Rock and nationalisation
One of the participants in the auction of Northern Rock will drop out today.
It’s not a devastating blow to the rescue of the Rock, since the possible bidder – the Tyne Consortium, which includes the US private equity house, – was not a front runner.
But it’s indicative of the huge obstacles in the way of a commercial solution to the Rock’s financial crisis.
Tyne, as I understand it, became increasingly frustrated by the uncertainty over whether the Rock’s future is being decided by its board or the Treasury (the confusing answer is that, in theory, the Rock’s directors are in charge – though no deal can be done without approval from the chancellor).
Also prospects for the UK housing market are deteriorating fast, with from the Halifax only the latest in a bad-news glut – which reduces the value of the Rock’s assets and undermines its business model.
What’s more, there isn’t a level playing field for the putative bidders, in that only one of them, the , is having some of its expenses met by the Rock (up to a maximum of £5m plus VAT).
The justification for recompensing Sir Richard Branson and his chums is that the Rock believes any jumbo loan raised by Virgin could be used by the company, even if the Virgin bid flops.
Unfortunately, that jumbo loan – from Royal Bank of Scotland, Deutsche Bank and Citigroup – looks more and more elusive.
These banks have made no firm commitment to provide the £11bn which Virgin thinks it can raise.
And, as I pointed out yesterday, the banks would only provide the loan if all the Rock’s plum assets are pledged to it – which would leave the taxpayer lending between £15bn and £16bn to the Rock secured against less attractive assets whose value looks set to fall for some months.
Just as disturbing, those running our biggest banks are deeply concerned that there’s now a structural shortage of liquidity in the sterling money market. The normally sanguine head of one was extraordinarily pessimistic last night when I saw him.
That liquidity shortage can only be exacerbated if £11bn is taken out of the system and provided to the Rock to pay off some of the taxpayer-backed loans from the Bank of England.
So in going for a commercial solution to the Rock’s problems, the Treasury could worsen the credit crunch that is wreaking havoc to our growth prospects.
It’s a mess of considerable size and complexity. Which is why, as I’ve been boring on about for weeks, nationalisation of the Rock may yet turn out to be the best of some unattractive options.
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Robert - everyone seems to be pleading for an irresponsible interest rate cut at a time when inflation, even on the CPI measure, is above target and rising.
I am interested in whether this would actually help. What if Libor stayed high, but banks including Northern Rock had to pass on the lower interest rates to people with tracker mortgages. Wouldn't this worsen their cashflow problem?
It is becoming increasingly clear that the only way out of this is for Northern Rock to be Nationalised or to be put into a form of government led management.
If there is no lump sum available to Virgin, as appears increasingly likely from the tone of your post, to allow them to complete the purchase then the government must step in to protect both the depositors and mortgage holders of Northern Rock.
The branches and savings bank can surely be sold as a going concern to a bank or other financial institution either UK based or overseas looking to get into the UK market for a fair price.
The mortgage side must be put into an effective run off with no new loans being written and a careful review of all existing loans. Then a sensible decision can be made about parcelling up the loans to be sold off to other mortgage providers.
If as people keep claiming the majority of the book is sound then there should be buyers for most if not all of this. The funds raised by this sale can then be used to, if necessary, subsidise the sale of the less attractive loans.
The government needs to act and act soon to ensure that there is still a savings bank and a branch structure that someone would want to buy to try to save as many of the branch staff jobs as can be with a number of head office staff also protected.
This would help to protect savers and stop the need for any government funded depositors protection.
If the mortgage book can be sols of in manageable chunks maybe most of the current staff managing the mortgage books will also have their jobs protected.
After all mortgages are long term investments and any sale of the mortgage book and orderly run off is likely to take a number of years.
There may even be some money left at the end of this for the shareholders.
Northern Rock will almost certainly be nationalised, and other banks are likely to follow them into insolvency and state rescue.
The big question is how solvent the UK government is. Of course we all "know" that the government can tax and inflate away its debts, but it would be foolish to assume that bond holders will be as relaxed, and rates may yet rise in what would be a crippling blow.
The slow-moving credit crunch is massive in its scale and will bring down large chunks of the UK economy. Very have grasped the implications of what is going on and to be certain the government is clueless. Brown, Darling and King are like rabbits caught in a car's headlights.
I have a strong feeling Branson will walk away from this.
Unlike our Chancellor I'm a closet economic and industrial patriot so I wouldn't actually have any problems with all the banks being nationalised.
What these last few months have demonstrated clearly is that a combination of greed and incompetence has produced huge dangers for the economy and there's a real question in my mind as to whether we should be prepared to put up with this nonsense anymore.
The "Big Bang" experiment is effectively over and it's failed.
As Northern Rocks loan to the Bank of England is set up on a commercial basis i.e. bank rate + (1.25% payable 5 years).
Mortgage variable rates are hitting 7.80% among lenders at the moment and with Northern Rock paying the Bank Rate it certainly should hit the 500 million profit mark for 2007 & 2008.
Would it therefore not be better to leave Northern Rock continue as is. Install a new Chief Executive to help resize its balance sheet and increase its retails deposits.
When the money markets return to normal Northern Rock will be more than anxious to repay its debt to the Bank of England to avoid paying that extra 1.25% and hopefully by then banks should not have problem lending to a profitable bank like Northern Rock.
Nationalisation is a political solution that will create a moral hazard. We already have a nationalised bank, its called the Bank of England.
With all due respect to you Mr Preston, I still think the best solution would be for the Rock to be allowed to go belly up. Taxpayers take the hit for a reckless, irresponsible chancellor and we get on with our lives.
It would set a precident yes, but it would also teach the leaders of business to deal with other peoples money more prudently.
The last thing that the UK taxpayer needs is the president which allows an institution, which was reckless in it's pursuits of profit, to become a tax liability for the nation. Particularly because director negligence.
Paul Amery wrote:
Very have grasped the implications of what is going on and to be certain the government is clueless. Brown, Darling and King are like rabbits caught in a car's headlights.
King has stuck to his guns and role. Interviews have made it clear that it is Darling's U turn and flapping that have exacerbated the situation. Because Darling can not do anything without Brown's ok we also are lead to lay the blame squarely at the feet of the PM.
Of course King will take the blame especially as certain people at the FSA read the political situation quite clearly; they blame the BoE and thus put themselves on the same side as Brown and Darling.
I don't see how the Gov't can set a precedent by nationalising NR.
So far, we've only seen the tip of the financial problems headed our way - if the Treasury takes this step, many more banks will continue to chase lost money that they don't have in the knowledge that they will be 'bailed out' with inflationary money created by the Treasury. This has to end at some point. And when it does end, banks left in the lurch will probably sue the Treasury!
Crazy.
Does the moral hazard argument still apply? I cannot imagine that the BOE has either the funds or the inclination to try and shore up another bank facing difficulties.
Things will get really bad if another bank gets into liquiditiy problems and it could bring down the whole house of cards.
I am also not convinced that changing base rates will help anyone very much. The real cost of money is the LIBOR. There will not be money on offer at the base rate, so its a bit like 'freezing' prices to try to stop inflation.
My only hope in all of this is that the banks are deliberately hyping up the credit crunch to force central banks to provide liquidity and thereby safeguard their end of year bonuses. They can also squeeze mortgage holders out of more money.
What have NR done with the £29bn they've borrowed off the government ? Is the total 'value' of NR about £130bn and if so does the loan then equate to 22% of it's total worth ?? At this rate of knots it won't be long before we have 51%.
Not enough time has passed to allow us to look at NR in hindsight, but, with foresight, what is the government strategy if/when there is a run on another Bank ? The likelihood of this is building.
How did Germany and the other European countries manage to patch up many of the first wave of their bank problems earlier in the summer without incurring the wrath of the EU ? The infamous and inadequate 'Memorandunm of Understanding' between BofE FSA and UK Treasury was set to fail its first real test, but I'm not fully clear why the European rules seem to be operating against the UK. The French ran with a nationalised banking system for years and I can see the desire to avoid that, but not if systemic collapse is such a widespread risk. Could this force us into the Euro, and at a very adverse rate like Italy ?
I have commented for many months now to you Robert, and the next 2-3 years are going to be tough for UK Plc and its workers. There are actually three stages to this
1. 9 August - the fallout will show through by end March 08 in the UK as the first waves of losses are announced by the UK global financial institutions.
2. By End 2008 - house prices will be falling more steadily and faster than now. Credit will be harder to get and defaults will rise (both personal and corporate). Chinese and Asian stock markets may also burst as high commodity prices feed through and consumers slow down spending globally.
3. By End 2009 - US Personal and Auto Finance markets are not yet on the horizon, but they too have had their debt "packaged and securitised". This debt has done the "pass the parcel" around the world, to lay off risk. If this debt starts to wobble, the world faces economic recession.
2010 will see some recovery starting but this will take 2-3 years to feed through too. All in all, not an edifying scenario.
I just don't think anyone knows the true scale of the global financial mess, but one thing is for sure. When the calculations are done, many major financial institutions will be nursing some heavy losses. We of course, will have to pay through use of services, borrowings etc.
There are no winners. Cash is fast becoming king.
I find it almost unbelieveable that there are those at the top of the financial banking tree calling for an intrest rate cut.
The reason they give is to boost the housing market and consumer confidence 'to allow them to carry on spending'! It beggars beleive that there are those who want us all to carry on borrowing to stave off a recession now just when inflation is really begining to pick up. It's just such idiocy that created this mess. Furthermore, recessions are a natural part of the economic cycle and we are probably due one.
As an estate agent I can tell you the the Housing market decline is well and truely happening. No one wants to sell, even fewer want to buy. I've got nothing to do all day but read and reply to these blogs... and it's been like this since mid September.
NB to #5 Nationalisation does not create moral hazard if those responsible for incurring such loses that their bank has to be so treated lose their jobs, pay, bonuses and golden goodbyes. Moral hazard is created only if those responsible remain. However your point is a fair one in light of the fact that ,for example,the gentleman who resigned as head of HMRC when those two discs went missing has since been re-employed in the cabinet office on the same salary.
A reply to Damian Kelly
Was it not Mervyn King who said, on September 12th, that
making life easier for investors who were now nursing losses as a result of risky behaviour would penalise those financial institutions that "sat out the dance", encourage "herd behaviour" and increase "the intensity of future crises"
and then bailed out Northern Rock two dayus later?
Why are the Treasury and Northern Rock still messing about ?
It has been abundantly clear that nationalisation has been the best option since Northern Rock had to approach the BOE for emergency funding.
If NR themselves couldn't raise funds at a viable rate, then potential purchasers aren't going to be able to either - unless we the taxpayers provide them on a plate.
Nationalisation (in whatever face-saving form it is presented) is the best way forward - and least damaging to the banking system as a whole.
Please Peston, keep your views to yourself its easy to exploit your viewpoint when you have the bbc as a portal to the masses. Unless you know the facts please pipe down. All you ever seem to write is negativity, shameful
Hilariously, the Treasury is almost certainly breaking the law: The Financial Services & Markets act makes it a criminal offence for a person who is not appropriately authorised ("approved") by the Financial Services Authority to exert any significant influence over an FSA-regulated entity. But try telling Mr Darling that!
There is no way NR will be nationalised. Firstly, it's a silly option, and secondly, they are still a functioning business. This will drag on until NR have got out of the BofE loans themselves.
Nothing to see here. Move along.
Is Robert capable of talking about something else apart from Northern Rock???
With all due respect to you Mr Preston, I still think the best solution would be for the Rock to be allowed to go belly up.
The Rock isn't going to go belly up, and isn't in any danger at all of doing so. That's the point.
Why do you write as though the credit crunch is just a rock in the water that we may or may not have been able to see in advance? And that the failure to anticipate and deal with it earlier is not something that legislators, bankers and other City folk should be held to account for.
This is nonsense. Anyone with a brain who prevented themselves from becoming locked-in to defending the status quo has been saying for ages that the bubble of the last 10 years (at least) is unsustainable, and that it is the result of illogicality, stupidity and total immediate self-focus, the effects of which will sooner or later have to be corrected and reversed. And that the sooner we recognise this, and start the corrective process, the less pain it will actually cause.
You make it sound as though the City has a legitimate grievance against those unspecified wreckers who threw the banana-skin of the credit crunch in their path. Rubbish!
Nationalisation is only an attractive alternative for partisan political reasons - ie to hide the losses (not that they will be able to with us watching). If the private sector cannot make a rescue plan work, why on earth do you think an utterly incompetent public sector can? As has been the case from the beginning of this affair, liquidation is the only sane solution.
Quick question Mr. Peston - do the Bank of England and MPC now have a conflict of interest when setting interest rates because of their loan to Northern Rock?
Clearly to the downside, if they had to raise interest rates (for inflation reasons), that would reduce the relative premium due on their loan to Crock if it's fixed rate, or worsen the burden if its variable. Or it could make it more or less attractive to buyers for the same reasons.
Either way, here's a political angle to the BoE's choices, so they can no longer be considered as independent now they have a £25 bn interest to consider. Unless there is a clear separation of the management of this interest between the BoE and the members of the MPC, I see that as a problem. Does it bother you?
Nationalisation has always been one possible outcome of this issue. That was clear from the beginning. However, to make it the only ,or prime outcome from the beginning is simply to be naive. The political dropout from such a stance would have led to a huge hue and cry. Better to just go through the process of seeing what commercial bids were available and if none were timely enough ,or attractive enough then you have created the opportune moment to start talking about nationalisation in the interests of protecting taxpayers money and jobs.
This stance you can then reasonably defend.
I'd be surprised if the people pulling the strings have not been thinking along similar lines to this and indeed sometimes market events simply move too fast and options get closed out which looks very possible in this issue.
If market conditions caused NR to fail, if those same market conditions are still worsening, and if they are not likely to improve significantly in the near future, is any kind of rescue still viable?
Of course nationalisation remains an option since all commercial realities can then be ignored. But should they?
I cannot help but compare this to all the manufacturing industries that were let go with no state aid. Why should banking be different? Is it simply that the banking bigwigs lunch in the same clubs as the treasury bigwigs, and want to find cushy jobs when they "retire"?
Would it not be best for the country in the long term to let the bank fold?
How much longer can we allow the inept management of Northern Rock and the cry baby antics of a couple of vulture funds to dictate to the Bank of England how the business should be run.
There is one thing clear as day. Without support from the government Northern Rock is bankrupt. Whatever the hedge funds might say.
If you cannot pay your mortgage your house gets repossessed. Why shouldn't the same effectively happen to Northern Rock.
There have been nationalised banks in the past there is one nationalised bank already and the government could add Northern Rock into that and still keep confidence in people's savings.
Why can't the Northern Rock savers be effectively transferred to the Post Office and into national savings accounts administered from the post office network.
The same could happen to the mortgage book as the Post Office already offers personal loans and mortgages. their mortgages nclude buy to let and self employed mortgages. See the link below for further information.
The extra footfall at post offices from Northern Rock customers and allied additional sales of other goods such as stamps, home and travel insurance etc could help keep open hundreds of Post Offices that may otherwise shut.
The Post Office could also administer these extra mortgages from the current Northern Rock admin offices. They could keep most of the staff on and also help to increase the sale of mortgages via the post office at sensible interest rates and terms.
Your thinking is spot on, and prescient as ever Robert. In 2008 liquidity will be all. And that goes for Treasury. More big picture thinking such as this would be welcome from the government at this juncture.
Robert,
If we assume we are only at the beginning of the credit crunch, could you advise as to what indicators might show weak banks / lending instituions versus stronger i.e which might go the way of Northern Rock. We all hear of Bradford and Bingly and Legal and Gen being vulnerable but I am not sure why versus others. A league table would be nice.
I am aware that this sort of thing might (and you being in a postion where poeple listen and act en masse to your advice)just lead to a self fulfilling prophesy and more runs on institutions but if they are fatally flawed, demise will happen anyway but just later.
PS:If you could tell me first so I am ahead of the curve...... ;-)
The issue of nationalisation cannot be discussed without saying what price should be given to the shareholders. That is why a market solution is needed. If there is no market price then nationalisation at zero seems a possibility. In a rush to create Network Rail the owners of Railtrack got too much from the tax payer. I hope that the Treasury take this one carefully.
Where can we buy what Sefendum has been drinking?
Northern Rock is only functioning because of the continuing support of the UK taxpayer. Without the UK taxpayer (i.e. you and I) loans supporting it it would be bust! It is that simple.
There seems to be a number of concerns raised most notably in the Guardian that many of the better loans have been siphoned off to Granite and that our £ 24 billion or is it £ 29 billion, after all whats another £ 83 for every man woman and child in the UK between friends, may well be supporting the worst of the loans and as such it is very very exposed.
I think we need to know and very soon. I fear that this is going to cost the UK tax payer a lot of money!
The Northern Rock should be forced into Administration.
It is a private business that operates for profit.
It does not have the funds to meet it's running costs.
All assets should be sold to pay back the customers of Northern Rock and the treasury.
All senior management should be investigated for any wrong doings.
All money owned to Northern Rock should be collected by the treasury to recoup the 26 billion loan.
Only in Britain will the public tolerate clear case where the Government is shafting us.
Robert
I think the Northern Rock nationalization is a solution but what I think is the best solution is the re-capitalization of the bank by issue a IPO to raise £10 or so billion under the supervision of the BoE and make the issue as accessible to the general public as possible and I sure it will be over subscribed as long as the minimum shares purchased are brought to 100 @ 25 pence a share. People know that there is value in the bank and long term there will benefit on their tax money that was used to support the bank.
To Simon Ball
The whole problem is there's an enormous game of chase-the-ace going on, because no bank wants to have to admit it's got bad debts until it's forced to, and can try to pass the parcel onto someone else - nobody's got the resources to unwrap the lot. The credit rating agencies are as much in the dark as anyone, and so the end result is nobody's getting any credit premia, which is stoking interest rates in the market and will in due course cause yet more inflation, with the bonus of becoming stagflation by mid-summer.
There's a better than even bet, as well, that there are scammers out there creating junk debt out of it as well. It's starting to look more and more like the Albanian pyramid setup on a world-wide scale, and the question then will be whether anything can be salvaged.
Surely we are not seriously suggesting that Labour ministers should be running a bank. The levels of incompetence shown in recent months would not qualify any of them to run a whelk stall. Nationalisation of the Rock if it formally occurs should be accompanied by Mother Brown admitting that his decision to give oversight of the financial sector to the FSA was a mistake and that there will be an immediate handover of their responsibilities to Threadneedle St. We are told that future of the UK financial system is at stake if the Rock is forced into administration. This is a fatally damaged banking franchise and the cost of public involvement is a national disgrace. Will it all end in tears for the taxpayer? With this governments record there can only be one answer.
I expect the tune 'I will survive..hey hey' will be most popular karaoke song at the Bankers Xmas parties this year..
Please Mr Peston (or anyone), can you spell out how nationalisation would work and the risks to the taxpayer associated with it?
If a local business owed me money, and I heard it was insolvent, the last thing I, or any sane person, would want to do would be to buy it, because then I would be liable for all its other debts.
How will the Treasury be protected against this risk? Is it reliant on NR not being insolvent? Remember if the housing market falls dramatically the value of NR's assets will fall accordingly.
What do we gain through nationalisation?
Why should the State take it on if no private buyer can be found?
I think the main thing at the moment is not to panic. Robert Peston on the other hand seems desperate to make people panic, the credit crunch will pass the BOE will get its money back plus interest and the Northern Rock will continue trading. This isn't something that needs sorted overnight and the longer it goes on for the less chance of somebody doing something stupid which nationalising it would be in my opinion.
Since when is the Bank of England nationalised? Its a private bank. Big misconception.
#38 "What do we gain through nationalisation?"
The NR is only surviving through the intervention of the BoE, as no one else will take over the debt.
The BoE can cut its losses, liquidate the assets and pay out the depositors if required, according to the guarantee, and maybe even some shareholders.
This would be bad, even if the bank can recover its loan wihtout paying depositors anything, the banking industry takes a blow, and you would see runs on other weak banks that *don't* have the guarantee extended to NR depositors.
Alternatively, the BoE can attempt to nurse the bank back to health, but with a significant risk that it fails, and it loses even more money than if it liquidates now (a risk no private banks are not willing to take).
However, it would be very unfair to do this with the current ownership in place. The current owners are not providing the equity capital cushion that is required for the bank to operate, or else the BoE loan would not be required. They therefore get a disproportionate share of the upside (their shares rocket if it goes well), relative to the downside (their shares are worthless).
Nationalisation is simply recognising this fact and taking out the shareholder free ride that a prolonged public rescue would provide. Once it is back in health (if ever), the public can recover the rewards from the risks it takes through a privatisation IPO.
Northern Rock, schmorthen rock.
So class, let's recap.
1. NR gets £25bn(£40bn?) from BoE, lender of last resort. But BoE is owned by the country right? - unlike the US Fed; was nationalised in 1946, right? So we the people stand to foot the bill for this loan if not repaid, right? So that's actually £25bn min., more like £40bn added to the national debt, to be repaid by taxes at 7% interest. Great! But we nationalised and own the goddam bank, right? By the way class, why do we have a National Debt(c.£700bn, annual servicing of c.£50bn) if we own the Bank of England? Funny that! It's almost as if the BoE was acting as a private institution representing the interests of various stupendously wealthy entities - US Fed owners anyone?
2. The £25-40bn taxes gone in to NR has been used to repay due loans from the the main banks whether in London or NY, makes no odds. This has helped them greatly to shore up their fundamental insolvency caused by their own betting on ever rising asset prices and fantastically leveraged supposed assets to real capital reserves ratios. So three cheers for the UK taxpayer riding to the rescue of reckless, feckless, *&!@!*&!(use your imagination) banks. Don't you just love this redistributing socialism thing. I think they call it the flood-up economics.
That was lesson no.1 class in political economics actualite, now lesson no.2
The BoE's prime role is monetary stability(stop sniggering!).
Now, we all know that the official measure of rate of prices increase is a crock of sh*t, right class? We all know that stuff for joe punter is going up crazy at 15-20%pa, right class? We all know that the job of economic pundits is to ignore the nose on their face and call at the top of their lungs for interest rates to be slashed forthwith, lest we all perish(no, not so we miss out on xmas bonuses, naughty!) We all know that said pundits are only doing this for the ultimate good of the country's economy and people and not as scurrilously suggested as lackeys of the bankers and assorted hangers-on.
Third lesson class, the BoE MPC committee is entirely independent, unimpeachable in its quest to hit target for price stability, and impervious to outside lobby groups who seek to influence its decision for their own narrow, selfish gain. No class, the 200 point rise in the footsie and the ginormous rise in housebuilders' share prices on the eve of decision does not mean that traders have been forearmed with knowledge of this august body's decision and are seeking to capitalize on a foregone decision and no, absolutely no, there is no similarity to positions on online betting exchanges during a premiership football match. What do you think this is? This is the BoE and the London stock exchange, where a gentleman's word is his bond!
Class dismissed.
PLEASE...
Write about something other than Northern Rock.
10 of the last 12 of Peston's Picks have been explicitly dealing with the former building society, despite thwe fact that nothing material has happened during that period.
"Peston's Picks" might as well be renamed "Robert on The Rock".
It is evident to anyone that it is now pointless expecting the banking sector to sort out the Northern Rock. The business is broken and either it is liquidated or it is nationalised and the assets sold.
It is not in the national interest for it to go into liquidation so the only other alternative is for it to be nationalised without compensation to the shareholders and bondholders.
I have no idea as to why this obvious course of action has not already been taken by this government. It is wholly justifiable from a political standpoint as the blame can be laid squarely at the door of the directors of the business.
The only question unanswered is why all the prevarication? On that we can only speculate but never accumulate.
Re: 5. Scamp
Unlike our Chancellor I'm a closet economic and industrial patriot so I wouldn't actually have any problems with all the banks being nationalised.
What these last few months have demonstrated clearly is that a combination of greed and incompetence has produced huge dangers for the economy and there's a real question in my mind as to whether we should be prepared to put up with this nonsense anymore.
The "Big Bang" experiment is effectively over and it's failed.
No, what these last few months have demonstrated is that you can't defeat the economic cycle, which is exactly what the Federal Reserve tried to do at the turn of the Millennium when the bursting of several bubbles at that time (such short memories...) created the very real threat of deflation - the fear of 2 decades without economic growth (as experienced by Japan) panicked them into dropping interest rates to ridiculous levels. This led to interest rate drops globally, including our own historically low ones (for which one Mr G Brown was quite happy to take the credit), and the subsequent explosion in borrowing. What we are seeing is that these "economic growth at any cost" chickens are now coming home to roost. However, in the current case of Northern Rock, the actions of the BoE have prevented this drama turning into a crisis and will undoubtedly all work itself out given time (as per Segedunum's post #2), although that doesn't stop lots of people running round like headless chickens. After all, such dramas do make good copy.
Moral hazard? As in fostering artificial economic growth through encouraging unprecedented levels of personal debt? Looking forward to Channel 4's Dispatches on Monday...
Northern Rock... !!! What about retail sales. During the past 2 weeks I have taken 3 days off to do some Christmas shopping in York. What a pleasure! I seemed to be the only one there.
Also... Many people "up North" are still getting over the floods; so not much Christmas cheer for them. Many homeowners are still paying a mortgage on an asset they can't live in and on which it will be almost impossible to re-mortgage. Better to miss out 2008 and go straight to 2009.
"40. Karl Skerstins wrote:
Since when is the Bank of England nationalised? Its a private bank. Big misconception. "
1946. It was a private bank for something like 300 years though. Created in 1694 by a right chancer by the name of William Patterson. But that's bankers for you.
Almost all of our money is based on credit. 97% of it. Only 3% (the notes and coins) are not based on debt, so the last 10 years, the last 100 years are all a big inflationary credit boom.
Interesting when you realise that our monetary system was privatised 300 years ago. You have to wonder if it's being operated to the benefit of the nation or to the benefit of the owners.
In theory and in practice, every individual and every company are insolvent - if someone pulls the carpet under us.
Individuals have costs of living, bills and mortgage. If employer cannot pay salary, how long can u stay solvent? If bankers panick and come knocking at your door, are u not insolvent NOW?
Companies buy fixed assets on debt. If bankers panick and demand money back NOW, how long can u stay solvent?
Merry-go-round must keep going round, so that every individual continue to work and every company continue to trade to stay solvent.
The REFEREE must blow the whistle as soon as someone starts panicking and pulling another's carpet under.
There are some incredible comments on this blog. Not only is Northern Rock is crisis, it is getting worse by the day as more deposits drain out and more loans fall due for repayment without further loans to repay them. Without treasury support then this would be an ex-bank, with its shares valueless. At the moment there isn't a realistic rescue plan, and the Virgin bid has many unanswered questions. Unless a new source of capital can be found then the only alternatives are administration of nationalisation, either option a progressive write-down of assets and a dismantling of the business. It is a mess caused by a Labour government who would not overrule the Bank of England to provide liquidity to the markets and then overruled the Bank of England to provide support to Northern Rock when it couldn't find funding on the capital markets. Either the market should have been supported or Northern Rock allowed to go bust. As it was policy stumbled from one driver to another and now, predictably, we have a mess.
I am still unsure why people think Northern Rock will sell? Why? Why? Why?
Did I miss something?
The ³ÉÈËÂÛ̳ report today talks of an auction. Did I miss that? Did they announce it? When's the date?
In the sale (what sale) the ³ÉÈËÂÛ̳ page says:
> But the Treasury clearly has a big say in the process because the Rock is only able to trade because of more than £25bn of loans it has received from the Bank of England.
Nonsense! The treasury doesn't have any shares. They have no say.
Interest rate coming down surely helps the Rock. I assume (and none of you know better) that they have some fixed rate mortgages. That's good news, more profit (because the loan price comes down but the interest from the punter doesn't).
We will only KNOW what is going on when they make a profit or a loss. And that has not happened yet.
Today's blog doesn't seem to be based on anything apart from a hint of nationalisation. (What? Did I miss that too? Where did it come from?)
Yesterday the blog focused on something equally bizzare.
Please someone enlighten me.
WHY DOES THE ROCK HAVE TO SELL???
If no one will buys NR it is the Tax payer who loses and therefore it is the taxpayer who should pickup the pieces now before they get scattered all over the place.£25billion is a lot of money ladies & gentleman. Its better to start contributing now if about 30 million people chip £100 each to buy shares and safeguard the £25billion rather than total give-up and let £25b down the drain.
Northern Rock is only functioning because of the continuing support of the UK taxpayer. Without the UK taxpayer (i.e. you and I) loans supporting it it would be bust! It is that simple.
I want whatever you've been smoking.
There has been no taxpayers' money of any description involved at Northern Rock. This is a myth that has been perpetuated by people who don't know what they're talking about. The BofE loans NR some money it has made up, and NR then effectively funds its own loan through Fractional Reserve Banking at a penalty.
The business is not bust, and continues to make money as it has always done - hence the short-term lender of last resort loan which the BofE wouldn't have given otherwise. This is a private matter between the BofE and Northern Rock, as Mervyn King always wanted it to be to start off with.
There seems to be a number of concerns raised most notably in the Guardian that many of the better loans have been siphoned off to Granite and that our £ 24 billion or is it £ 29 billion
These figures have been pulled right out of thin air. Robert admitted as much in his last blog entry. This is a pure BofE loan, is money that has never been anywhere near a taxpayer and is being paid off to the BofE. It also will not run into billions. Money will be drip-fed in a process that involves the BofE overseeing every aspect of what is happening. It is by no means a 'big bang' approach where the BofE throws money at NR and allows it to spend it on whatever it wants.
This is not taxpayers' money. Understand that quickly please.
I wish most of you would just shut up and hit the MSN showbiz chatrooms - where clearly you belong.
Most of you cannot even spell properly, let alone comment on complex macro-economic issues. I believe Mr Peston is eminently qualified and perfectly entitled to offer his opinions here. So stop the whining please.
The press are now clamouring for a cut in interest rates to ease the burden on Northern Rock and other struggling institutions but..
does anyone think 0.25% is going to change anything in reality
the MPC have an inflation target and inflation is rising.
Interbank money rates now have lost the link to base rates with money market rates (LIBOR) priced no differently than a commodity so there may be little hope other than to encourage consumer spending.
The root of the property problem is that property rose so much in price that it became unaffordable ( other than on ridiculous levels of debt to equity which is the hub of the Rock problem).
Finally we are seeing a small correction in the property market and there are cries to cut rates to support the property market. if we have an inflation problem looming and we want property to become more affordable for the young and lowly paid then rate cuts shouldn't be on the agenda at all. We want a fall. For those that own and live in property its value is irrelevant until the need to sell at present the need is for a reasonable level so that people can actually get on the ladder without Northern Rock style loans.
Re: Colin Smith #47
Sorry, but YOU are still labouring under the misconception that the BoE is nationalised. You are quite correct that it was nationalised in 1946 - however, it was made 'independent' (a euphemism for privatisation) in 1997 by Tony Blair, and now has shareholders and is a completely a private concern. Check the BoE web site if you don't believe me, they have comprehensive accounting statements showing how much profit they made last year and how much was paid to shareholders.
The press are now clamouring for a cut in interest rates to ease the burden on Northern Rock and other struggling institutions but..
does anyone think 0.25% is going to change anything in reality
the MPC have an inflation target and inflation is rising.
Interbank money rates now have lost the link to base rates with money market rates (LIBOR) priced no differently than a commodity so there may be little hope other than to encourage consumer spending.
The root of the property problem is that property rose so much in price that it became unaffordable ( other than on ridiculous levels of debt to equity which is the hub of the Rock problem).
Finally we are seeing a small correction in the property market and there are cries to cut rates to support the property market. if we have an inflation problem looming and we want property to become more affordable for the young and lowly paid then rate cuts shouldn't be on the agenda at all. We want a fall. For those that own and live in property its value is irrelevant until the need to sell at present the need is for a reasonable level so that people can actually get on the ladder without Northern Rock style loans.
@ FR #55
Sorry, but you're clearly still labouring under the misunderstanding that the BoE is not 100% owned by the government and being somewhat selective in your reading of the BoE website.
Yes, it does have a shareholder - the government.
Yes, it might make a profit and even pay a dividend to its shareholder - which will be gratefully received by the Chancellor through the Treasury.
Since you're so fond of the BoE website I suggest you consult this page, particularly the first paragraph
Alternatively, you could actually read the Financial Statements properly, where on page 11 you will find note t which states that "The entire equity capital comprising £14,553,000 of Bank Stock is held by the Treasury Solicitor on behalf of HM Treasury."
If that doesn't constitute a nationalised institution, I don't know what does.
@ FR #55
Sorry, but you're clearly still labouring under the misunderstanding that the BoE is not 100% owned by the government and being somewhat selective in your reading of the BoE website.
Yes, it does have a shareholder - the government.
Yes, it might make a profit and even pay a dividend to its shareholder - which will be gratefully received by the Chancellor through the Treasury.
Since you're so fond of the BoE website I suggest you consult this page, particularly the first paragraph
Alternatively, you could actually read the Financial Statements properly, where on page 11 you will find note t which states that "The entire equity capital comprising £14,553,000 of Bank Stock is held by the Treasury Solicitor on behalf of HM Treasury."
If that doesn't constitute a nationalised institution, I don't know what does.
Regarding the NR loans from the Bank of England these are the facts.
The Bank of England has loaned NR a sum of between £ 24 and £ 29 billion, depending on who you believe.
At present NR are paying interest on that loan. All well and good so far.
There are a number of kep questions that need answering.
1) Where has this money come from? Is it from reserves or where else?
The Bank of England has available to it funds from a number of sources that would be utilised elsewhere if it was not used to support NR. There needs to be an acceptance that there is no such thing as a free lunch. If these funds are earning a greater return than they normally would do and NR is able to continue making interest payments and is able at some time in the future to repay the loans then again all well and good.
This is the rosy scenario that Segendum and another put forward. It may well all end up this way. In which case we will all be relieved especially the employees and shareholder of NR.
2) Just what is this loan secured against? Have the better quality assets been secured by Granute previously elsewhere or are the B of E loans secured on very safe assets. The truth is we simply do not know. The frightening thing is maybe no one knows!
It is this degree of uncertainty that lies at the centre of the whole UK credit crunch at present. Until we know just who has been left holding the dodgy loans and just who has lost what people will remain nervous whether they be multinational banks, other financial organisations or the man in the street.
3) Just how secure is the funding behind the various companies that are seeking to buy or invest in NR?
There seems to be a growing sense that the Virgin deal is not as good as it was first thought to be and there are questions about how much if any of the current loans to the B of E will get repaid when any deal goes through and just where the balance of the loans will be secured after any deal. This is crucial to whether the UK taxpayer will get all of our money back.
Agains the void of information allows for all sort of extreme suggestions to run rife.
4) If at some time in the future it comes out that actaully the B of E isn't going to get all of its money back just who will end up paying for this loss?
The answer to that is we do not know. It might involve an increase in government borrowing; it may involve other expenditure having to be forgone in key areas. The fact is that somewhere somehow someone in the UK is going to have to pay for this if the B of E does not get all of the loans back.
With the values involved people have a right to be worried and in view of the lack of faith many have regarding the organisational and financial acumen of Gordon Brown and Aistair Darling we shouldn't be blind to the fact that there might be a good day to bury some bad news in the future to annouce that the NR "rescue" has cost the UK taxpayers several billion pounds.
10 hyper-macho men bidding for one girl!
The 9 losers have to wait 10 years for another crisis for another opportunity to pick a girl on the CHEAP. Mayhaps they never really want to be a banker in the first place.
Alas, but the girl's parents keep pushing her out the door!
Now even EU approves the rescue aid, Implying EU want to give NR time till February.
What happens now affects the valuation multiples of banks vs those of emerging markets banks!
To Dominic,
How many times do you (and others) have to be told that the 'hub of the NR problem' is nothing whatsoever to do with NR customers defaulting or being in arrears on their NR loans before you will stop banging on about this? The hub of the problem was that the sub-prime problem IN THE USA caused banks globally to stop lending to each other and NR was more reliant on wholesale funds than other UK banks (as it has a smaller retail deposit base). Why is that so difficult for folks to grasp?
Segedenum writes
"There has been no taxpayers' money of any description involved at Northern Rock. This is a myth that has been perpetuated by people who don't know what they're talking about. The BofE loans NR some money it has made up, and NR then effectively funds its own loan through Fractional Reserve Banking at a penalty."
If NR is unable to repay its loans, are you saying that there will be NO cost whatsoever to the Treasury (and hence the taxpayer)? This is not my understanding. Technically speaking you are correct, but you are describing a mechanism, not the possible outcome.
Replying to Post 52 here are some facts.
The loans have not magically appeared to support NR. The money has to come from somewhere. The B of E has reserves which are used for a variety of means. If these reserves are supporting NR then there is a gap elsewhere.
It might not be perceived as a real gap by many but it does exist. The money will have been supporting other assets that earn the B of E income and help to lubricate the financial system. These investments earn the B of E and indirectly UK plc income which doesn't have to be raised elsewhere via taxes or government debt.
The loans to NR may be paying more money than where this money would othwerwise have been. So we may be better off. If NR can afford the repayments.
The simple fact is we do not know and most comments are being made in an information vacuum.
What concerns many people, particularly with the current Governments track record since 1997, is that a decision has been made in haste that was politically motivated to save a business that happens to employ a large number of people in an area with a large number of labour MPs.
If the current credit cruch continues for much longer and house prices continue to fall as many people fear, not unreasonably, that we will not get that money back and that it will cost us all a considerable amount of money.
Any money lost if we do not get all the money back will have to come from soemwhere be it increased taxes or
increased government borrowing with more interest being paid by us all or
less money to spend on education, health or defence.
Replying to Post 52 here are some facts.
The loans have not magically appeared to support NR. The money has to come from somewhere. The B of E has reserves which are used for a variety of means. If these reserves are supporting NR then there is a gap elsewhere.
It might not be perceived as a real gap by many but it does exist. The money will have been supporting other assets that earn the B of E income and help to lubricate the financial system. These investments earn the B of E and indirectly UK plc income which doesn't have to be raised elsewhere via taxes or government debt.
The loans to NR may be paying more money than where this money would othwerwise have been. So we may be better off. If NR can afford the repayments.
The simple fact is we do not know and most comments are being made in an information vacuum.
What concerns many people, particularly with the current Governments track record since 1997, is that a decision has been made in haste that was politically motivated to save a business that happens to employ a large number of people in an area with a large number of labour MPs.
If the current credit cruch continues for much longer and house prices continue to fall as many people fear, not unreasonably, that we will not get that money back and that it will cost us all a considerable amount of money.
Any money lost if we do not get all the money back will have to come from soemwhere be it increased taxes or
increased government borrowing with more interest being paid by us all or
less money to spend on education, health or defence.
Ian,
No, the money did not 'come' from anywhere-it WAS created especially for this purpose- that's what banks do. Were it not for the fact that this liquidity is simply replacing that which dried up due to the 'credit crunch', the concern might have been one of inflationary pressure. Working out how much the BoE loan represents in terms of each UK tax payer was just the most sensationalist- and entirely misleading- way the story could be reported- so it was.
I've just been looking at the Northern Rock website and something is not clear. Does the government guarantee extend to brand new savers who have never had accounts with Northern Rock before? It's just that the interest rates they are paying on the Silver Savings Online account looks pretty good.