Rock to go for a song?
The clever lads at have got hold of the sale memorandum for Northern Rock and put it on their website.
And – curses – it doesn’t include the one really vital piece of information for any bidder, which is precisely what the Rock is paying for its Treasury-backed loan from the Bank of England.
The Government, I am told, regards this detail as too sensitive even to tell prospective purchasers.
All the document says is that "any potential purchaser/investor... will need to have discussions with the Bank of England and its advisers before concluding any proposal."
Too right they will.
The value of the business for shareholders depends almost totally on the length and cost of this borrowing facility.
What the sale memo does disclose is that the Rock expects to have borrowed £24bn from the Bank as of Jan 1 2008 (though, curiously, the Bank of England believes it may well have lent £30bn by then).
The memo talks about this loan being refinanced – though it is not explicit about whether such a refinancing would continue to involve Government support.
However those involved in the sale process tell me it is simply impossible for this facility to replaced by a pure commercial deal in the foreseeable future.
So we are talking about the Government loan rolling on to the horizon. And according to the sale memo, even in 2010 the Rock will need to be in receipt of £6bn from what it calls a Replacement Facility – which, as I say, is in effect the current Bank of England loan by a different name.
Anyway, the memo outlines three possible different destinations for the Rock:
• sale of the whole company;
• sale of the basic physical infrastructure of the business, viz. the branches, IT and call centre, which might or might not also include Northern Rock’s £13.5bn of retail deposits and matching assets;
• sale of the infrastructure plus all those securitised mortgages, leaving behind a rump of assets and liabilities for orderly run-off.
Now, it looks to me as though the jobs of most of the Rock’s 6,000 employees should be retained, under these scenarios.
But if I were a Northern Rock shareholder I would be alarmed, because the possibility of retaining the Rock as a listed company in its current form is simply not mentioned as an option.
And the point about the status quo is not that it is necessarily the best option. But you would expect it to be the base case for any examination of what should happen to the company – such that any deal would only be done if it created more value for shareholders than sustaining the current structure and ownership.
The implication therefore is that Treasury simply wants to get shot of the business – though it would deny any such intention, largely because it can’t be seen to be pulling the strings for fear of being forced to take more formal responsibility for the Rock’s welfare as a shadow director.
Also it won’t wish to be seen to be short-changing the 150,000 or so small shareholders in the Rock, many of whom acquired their shares when it converted from a building society and saw their stake as a retirement nest egg.
But the contents of the sale memo imply that the initiative put forward by Luqman Arnold and his Olivant financial business is going nowhere. This credible former boss of Abbey National and UBS believes he can stabilise and grow the Rock as a going concern. His plan would be to retain the Rock’s listing and inject some new capital into it in return for a stake of less than 20 per cent.
Unsurprisingly, a number of the Rock’s larger shareholders – including the hedge fund, RAB – believe Arnold deserves a proper hearing. So they won’t be pleased if he’s already been effectively ruled out.
In the memo, the Rock is given the cutesy codename "Blackbird". Its shareholders will hope that’s not because a decision has already been taken that this bank is going for a song.
I'm 
°ä´Ç³¾³¾±ð²Ô³Ù²õÌýÌý Post your comment
Thanks again for your great blogs!
Why should shareholders be alarmed about the failure to mention the possibility of the company continuing. The main concern of shareholders is that price of the assets and especially the mortgage book is maximised by ensuring optimum lots. The Blackbird scenarios seem to offer just such possibility. If I were a NR employee I would be much more worried.
Robert,
If indeed 'those involved in the sale process' are communicating with you directly as you have us believe- why not just ask them what the BoE are charging NR by way of interest on the loan?
Or has your 'source' really abandoned you in favour of the clever lads at FT alphaville? Shame..
A point about the sub-prime problem in the US which I haven't seen spelt out:
My cousin is a mortgage broker in the US (one of the people who created this mess...) - he makes his money by arranging a mortgage (collecting, say, $5k commission) but then spending part of this commission on paying the penalty to extricate his client from the mortgage before it moves from the introductory 9% to the boosted 14% (for example) interest rate. He then re-finances them every 6-12 months and has a stream of income from each client (and only needs a small stable of clients, rather than new ones), where he uses part of his commission to pay their early-exit penalties and also as sweeteners to keep them loyal... What I'm saying is that these people will now find it impossible, due to the credit crunch, to re-finance and to stay on introductory interest rates. People who could have avoided defaulting on their sub-prime mortgages will now not be able to afford the boosted interest rate and the number of defaults will spiral upwards exponentially.
I haven't seen this spelled out anywhere so far: Some defaults in sub-prime US mortgages have led to a credit crunch. But the credit crunch itself will then lead to a massive acceleration of defaults due to the inability of people to re-finance back onto introductory interest rates.
Mortgage brokers in the US have actually been making their money not simply by selling lots of dodgy mortgages and lying about incomes etc. (although there has no doubt been a lot of that too) but through continual re-financing (playing by the rules of the 'game' without anticipating that the rules would change).
It also follows that the actual risk to the UK depends in part upon the extent to which people here continually re-finance onto lower interest rates - and therefore the proportion of people vulnerable to defaulting if expected to pay the interest rates they signed up for (if unable to re-finance).
The big mistake that the government made was agreeing to loan money to the Rock in the first place. Now that poor decision is coming home to roost.
It looks to me as if the potential bidders will all be trying to use a bit of politics to secure some sort of taxpayer subsidy in exchange for taking over this business. They know that the Bank of England and the Government are well and truly in a hole here, and are desperate for a solution.
Now that they are in this hole, the Bank of England cant close the bank down without it needing a lot of taxpayers money. Those guarantee's stupidly given away at the start of the crisis means any wind down will almost certainly result in large losses for the taxpayer. I have little doubt that the lending by the Rock hasnt been that sensible at all, and the bank's assets arent as good as everyone thinks.
What a horrible situation. A good advert for Government to avoid political pressure and knee jerk a response to a crisis, but that is the only good that has come out of it.
Why blackbird and NOT blackmerde???
If NR were to be a cartoon character it would be striding forward way out over a precipice with the cliff in the distance called "Liquidity". It will not fall unless it realizes there is nothing to support it. When the realization dawns - it drops. NR's business model is now broken. Its assets are, by all accounts, quite reasonable - except the free market will not accept this as it will not accept that much of the banking industry stands on firm ground - not all and there is the problem!
The guess is that NR is paying 7 or so percent to the BOE and it has had (as I understand it) to provide security for the loans.
So if the BOE is left holding bunches of mortgages then so long as these mortgages perform we (the UK "we") have lost nothing. NR has only 6 Bn of retail depositors funds left and that is a national liability. (About 18Bn has already left.) The BOE should encourage depositors to take their money out and give NR loans secured on mortgages if it wants to minimize its (and our) risk.
It is after all better to hold high quality performing mortgages as security than it is to guarantee depositors loans - isn't it? (Or maybe the BOE has already done so - does anybody know?)
The shareholders, I am afraid, took the risk and they have lost - sorry but that happens sometimes in the free market.
Solving crisis, should allow freedom from old thinking such as moral hazard, etc. Can you stress test great depression, climate change, ww3 . . ? At what costs? Why you choose to talk down instead of talk up? After all, services is about image and prestige. Remember contagion crisis 1997? Tourists? Restaurants? Pension funding? Business investment? Consumer confidence? Are you sure you and your loved ones are immuned from contagion?
So the Rock is being put up for sale by Merril Lynch, Citibank and Blackstone?
One busted flush for sale by two others along with a good candidate to be a third?
To Post 7:
How about those pension trustees and shareholders who passively invest in market trackering funds, hence indirently hold NR shares?
Employees given NR share options?
All in the good name of Modern Portfolio Theory and diversification. What have they done to deserve this?
Whilst I have every sympathy for the 150000 or so small shareholders who may or may not lost out. Anyone who depends on pure equities as a retirement nest egg is either not risk averse or incredibly naive. If you play the markets you will lose sometime, end of chat. As for why the leaked report does not contain full details of the BOE loan, maybe, just maybe, The Rock anticipated the vultures at the press getting the sensitive and confidential information and splattering it all over the web in a sensationalist manner just for a change.
To post 10:
Deserve? It is the free market. Shares go up as well as down. This is how it works. This is why one should diversify ones portfolio and the ideas are not, I think, modern.
More generally:
Anyway, I have just read the NR Memorandum. One thing that strikes me immediately is the limited range of 3 options. What about a full break up? If the loans as so good then they will be valuable and the 76 shops might make a good pub chain (Isn't that a traditional conversion for a bank?) If the company's software is so good what about selling it separately? The company should be setting out to maximize the shareholder value - that is the prime duty.
Overall I wonder if the assumptions behind the 'constrained' scenario are sufficiently robust. Lets face facts the 'goodwill' in NR is shot. Calling it Northern Virgin or whatever will not erase the memories of the queues. I think the breakup value situation should be addressed, obviously not by Merrill Lynch, Citi and The Blackstone group as it was not in their brief, but it should be addressed, by the shareholders and the BOE. I have a hunch NR may be worth more as a sum of the parts than the very heavily discounted whole.
Looks like they've set the lawyers on Alphaville - all the Rock's docs have disappeared from the site.
According to the Guardian, Northern Rock advisers the Blackstone Group have won an injunction to force Financial Times to remove the story from its website. I've just looked and it's gone!
The link you give leads to a page that is no longer there. I checked earlier from my workplace website and the page was present. Is something up with the original report?
After last nights white tie knees up and jellied eels all round Mother Brown is facing a rough ride from one of the usual suspects. According to the Telegraph Willem Buiter, former member of the MPC, has prepared a submission on Northern Rock for the Treasury Select Committtee which may have Mother B reaching for the Alka Seltzer. Buiter has the temerity to refer to the Rock as a shambles and puts the blame on Mother B's decision to hive off the role of regulator from the B of E to the FSA. Unfortunately the ³ÉÈËÂÛ̳ website does not show any link for the Treasury Select Commitee so we shall have to wait for tomorrows papers to find out more. However Buiters comments will send a stark warning to Mother B about the political fallout from the Rock. Blaming the Bof E is a smokescreen which will not provide sufficient cover for Mother B as attention is slowly but surely focussed on the pathetic performance of the FSA. Mother B looks to be in a political straightjacket from which Harry Houdini would not have escaped. The harsh reality is that there is no private buyer in place with the capital or the inclination to take the Rock from under the table. Any solution that lumbers the taxpayer with part of the bill will fall foul of European law. This one has legs so keep up the good work Robert but do ask your colleagues to post the submissions to the Treasury Select Commitee on the ³ÉÈËÂÛ̳ website.
Well Bob, commentator number three seems to have a point about your sources. The FT story appears to have vanished. What credability does does your story now hold. I am slightly worried about the amount of fiction being created on this story. If your story is based on the leak to the FT which now seems questionable where does that leave you?
Quite a few good lines in the 36 page document it seems, such as
'Blackbird's business strategy is based on its low operating costs and high asset quality'
According to the FT, the memorandum assumes Northern Rock’s profits will plunge to £143m in 2008 but will recover to reach £643m by 2010
Highly optimistic, verging on fantasy....
Robert, Why did you not mention the information from DRB #18?
And DRB are the profit figures 'assumptions' or forecasts?.
The memorandum has assessed the current business and judged that it is profitable even with penalty rates on BoE loans. The forecast for 2010 must assume cheaper sources of finance for NR become available. On annual profits of £600m - or even half that - the mortgage book is worth many multiples of the current share price.
Filings to LSE seems to show some speculative short selling of NR shares. In time this may reverse.
Those 150000 shareholders are perhaps genuine shrewd long term value investors who may not need dividends.
History shows no banks ever failed over last 507.75 years. In particular, NR business model is totally sound. Commercial paper markets perhaps?
NR emerges a very strong brand!
150,000? If each holds £10,000 worth of NR shares, total £1.5 billion (> NR market capitalisation) is already locked up for long term.
Naked short sellers can only cover by buying back from new short sellers. But price cannot fall below £0. When no more new short sellers, how do they possibly cover?
Is it possible that shares held by those 150,000 shareholders are currently being lent out to short sellers without their knowledge and without paying them their rightful fees?
The goverment don't want to get involved as they can see that shareholders will hold them to count if they pushed forward one of the above mentioned ideas.
Considering the government can't pay off the shareholders who have lost money doing nothing and leaving it to market forces is all they can do.
Dear Robert
"Who is under writting the BoE's loan to Northern Rock,"?
"ITS the Rax Payer, and its going to be a darn sight more than £30 billion, because the Sub Prime scam, and thats what it is, is going to run for another 6 to 9 months, and there are THOSE, who have yet to declare involvement in this."?
Under writers are making millions of pounds profit in this sub prime market, a money Bloc, to both cool the market, and bring house prices back to there real worth, instead of this over inflated market there at at the moment, Whilst the money men make millions on misery, the real loosers are the house buyers, AND NOW THE ECONOMY BECAUSE ITS GOING TO GET A LOT WORSE BEFORE IT CAN RECOVER, there is a definate down turn in economic terms.
Every mortgagee may now feel like NR. If interest rates rise and house prices fall, and if banks call back on their mortgages now, just like how the commercial paper market drys up, there may be many many NR.
So, banks are not allowed to call back on their mortgages because many many people will become NR.
Commercial paper market should not be allowed to dry up, so that real economy can continue to grow at its natural long term sustainable rate.
Unjustified widespread paranoia, arising out of nothing but PERCEPTION (or is it DECEPTION?) among its participants now disrupt the health of real economy, incurring real costs, jeopardising long term prosperity of you and me.
Robert,
This situation has become a right mess and i feel that the Treasury does not know how to deal with it for fear of creating a political fight. Ultimately, whilst i feel very sorry for the thousands of small stakeholders, it is going to be the shareholders who will take the hit on this. Their shares are now effectively worthless. The Treasury, who are now underwriting and in effect controling the business cannot allow the hedge funds to bully them into a particular course of action as they have a duty of care to the tax payers who are putting in £24 - 30 billion to prop up the bank. The hedge funds took the risk and should have known better that the business model being used by the NR board may lead to problems. However, they chose to ignore this when the bank was making some serious profits. It is now time to stop the charade and take the bank under public ownership so that its considerable assets can be used to repay back the public debt and allow it to be restructured prior to being privatised again.
'The Exchange expects all member firms to act responsibly in their dealing in Northern Rock shares and to trade in a manner that will ensure that settlement deadlines can be met" LSE today.
Looks like SSs are hanging on by the fingernails. Just can't force the NR price down any further. Going to have to start buying to settle soon. Oh dear... their business model is in trouble.
Every mortgagee may now feel like NR. If interest rates rise and house prices fall, and if banks call back on their mortgages now, just like how the commercial paper market drys up, there may be many many NR.
So, banks are not allowed to call back on their mortgages because many many people will become NR.
Commercial paper market should not be allowed to dry up, so that real economy can continue to grow at its natural long term sustainable rate.
Unjustified widespread paranoia, arising out of nothing but PERCEPTION (or is it DECEPTION?) among its players, now disrupt the daily activities of real economy, incurring real costs, jeopardising long term prosperity of you and me.
The shareholders must take the hit here. That's where the risk should reside. Don't expect sympathy from the market - or HMG at the moment.
Those who got their shares for nowt either by being real NR customers or carpetbagging had the opportunity to take their profits over the best part of a decade - as I did. If I still had the shares today, I would just have to take my lumps and STFU.
If you bought the shares latterly, then the risk was plain to see.
Northern Rock have won an injunction preventing further publication of the memo, and it has been pulled from the Alphaville website on the judge's orders:
Thanks to those of you who've commented that the article I originally linked to has been removed. Obviously it's out of our control, but you can find out what happened .
I fail to see how NR can 'go for a song' when it's not currently going for anything. Nothing is happening on the sale front at all.
As for NR continuing as a going concern - it already is! The status quo is what we have right now, and it looks doubtful to change, much to the chagrin of certain analysts and commentators ;-).
My concern is what action will be taken against the Bank of England if it writes off the interest due on it's loans to NR ?
If BoE plans not to recover my tax money it's given to NR as a sweetener to get rid of it, I'll have it back please or an interest free loan to buy myself a house.
Re #25
Yes, the situation is a right mess, NR on it's knees, the tripartite authority a laughing stock, everybody who cynically sold short to make a profit on NR shares unable to complete the deals (didn't your business plan foresee this then, I hope you all lose your shirts !!). If only it could have been avoided, if only the myriad of lawyers who have subsequently told all sides concerned that financial assistance could have been given to NR in confidence (Oh yes they have, TRUST ME -said people 'familiar with the situation' funny phrase that !), if only Bob a Job Peston hadn't been so keen to earn a whacking bonus by bringing the whole structure down with his nasty leaked story - for which no one seems accountable and no one has had a chat with the select committee. Why don't you justify yourself Bob lad !
Any way, we are where we are. Heres to a happy Christmas to all concerned, especially the shareholders who stand to lose money (that's the gamble i'm afraid) and to the 6,500 professional, dedicated loyal staff in the North East who remain focused and determined to get through this despite the frenzy engulfing them and causing them unbelievable stress and uncertainty. But hey Bob, you wuz only doin' yer job, Right ?
ROCK STEADY ! Come On !
This is really getting sad now. NR should have been left for dead. I feel sorry for the small shareholders as they were gifted these shares they can be forgiven for thinking that shares will retain some value. The pension funds and whoever that purchased shares only have themselves to blame. It is their job to try and achieve the best returns for their customers, not just match an index and that may require using some intellect to make market calls - DO YOUR JOB! As for international investors in Northern Rocks funding instruments, by buying the paper you acknowledged you are professional investors, deal with it you made a mistake. You could have invested in one of Bear Stearns leveraged funds if you so desired. Anyone who thinks that this is the first banking crisis in over 100 years should check history, I am not talking about merchant banks such as Barings but what about the 70's banking crisis? Don't any of you recall when NatWest wasn't just a subsidiary of Royal Bank of Scotland and how it was created. How the BOE forced the merger of institutions to shore up the rickity banking system, just type in secondary banking crisis in a web browser or wikipedia and learn something. Does anyone recall how Midland, (once the biggest bank in the world), was in dire straits after the Latin American syndicated loans and the Crocker Fiasco. Luckily HSBC took the decrepit institution over. The FSA has no right to make comment because the funding scam at Barings was well within their remit at the time, but the FSA has always relied on the BOE to handle things with discretion. Northern Rock was a sham with a deposit base that could not match its agressive lending , Depositors should have been bailed out to the full extent of their savings but the shareholders deserve nothing. I haven't checked but I hope the ex-Abbey National guy in question isn't the guy who was in charge when AbbeyTreasury Services lost its shirt in the junk bond market and was sold to Santander for a song - If so that would be just too ironic.
It's probably not a coincidence that the latin name for Blackbird is Turdus merula from the family Turdidae
It would be somewhat 'constrained', to say the least, if there were but three potential outcomes to Northern Rock's future.
I would like to add one further possibility:
Northern Rock could be 'split' into a classically-defined Retail Bank (only offering personal current account and lending products) and an Investment Management company (only offering savings accounts and investment products).
The investment management side could retain the 'Northern Rock' name, whilst the Banking side would need to operate under a quite separate corporate brand - although I still rather think that 'Virgin' is best suited to the world of media or publishing rather than the financial!
comment no 20
don't get too hung up on conspiracy theories about "short sellers" etc
the bank is an ex-bank, the bank has ceased to be , its slipped off its mortal coil to meet its maker.
Perhaps its only asset is the name and address of the 135,000 small shareholders who hold and hope.
How much are the names and addresses of the people who bought the bank over the past 6 weeks worth?
You could sell them shares in BL.
Well, it looks like all the chickens are coming home to roost. NR cannot be sold at the moment at its current price. Just look at th FTSE and DOW over teh past week - red on red - any buyer is goign to try to pull the share price way down on its current trade to creat comfort. NR deposits at the moment? Hmmm... Customor loyalty to a new rebranded NR, not achieved overnight. I would guess that NR's mortgage book is so fat at the moment and its deposit base so thin that the ban will only be bought at 40% discount to the opening trade today. The buyer is simply buying debt in a firesale. Let's not loose sight of that fact.
Only one question !! I bought a few weeks ago 1000 NR shares for 2.83 !! Next day it was about 3.20 and i was so happy, then the shock. I thought when i wait enough, maybe the share goes again over 3 pounds. But now, I can not sell it , because i loose then so much money (for me it is a lot of money). Does everybody realy think i never again get my money back ? Do you think i must sell it now, and loose money before i loose all my money. I am sorry, my english is not so well, i hope everbody can understand what i try to say, and can give a advice what to do. Thank you very much Vincent.
I agree with the comments on the piecemeal nature of Barclays' announcement.
However, serious concerns lie in the possibility of an aggravated illiquidity in the wholesale money market, with their consequential impact on the stability of the banking system and the economy at large.
This risk should attract the immediate attention of the authorities.
In the first place, they should perhaps reform the regulatory structure and divorce it from the day-to-day supervision of UK banks. This responsibility should be returned to the Bank of England, which, in turn, should be more proactively engaged in their intervention in the wholesale money markets.
The Bank of England could also considerably widen the eligibility of longer-term securities to enhance liquidity in the wholesale money markets.
Last, but not least, the government must pay serious attention to the upgrading of the level of deposit repayment guarantees to shore up public confidence in the stability of the banking system.
To Vincent #39
The stock market is not a game. Traders and individuals CAN indeed make a living from it and they CAN also make a fortune. BUT for there to be winners there must also be losers.
Take out your money, accept your losses, and learn your lesson.
Never chance more money than YOU cannot afford to lose. Do your homework - learn the system - if it sounds too good to be true ... it is!
Wishing you all the best.
Dear Mr. Peston
What is simply astounding to me is that you cannot see that what actually metters is not liquidity or whether the bank has been run properly or indeed what is happening in America. The only thing that means anything here is PERCEPTION, and as such I wanted to thank you and the ³ÉÈËÂÛ̳ for your grat contribution to the stagnation in house prices and wish you luck in your gallant efforts to bring about a recession.
Kind regards
Knu5