if liquidity starts to return to the debt markets. Furthermore, while the BoE may have some concerns about the impact on a British rival taking over the Northern Rock, it's doubtful they'd share the same level of concern if it were NAB or some other overseas bank.
To make absolute statements about how Northern Rock just can not be taken over under headlines such as 'Rock can't be sold' seems at best misleading, and at worst just more southern-centric anti-Northern scaremongering from the person who's article started the run on the bank in the first place. The ̳ should be promoting responsible journalism, not self-important tabloid reporting. More balance and consideration please.
"To make absolute statements about how Northern Rock just can not be taken over under headlines such as 'Rock can't be sold' seems at best misleading, and at worst just more southern-centric anti-Northern scaremongering from the person who's article started the run on the bank in the first place."
Just the sort of logical 'shoot-the-messenger' argument we need at this time ! Imagine, if Mr Peston had been on his holidays last week, none of this would ever have happened..
Dearie, dearie, me..
Michael Hogan says it well, sell the loans on in smaller chunks. It means more loses for shareholders but that may be a good thing for the economy as a whole in terms of moral hazard. Sadly it's not just the wealthy that hold shares of NR in their pension schemes!
By selling they should be able to pay back their savers without needing to call on the FSA deposit protection scheme.
About breaking NR up, are its assets significantly larger than its liabilities? Presumably it would have to sell many of its assets at a discount due to the need to get cash quickly
Fred Brown wrote
just more southern-centric anti-Northern scaremongering from the person who's article started the run on the bank in the first place.
This is nonsensical messenger shooting. Those of us who have been doing our own research have known for months that NR was most likely to hit these problems which result from their own, risky, business decisions in using securitization to help pump up an already bloated housing market.
The fact that depositors now know what many people 'in the know' have known for some time seems to me to be entirely fair, and any journalist revealing this has been performing a public service.
Fascinating stuff - at the risk of being flamed, I was wondering about taking a punt on NRK on Monday if the price went below 350p, in the hope price would go up on a takeover.
Now I'm not so sure!
The bank HAS acted irresponsibly and recklessly, but Northern Rock is not alone. Crazy loans based on 6 x salaries and 50 year repayments – come on, who are you trying to kid? These are unsound principles helping to drive the house prices. Enticing people to just keep borrowing more and be happy, while you and I (the golden geese) lay the egg for the fat banker every month.
False economies, herd mentality, borrowing from Peter to lend to Paul to keep things afloat and a digital money world combine together to cause the start of a collapse. We live on credit and our ‘wealth’ is calculated on completely flawed principles. Will it crash magnificently? It has started. The government can try and prop things up just for long enough to get into power – then watch it meltdown. I am sad that the poor bloke on the street as usual will have to suffer the consequences of the ‘experts’ actions.
i believe the panic by savers over northern rock is entirely due to rip off britain.banks and building societys make billions each year thanks to high charges and then to see a small wobble from northern rock~ignore the advice man/woman in the street~get your hard earned money(including the miserable interest it has earned)and put it somewhere safer for the time being~vote with your feet and your hand!~its the upper hand for the consumer at this present time~make them sweat and let this be a warning to other rip off banks~mess up and the worm turns~the people have the power
It should be noted this is a loan which has been given to NR and not a bail out. They have to pay interest on it, like any individual. Also the panic we are seeing is totally beyond belief - as usual fueled by the media.
If NR is to be rescued, by means of a bail out then it or any other bank in a similar situation should be forced to hand over a% of its equity or perhaps the entire company. Barclay's have also been "bailed out" recently and are demanding more help. While at the same time paying big bonuses to their directors.
Ordinary people always get made to pay when we get into difficulties, the banks and their bosses should be no different.
Excellent piece that throws into relief a very fundmental question: To what extent is the government prepared to nationalise the mortage market in order to prop up the housing bubble, given that the government is surely out of business if there is a crash?
Many of the comments are optimistic that a market solution can be found, and this optimism is based on a postive appraisal of the Rock's loan book. The problem is however that the loan book itself might be far more toxic than is generally assumed: NR has rapidly expanded its loan book through the use of 125% mortgages, 5X income mortgages, self cert mortagges etc - the real value might be far less than the numbers suggest, making a sale improbable.
No 1 Bluebird thinks the taxpayer should bail out anyone who loses his/her shirt, why?
No 2 Bedd Gelert, I agree and also live in Gwynedd.
No 3 Daniel thinks there is a share price at which someone would purchase a bank that has liabilities and potential losses far in excess of its market value.
No 4 michael think it is the size of the bank that is the problem whereas it is the size of the black hole in the loan balance sheet.
No 5 Chris should wonder what S&P know about anything given all the troubles caused by such agencies when they graded the risks associated with securitised loans.
No 6 Fred should ask Merrill Lynch to buy it if it is such a steal.
The truth is that nobody knows what is going on, not the man in charge of NR, not the man in charge of HM Treasury, not the man in charge of the FSA and perhaps not the man in charge of the BofE. Even Greenspan admitted he didn't see this coming.
If you are not a worried man or woman you are either deluded or dead.
Could the FSA, Bank of England and the Chanchellor (and the ̳ and various newspapers) please note that it wasn't the shareholders who were with me in the queue outside one of the branches yesterday - it was pensioners, average age 70, many of whom didn't understand about the compensation scheme and many of whom had investments well in excess of the current £35,000 limit of the compensation scheme.
I'm a pensioner and I don't invest in shares as I can't afford the risk.
Can somebody tell me why people who invested cash in a Silver Savings account designed for people aged 50+ ie of pensionable age or approaching pensionable age should lose everything in excess of £31,700
Can we stop calling the people with deposits "investors" and start calling them "pensioners" - as that is what many of them are. Sizable pension funds do not make us fat cats, it just means that we were sensible and saved and made provision for our old age.
Many of the people I spoke to would keep their money in the bank if they knew the limit would be raised and their losses minimised. Why can't some sort of attention be paid to those aged 50+ whose understanding of financial markets and investment strategies is a lot less sophisticated than the Governor of the Bank of England appears to expect us to have?
I enever realised that reading the financial pages and developing a complete understanding of the ins and outs of the economy was a requirement of old age.
If the Chancellor fails to protect people who have acted in a prudent way in saving for their old age, what sort of message does that send out about the attitude that this government has towards older people?
People trying to protect pensions for their old age are NOT the same as those trying to make a 'fast buck'. At present it seems to me that pensioners have been totally stitched up by irresponsible management and insensitive regulators.
Why, oh why, did the media have to use the word "emergency" in reporting the problems at Northern Rock?
Emergency is a very emotive word. Was it not possible simply to report the facts, i.e. that the Bank of England was approached for funds because of the ongoing credit crunch, in order that it can continue with business as usual?
In the James Bond film, "Tomorrow Never Dies", a media empire seeks to create World War Three in order to be the first to report it! Whilst I feel sure that there's no conscious intent to create a greater crisis, I believe the media risks doing just that if it fails to consider properly the impact of its reporting.
This blog is a terrific piece of journalism. To me it's worth the licence fee on it's own.
Another very good piece on NR.
There is evidence where I live in Glasgow Southside of a substantial number of NR repossessions due to default. There is a good chance in this housing market they will not be able to clear the loans on these properties. The repossessions will I think increase drastically now.
A lot of the loans were on flats and there is a massive over supply due to new building.
As others have said the mortgage book may not be as solid as made out, not quite trailer park but certainly not prime.
If NR is solvent and it's "business as usual" (according to NR's Chief Exec), why can't I withdraw ANY money from my online account? After 3 days of trying, I finally manage to log on and request a withdrawal, to the get a message, "Your request cannot currently be processed. Please call our Call Centre ..." (The Call Centre, of course, does not answer when I try.)
For all practical purposes, NR is either unwilling or unable to allow me to withdraw my money. Does this this sound like a solvent bank to you?
Surely this is the end of Northern Rock. I can't see anyone investing savings or taking out a mortgage with them ever again. From Mr Preston's article it also seems that they are highly unlikely to be taken over. So it's goodbye Northern Rock and probably goodbye to my savings unless I can ever get on line to withdraw them.
So the directors of Northern Rock have allegedly been trying to pass the parcel to a potential buyer. At this stage of the drama it would be very interesting to have details of any share purchases or sales of Northern Rock stock by the directors of the company during the last six months. Such an analysis should also look at any sales by family members and friends. Clearly the directors have known for some time that their gamble on third party financing was coming unstuck so it will be comforting to retail investors if they see that there has been no unusual activity in the shares. Over to you Mr Peston, you are doing sterling work.
I'm in a similar position to Paul Cuerden (above), but I haven't even been able to log on yet to my online account.
Northern Rock is holding my money and I haven't a way of getting it out. I have less than £35K in there, but I don't want to loose any of my money, even 10%. I'd like to think the government would tell us the truth and protect our savings, but why would they suddenly become trustworthy in this case?
Surely the best way of reassuring those with money deposited in Northern Rock is for the Government and the FSA to put their money where there mouth is and state unequivocally and publically that in the (unlikely) event of Northern Rock going insolvent that the depositers would receive every penny from the FSA and Government sources.
Failure to do this shows a lack of confidence in Northern Rock.
I also believe that the time is right to introduce strong legislation to take severe punitive action against Directors of financial institutions and against the larger organisations that sold shares and precipitated the massive crash is share value on Friday. "Rats leaving a sinking ship" springs to mind.
The panic and queues at Northern Rock could have been avoided by a simple technical solution. When Northern Rock became aware of the likelihood of its Internet customers wishing to withdraw funds en-mass it should have had in place some overflow capacity with other web based servers (a properly designed web based banking system needs to be fully and instantly scalable). Pop in an intermediate screen telling the customer that it could go ahead for an extra £50 in bank changes arising out of the use of premium rated web services and the customer would then be faced with a choice - pay £50 to close their account immediately or accept the guarantee from the Bank of England, FSA and the Chancellor that it was sound and try calling to close it at a later time or decided not to close the account,
Most problems of this kind can be solved by good systems design - it is a pity that the bankers do not appear to know this.
AK
The great thing about Mr. Peston's blog is the simplicity, even a lay man can understand the complexities of this financial crisis. This is a great piece of public services.So well done Mr Peston.
The reason nobody can access online accounts is because vast swathes of panic stricken idiots over-influenced by media sensationalism have overloaded the computer servers.
Computer servers are sized for normal peak load operation - not media created bank runs.
I just logged on to look at my account and reached the point where I could have withdrawn money. It was quicker than it was 'before the crisis'.
Was I just lucky or is the system programmed to give preferential treatment to shareholders?
I am involved with a charity that receives significant amounts of funding from the Northern Rock Foundation.
Any break-up or managed run-down of Northern Rock would have severe repercussions for the charitable sector if the millions that are being donated via the Northern Rock Foundation was to stop flowing. This would devastate many worthy charitable projects across the country and particularly in the north east of England.
How could this be prevented? Well if large numbers of people decided in the next few days to invest £2,000 in a Northern Rock savings account, in the knowledge that it is fully protected by the financial compensation scheme, then perhaps something could be salvaged which would enable the charities that depend on the Northern Rock Foundation to continue operating.
One thing I don't understand is why NR can't show to the money lenders their lack of sub-prime exposure and therefore be lent to as before.
" accept the guarantee from the Bank of England, FSA and the Chancellor " (Post 25)
Just what kind of guarantee is this ?It is waffle. Northern Rock is a goner and the above 3 authorities know it. The only guarantee that makes sense for stabilising the banking system is a guarantee, undertaken by the Bank of England, that warrants all savings in all High Street Banks abd Building societies 100%, not the present arrangement where anything over £31K is lost.
If Mr Darling does nothing now this will not be the end of it, only the beginning.What is required is not words but action.
There are two options when it comes to a sale: a fire sale, which keeps the problems local, or a going-concern sale, which simply shifts the problems elsewhere. And if it's to be a fire sale, the cost comes initially from the shareholders, then from the other unsecured creditors, in other words the little depositors: you can be damned certain neither the Bank nor the Treasury will take any responsibility or give up their pound of flesh, however close to the heart it may be.
Post #25 could leave Northern Rock customers open to a phishing scam. A scammer could set up a fake site and gain customer details then later remove money from accounts. I have recieved a fake Nationwide e-mail today and fraudsters could soon target Northern Rock customers. BE AWARE!
Mr. Kelman (comment 25), Do you honestly think that it is reasonable to charge savers an additional £50 to withdraw funds from their account - because the financial institution has been greedy and had its fingers burnt as a direct result?
Perhaps some of the highly paid directors could refund some of their obscene bonuses in order to pay for the "good system design" or maybe, if they had not been so profit mad and therefore blind to economic reality, the IT "overload" would never have happened. (thats if it was not engineered anyhow by NR - hoping that the storm would blow over).
What is the differential between the funding from the BoE and investors interest rates. If NR are paying the BoE, 7% and their investors 6%, then surely they would rather keep the savers monies and lend that out than borrow more money at additional cost.
5 x income, 125% lending - when it all falls down - simply charge the poor customer more.
No wonder our world is in a mess with an attitude like yours.
Has it ever crossed your mind that perhaps the global markets were/are engineered to collapse.
Rome - America - A New World Order. Slavery in a different guise. No wonder the Iranian president laughs at Bush, America is bankrupt.
cheers
cheers
To blame Robert Peston for starting a run on Northern Rock is a typical example of someone who would like any information tht is remotely useful to ordinary savers and investors swept under the carpet, in order to maintain a pretence that the sea of debt that the British economy floats on can be maintained indefinitely. Note that it was S & P's downgrading of the Northern Rock's bonds which triggered the initial sell off of shares, allowing those in the City to dump their shares before the wider public had any idea of the real state of the business.
I have read all of the comments relating to this issue in the last few days and the patronising attitude of those who criticise the people trying to get their money out has been appalling. Now that we know that Northern Rock has been desperately trying to flog itself off over the summer how 'sound' exactly can this business be?
This mini crisis will probably pass over with only a few ripples in the general economy, the real crash will come when the next generation of house buyers say ' sorry can't afford that, you'll have to reduce the price'
I am not by nature a doom monger but it just semms inevitable that there has to come a point where the enormously stretched finances of most people in this country cannot support ever increasing house prices, and as this artificial boom is all that is propping up the economy..its time for another recession
How different is this from the railtrack debacle of 2001 when the govt suddenly put it into receivership (under Alistair Darling who was Tpt Secretary if I recall correctly).
There is a precedent for intervention but not to the benefit of the 000s of investors/savers. watch AD he has a track record on this (pardon the pun).
dr.james smith wrote:
"There is evidence where I live in Glasgow Southside of a substantial number of NR repossessions due to default"
Where is the evidence of substantial repossessions ?
It is comments like this which spreads more fear and pours more fuel on the fire. Stick to the facts !
Robert Peston is to be congratulated on his initial story and continuing coverage. Only he is providing facts and background needed to inform investors and savers on this developing situation.
Thanks to him I was able - at 0400 hrs on Friday morning - to protect family savings from avoidable risks.
He has my vote to become a director of the FSA.
Why doesn't the Bank of England, instead of lending money to Northern Rock, buy up shares at knockdown prices and in effect nationalise Northern Rock? Rewrite the rule book if necessary. If no one will buy it and Northern Rock collpases, surely it is better to prop it up this way or the ramifications will be huge on the economy.
Another excellent article.
Though not everyone would agree with me, I reckon the BoE have had to make some tough decisions but have done pretty well so far. Having to balance:
a) Preventing everyone from taking all their money from all banks and building societies and creating a "full scale" mass hysteria (via the media) and;
b) Punishing shareholders/directors of NR for poor business decisions through what they knew would result in a large fall in its share price, large withdrawals of savings, penal rates of lending, its reputation, and now reluctance of other banks to take over NR.
An important question to ask is under what further conditions, and also how far, would the BoE protect NR's savers (e.g. due to any further unforeseen detrimental market developments) or fall in house prices (via customers defaulting on mortgages).
If the answer is "under all circumstances" then the BoE is itself encouraging a different "moral hazard" by telling savers their savings are always guaranteed.
How far will BoE go to teach the lessons of "Moral Hazard"?
I'm quite sure I'm missing something here, so perhaps somebody could explain this?
The run on NR followed the announcement that the Bank of England had offered support.
The support may well have been necessary - but why on earth ANNOUNCE it, thereby inevitably triggering the run?
Couldn't the BoE have provided support without making this fact public?
I agree, I don't see any buyers rushing forward for NR. Not only is there the problem of raising money in difficult times, but also the real value of NR's assets may devalue in the coming months. The interbank rate change historically precedes changes in the base rate, and the interbank rate is going skywards right now. So with interest rates rising, inflation rising because of increased energy and food prices, people who have stretched themselves on high multiple mortgages are going to be feeling the pinch. House prices are already starting to falter, so then companies like NR are in even worse positions.
Mr Darling is between a Rock and a hard place...
Please note cannot be sold, and will not sell at the price offered, are two different things.
The implication is that because no bank wanted to buy the loan portfolio at the asking price, NR tried to pawn it to the BOE?
Amazing and if true outrageous!
The Financial Services & Markets Act defines the first objective of the Financial Services Authority (FSA) to maintain "MARKET CONFIDENCE".
Well "events" have shown just how far short they have failed AGAIN.
Northern Rock's savers do not have confidence in a Regulator who has allowed a regulated bank to gamble with suspect business strategies with no fall back in case of disaster.
No one can believe this FSA regulator (supposedly independent of Government) - The same FSA who told us in December 2000 that Equitable Life were solvent !!
I think blaming the media for this run is a bit short sighted. The main cause of it outside of the fact that the bank is in dire straights. Is that no one believes a word anyone in this governemnt utters. As soon as the chancellor told us that it was business as usual the run started.
As to selling the assests. You will probably find some white knight moving in and buying the bank for a nominal fee this will protect the savers and get the whight knight a debt book that it can stand to loose part of. It will of course be sod the shareholders and any unsecured debt.
Thats the normal course of things in this sort of situation.
Tim M (#41): Northern Rock is a plc, so any announcement of this significance has to be announced by law.
In fact many would say that the discussions Robert Peston has flagged should have been announced much earlier.
Overall, it's harsh to say this but maybe NR should have been allowed to fold rather than this political fudge. It's been misrun for years - to call it a dog is an insult to dogs - so why keep it alive?
NR offering 1 year bonds at 6.71% Here is alist of other bans offering excessively hight rates. Draw your own conclusions on who might have liquidity issues
Anglo Irish bank 6.9%
West Bromwich BS 6.86%
Derbyshire BS 6.85%
Norwich and Peterborough 6.76%
Halifax 6.71%
Alliance & Leicester 6.55%
Bradford and Bingley 6.50%
There is a fundamental difference between a SAVER and an INVESTOR. If you invest in stocks and shares you take a risk. If you put your money in the bank it you are supposed to be putting it in a safe place. If savers in Northern Rock lose any of their savings that will have a catastrophic effect on the entire banking system which ultimately relies on trust and confidence. There has to be a fundamental change in the way savings are protected. Guarantees have to be given to make saving in a bank bombproof. This is not a "minor crisis". It is a major crisis of confidence.
Our dilemma is this. My family and I have our life-savings which are quite substantial with Northern Rock, 95% of which we hold in various fixed rate term bonds.
If we give notice and get out now we incur an early withdrawal penalty being either 60 or 90 days' loss of interest - dependent on the length of the bond - which would be several thousand pounds.
However if we don't close and withdraw these bond and so stay with Northern Rock do we run the risk if the bank should fold of losing ALL our investments except the legislative sum of £32,000 for each NR account holder which is minimal compared with our total holdings.
Thank you for your tireless work across the weekend Robert. In my view this is journalism in the best traditions of Woodward and Bernstein - a hunger for truth coupled with a desire for accuracy (as well as the nose for a scoop). It has stimulated a rate and quality of discussion that is a credit to everyone who has joined it. So blog on mate, and keep on telling us what you know,
Niels, Denmark
For 800 years, the Government has owed the Banks money, so it has been unable to dictate policy to them. Now for once, the boot's on the other foot. As everybody needs a safe bank account, perhaps it's time to nationalise the lot, rather than leave a permanent sword of Damocles hanging over the heads of the population: "Will my bank be next, and if so, can I get my cash out before it goes under". 31700 plus something-in-the-pound isn't going to keep big investors in the UK, watch the flight to quality begin right here if the Government doesn't actually lead for once. And if the fat cats get liposuctioned, they've only got themselves to thank.
The debate here is over how to keep the UK basket afloat as a whole, a there's rather more eggies in that, when it doesn't have the EURO stability mechanism supporting it. The queue of pigeons coming home to roost appears to be stacking up like aircraft over Heathrow on a strike day, with the added piquancy of having Corporal Jones on Air Traffic Control.
Some correspondants are worried about their personal circumstances: sorry, but this is not a Financial Services blog. One of the reasons you got a better rate of interest from NR than from others is because you took higher risks with them. Risks don't always work out and then you take a stuffing: if you've been foolish enough to keep all your eggs in one basket, this is how you learn if you didn't listen to the warnings at the time, so find a Qualified Financial Adviser and ask them. And if it's too late to learn, go get a job from B&Q, they support grannies.
The alternative? Learn how to make onlettes.
If Northern Rock is not bought, then it will presumably undertake only minimal future lending in future. The BoE loan facility will be needed until enough of the existing mortgage book runs off to offset withdrawals of retail deposits and any required refinancing of existing money market loans.
If NR is bought by a credible partner, then fewer deposits are likely to be withdrawn and the BoE loan facility won't be needed as much or for as long. So it makes complete sense for BoE to maintain its loan promise if this happens, rather than to put an obstacle in the way of a buyer. But BoE could not have been seen to support an "arranged marriage" with a selected partner before NR's problems had become public knowledge. Now it's all in the open, the game has changed.
Can I also correct the widespread misunderstanding about the "guarantee" that applies to the first £35,000 of an individual's deposit. This is NOT guaranteed by the government from public funds but from the Financial Services Compensation Scheme. In the case of deposits, this is funded entirely by banks and building societies (which of course means either by their shareholders or their customers). In theory, the number of people who can get compensation is unlimited, but there's a limit on how much these firms can be asked to pay - currently 0.3% of deposits or around £2.5bn in any year. If there's ever a bigger failure than that, FSA and FSCS will have to work out what to do about it at the time - there are no rules in place. Nor is there any commitment that government (ie taxpayers) will chip in. I'm not sure what sort of guarantee that implies - what do you think?
In any event, why should either taxpayers or customers/shareholders of other banks have to bail out customers beyond this limit - if at all?
The nearest thing to a risk-free investment you can buy is British Government stocks or National Savings. It's a risky world, and people who choose to put their money in banks that offer a higher return than this should recognise that it involves some increase in risk. "Low risk" is not the same as "no risk". If you want a "bomb-proof" deposit, use National Savings.
In particular, pensioners, however dependent on their savings, should surely be old enough to know there are no free lunches.
We shouldn't make savings decisions on the assumption that there's a fairy godmother who will make it all better if we make the wrong choice. The aim of regulation is to reduce risk, not to eliminate it.
Thank you so much Mr Peston.
As we all know you broke the story about NR going to the BoE. Was it you that deemed it necessary to allocate @ 15 mins of the 10pm News on Thursday night, and as a lead story, when other news stations had the story relegated to a minor mention. As if that wasn't enough you have pursued this story ever since, being the main reason in my humble opinion, of the queues hat formed outside a number of branches, this fuelling the flames.
So you've now got 6,500 jobs on the line. Are you going to keep pushing until mass redundancies are announced ?
I saw one piece that the ̳ ran which interviewed 1 unfortunate woman who had queued 4 hrs to take her £1,000 savings from the bank, because she'd seen it on the news. No mention of the insurance she already had or the many city voices or even customers who stated that this was a storm in a teacup.
Bad news is good copy. I can't wait to hear you're story about 6,500 job losses. I hope you can sleep at night.
You should be ashamed.
The B of E has made warning noises about property lending over the last few years. Even the ordinary punter in the street recognised the property prices in the U.K were in reality "false" made up of cash simply being printed when larger and larger loans were handed out by the banks eager to make bigger profits.
They ignored the B of E. So why is it that the BofE can seemingly only murmur it's dissatisfaction at this imprudent level of lending but can't actually stop it? And secondly if the bank's choose to ignore it why should they be bailed out? If High Street bank directors take their companies into insolvency and continue to trade wrongfully I would expect to see them prosecuted under the Insolvency Act S214-(2,b)
"[S]ore feet" (16) seems to think it is OK to reach pension age neglecting books, newspapers and literature found in the branch.
I (in middle-age) have read "Investing for Dummies", "Liars's Poker", "Where are the Customers' Yachts?" etc. Could it be by this neglect that "sore feet" has not properly prepared for old age?
"[The BoE] would in effect be choosing to enter the mortgage business and Northern Rock would almost be nationalised."
This is exactly what I feared (see my comment yesterday). The last thing we need right now is for the Bank of England to throw its weight behind the house-price bubble - especially given that, with the power to set interest rates, the BoE would then be playing gamekeeper and poacher at the same time.
I must admit I don't understand how the other option you outlined would amount to anything better.
I see this as a real test of the independence of the Bank of England. Can it distinguish, in its actions, between keeping the banking system functioning ahd the economy healthy on the one hand, and paying homage on the other to the great sacred cow, inflated house-prices? Are these two still distinguishable these days?
Maybe, however much Mervyn King would like to, the Bsnk can't do anything to keep the banking system functioning (good), without also entering the mortgage business, and thus subsidising the profits of those who invest in property (bad).
I'm writing this from the perspective of someone who's utterly sick of the conflation of "healthy economy" with "high house prices". For millions of us, this is not true - high house prices are a curse, and we're sick of them being praised to the sky as the One Great Economic Good.
GIven this signal, the Bank should be focusing on managing a devaluation of property, so that it doesn't cause too much damage. But can it do this?
John W (29) writes of "a charity that receives significant amounts of funding from the Northern Rock Foundation".
And that's a problem right there. Charitable giving is supposed to be done by individuals with their own money - a respectable charity would have turned down gifts from a plc.
I have tried to access my on line account more than 20 times without success over the past two days.Is this experience typical?
From Post 27: "The reason nobody can access online accounts is because vast swathes of panic stricken idiots over-influenced by media sensationalism have overloaded the computer servers."
well if you think they are idiots for taking the money out, I'm sure Northern Rock would be delighted to open you an account so YOU can put your money IN! lol...
No other liquidity issues in other banks? Then why is Barclays stonewalling on my ISA transfer? This ride is getting rougher!
Evi (comment 49) You are fortunate to have such reserves and it is critical that you protect these. A quick calculation of your family's assets show you risk losing massively if the unlikely happens or significantly if you withdraw your funds. Which loss can you survive?
Your dilemma can be resolved by your attitude to risk;
- do you carry insurance for house, car, holidays, the freezer contents, extended warranties etc? Then you are risk averse.
-do you gamble, invest in risky opportunities or take part in dangerous sports? You are a risk taker.
How far you are prepared to believe the government, FSA and other commentators that collapse is unlikely. (A stable banking structure is a critically important imperative) There is no universal guarantee (insurance) forthcoming. Could you survive almost total loss?
Unfortunately you need to make your choice based upon imperfect and incomplete information. However I'd guess your investments were prudently made. Better by far to rue the loss of several thousands of pounds than the consequence of the alternative. The former allows you the opportunity to stabilise your position and the luxury of reproaching yourself for collapsing under pressure. The latter leaves little luxury.
I have no investments, savings or loans with Northern Rock, what little I have is elsewhere. However should my bank show signs of the jitters, I'll up sticks asap.
I'm beginning to think someone at the ̳ should issue an apology, ~ or shot. Who? Everyone read comment No.7.
just a note to all those whingeing about NR not being able to process requests to withdraw money from online accounts.
It's not deliberate, it's not gated (whatever that invented term might mean) it's just reality.
Think about it. If the M1 is designed to handle x cars per hour and all of a sudden x times 1000 cars use the M1, what will happen? Well it'll grind to a halt won't it.
Websites are much the same. They're designed to handle a certain number of transactions per hour and all of a sudden the load multiplies a thousand fold and they can't hanle it. Quite normal, quite expected. Adding a thousand times more capacity can't be done overnight.
If you want to withdraw, use some common sense and pick a quiet time like the middle of the night.
And stop bloody whingeing!
What a load of rubbish, panic mongers are you all! The fact that NR (Northern Rock)had £24billion in savers funds available made no matter to you all. Withdrawls are now at at worst case £2billion. again so what! Still leaves £22billion!!! the simple fact of the matter is that NR have not yet borrowed the money from the BoE, only made the facility available if need be in the future. Which forgive me if i am wrong, but that makes good sense. Everybody seems to forget that even though 17% profits were forecast and only 15% are going to be realised, this still represents £500 million, which is more that enough to cover the BoE interest rate of 7% (if needed). The only reason people are in lines outside NR is because the media creates a panic!! Goodnight
You say, effectively, that withdrawal levels last week from Northern Rock were less than expected.
As withdrawal levels appear to have been at or near the maximum possible due to Northern Rock's inability to process more your comments here seem a little specious and to have veered towards political propaganda.
I hope other banks are looking closer, at their internal workings.
Robson
They could merge with the next bank to get into this kind of trouble - it would provide a larger asset base and the BoE would find it easier to bail out one big bank than two small ones. Well, unless the markets think only NR has this problem?
I agree with those who say the article was informative. HOwever it would be more helpful if all the press coverage had highlighted the basic solvency of NR and that there was no need to with draw funds.
It isnt an inherent long term problem with NR thats causing the problem, its mindless panic, by peple who dont understand their own finances, which is being inflamed by the media. But of course reassuring stories wouldnt sell papers/get hits on websites would they.
The lack of truly factual and balanced reporting in the media (and this not aimed at Mr Peston) is appalling.
Unless I am missing something, my theory is that NR has virtually no assets at all and is essentially - due to the collapse in confidence - defunct.
The savers money has to be paid back on demand, so is not an asset and people holding mortgages have the right (assuming that markets return to normal eventually) to get a mortgage elsewhere, redeem their mortgages and walk, so how can that be an asset? The only value left is the penalty charges on early redemptions, buildings, systems etc
I run a small business and regularly access by Northern Rock account to fund it. I tried at 4am today and 6am . The result was exactly the same as in the daytime .The Bank is shut to e-account holders.My business will suffer if this continues for much longer. I believe e- accounts are blocked 24 hours a day . Please advise.
I am in my late twenties, and this whole situation has made me fundamentally more risk averse, at least in the short term. So (hypothetically) which of the following would people prefer right now:
£30,000 in NR
or
£30,000 in Premium Bonds (for the long-term)?
Surely the point of the much cited “compensatory” scheme is to increase the confidence of savers? Well, the more I learn about this scheme the more worried I become.
However, as a graduate renting in London I have no money anyway!! I wish I had any money to worry about losing…
One thing we can probably be assured of is that NR won't be picked up by a Private Equity company because they are also struggling to get credit.
Hooray!!
Number 22. Did you not consider that perhaps lots of other people were also all trying to withdraw money online and that the server would probably be quite busy!? It is the very fact that people are panicking, listening to the hysterical and emotive media and withdrawing all their money that is making the situation so much worse. I can appreciate that people do not want to lose their savings but the only reason the BoE lent to Northern Rock was because they believed the problem could be resolved.
People put their money into a building society because they want a safe low risk investment and are prepared to receive a low rate of interest.
Why should they leave their money in NR if there is ANY element of risk? It is quite reasonable for people to move their money elsewhere and there is no way they can be blamed.
The government made a BIG mistake in not bailing out Equitable Life. It was regulated by the FSA and the European Court has recently voted for the money to be paid in full to its members.
If a million Equitable members had received the pensions to which they were entitled people could now have trust in the government and their confidence would not have been undermined.
The Blair/Brown government did not give any help to Equitable investors. People have no reason to trust the government. Mr Brown has never spoken on radio or TV about the Equitable,(to the best of my knowledge) and he is not saying anything now about NR. People have no reason to trust the government as they do not guarantee every penny of our money which is placed in the banks which they oversee.
NR is the tip of an ice berg. I notice that Alliance and Leicester shares are today, Monday, down by 14%. The pound has fallen over the last few days as foreigners loose confidence in the British banking system.
Devaluation is often the painful way out of a countries economic difficulties..
Just reading about Northern Rock. I lost my job a couple of years ago (forunately I was only unemployed for 30 days), the mortgage was in my wifes name - when we asked for help to reduce the mortgage payment - the response was: Yes..but only by 8 pounds per month. Needless to say - I was not impressed by Northern Rock!
"The Government has a duty to protect the honest savings of honest citizens"
Why, exactly?
I don't know - without seeing their current balance sheet and profit-and-loss account - Northern Rock can still maintain that it is financially sound. What must happen that a bank really goes bankrupt and won't be helped by anybody?
And all that while Northern Rock still advertises on its Website - at least on Friday - "Come get it with unsecured loans..." Isn't that deceiving the public?
Mr Peston I salute you.
Just a couple of thoughts for the fine people out there who are flaying NR savers alive for attempting to safeguard their hard earned savings :
1) Isn't it wonderful how principled you can be when you doesn't have a bean on deposit with NR?
2) To the same people - There is no problem you say, if the worst happened and the brown stuff hits the fan, the FSCS is there as a backstop to ensure that smaller savers' aren't disadvantaged.
True, the FSCS will do just that but remember it will take that body a very cosiderable amount of time to process the many millions of claims involved. I would suggest that during this protracted period most claimants, and pensioners in particular, would find life very difficult indeed without being able to draw on their funds, not to mention their loss of interest.
If you fine pricipled people think it's no problem for your money to be out of commission for x years or so, I'm with No 60.
The Bank cannot have enjoyed witnessing the damage being wreaked to Northern Rock’s reputation by all those images of anxious and irate customers queuing outside branches.
Hm. What about the damage to the reputation of British depositors? If I were a foreign bnker I would be very cautious right now about accepting the business of a bunch of brainless lemmings who insist on destroying the value of their own savings despite a guarantee from the authorities.
Before commenting, I declare, I am a shareholder in Northern Rock, not huge, just around 2000 shares only.
The problems, NRK facing is not their own making. Basically, their business is sound, and even their lending criteria is reasonably strict and sound. And also, they dont hold on to the risk of those assets, they are underwritten by their underwriters. And NRK is not in investment banking business, means they dont have CDO/CDS exposure, and considerably less exposure to US Sub-prime business.
The real problem is, the credit markets effectively seized up, means NRK can't really run any new business, neither they can service their existing obligations as they can't secure any funding from the markets.
In this situation, what BoE should do? Well, they dont have to do any charity, but they should be able to lend money, at normal interest rate. Why not? Say, if you see somebody asset worthy, and needs some money, wont you lend money on the strength of his assets?
BoE, FSA and all other regulators should take the blame for this credit crisis. The let the banks to run wildly about this CDO thing, and they did not do anything to stop irresponsible lending.
Fed Reserve completely failed in on of their biggest duty, that is ensuring system stabillity.
The old saying goes. "In Ben Bernanke, we trust NOT".
Re 81.
They were considerably exposed to CDO's.
They operated on a business model where margins are unbelivably tight.
Hit an issue and they go under.
Think Marconi and the telecoms collapse that led to it's downfall.
Companies can't assume that the good times will continue forever, smart companies plan for the bad as well, something NR have obviously failed to do.
Re 81.
They were considerably exposed to CDO's.
They operated on a business model where margins are unbelivably tight.
Hit an issue and they go under.
Think Marconi and the telecoms collapse that led to it's downfall.
Companies can't assume that the good times will continue forever, smart companies plan for the bad as well, something NR have obviously failed to do.
its only going to get worse...we are in for the mother of recessions. batten down the hatches and stop spending. cancel that holiday and cut back on everything. times are going to be hard..very hard.
Northern Rock is yet the latest victim of the vicious British press and the disgraceful unknowledgeable parts of our society. The article above is informative honest and something of a rarity is factual which is a welcome relief. There are too many people that believe the hysteria the press are churning out not only about NR but global warming and alike. British people are constantly being encouraged to feel guilty for their day to day lives and to live in fear. Wake up people while we still have British owned business.
Must agree with 85. I am in the mortgage business and NR are and have been, a very sound and profitable company.
As usual with the 'gutterpress',bad news sells papers, who cares about the consequences.
And yes, my mortgage, savings and shareholding are with NR and will stay so. If fact this morning, I bought even more NR shares. Bargain anyone?
Maybe the Chancellor should be looking at the impact on the treasury of a major loss of savings to pensioners. The lump sums are invested to generate income, the loss of monthly income could trigger claims for income support and loss of capital will mean less in the coffers when inheritance tax finally bites.
Lots of analysis going on here. But my question is what to do if this becomes a much bigger banking problem.
I agree with many of the comments about foolish lending and borrowers living beyond their means. But just where do you find a safe haven for your hard earned cash if we have reached a tipping point and this starts hitting major banks?
Re. 81.
You must have missed the news on Aug 21, 2007 that Northern Rock's US debt exposure was £275 million. £200 mil in US CDOs and £75 mil in US mortgage backed securities.
At that time, I thought that sounded like a lot of money for a small bank but then I quickly dismissed it.
I guess other banks must have thought so too but did not dismiss it like I did.
"this morning, I bought even more NR shares. Bargain anyone?"
No doubt. And tomorrow morning you'll have the chance to get an even better bargain as they fell another 35% today.
In fact, why don't you track the plummeting shares and double down each time? As an investment strategy, it's no more flawed than NR's business model!
just a couple of simple things; firstly, it's no surprise if you've had a mare trying to do online transactions with northern rock at this time. indeed, every time i try to get tickets for glastonbury it's almost like they don't want me to!...maybe they don't really actually sell the tickets....secondly, if you've got 2 grand or less in the NR then you don't need to withdraw as you are guaranteed (well as near as) to get it via the Frightfully Stupid Authority. surely there would be many fewer withdrawals if these facts were clearly reported and actually borne in mind by the more panic prone....anyway, NR may not have had a future as their 'borrow from peter and lend to paul' business model is no good in a credit crunch. nevertheless, the business was profitable and as far as i know, they are not big sub-prime lenders and their default rates are lower than the industry average so what's the big difference between them and their peers? the only potential losers ('cept the shareholders, of course) would seem to be employees when/if they lose their jobs.