Hedge funds and human rights
SRM, a hedge fund that controls 9.9 per cent of Northern Rock, has written what it says is a constructive letter to Chancellor Alistair Darling about the future of the troubled bank.
In the letter, sent before Christmas, it says that it has been advised that if the Rock were nationalised at less than a fair price for the shares, shareholders would have a strong case for damages.
SRM's view of a fair price would be the book value of Northern Rock's assets at the last balance-sheet date - or more than 400p a share.
It says that ministers would be vulnerable to a charge of "misfeasance" if they expropriated the Rock for less - and that there could be a breach of the 1998 Human Rights Act.
SRM has not made a direct threat that it would sue. But since the letter talks of shareholders pursuing ministers through the courts, the implication is unmissable.
The epistle makes the curious statement that the chancellor has already formally ruled out nationalisation.
If he has, I missed him doing so. And so did his officials.
They sent a reply to SRM on the chancellor's behalf at its Monaco offices last week. In it, the Treasury says that the Government would comply with the Human Rights Act at all times - and that all options, including nationalisation, are on the table.
What the discourse shows is the gulf between the Treasury as the leading creditor and the Rock's biggest shareholder.
Can that gulf be bridged?
Only if there is a rescue of the Rock that keeps the bank in the private sector and leaves the current shareholders with the bulk of its shares.
Will there be such a rescue?
There is a frenzy of activity by putative bidders, bankers and the Rock itself to secure one.
Putting a probability on their prospects is impossible - though conditions in money markets are less tight than they were, so it looks a bit less bleak for the Rock than it did before Christmas.
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Time to pull the plug on this rotten bank and its odious ambulance-chasing shareholders.
SRM have made a bad investment and they ought to be man enough to admit it instead of trying to wreck every attempt at rescuing Northern Rock. Northern Rock is not worth its book value - it is worth the maximum that any buyer will pay for it. If no-one in the private sector is prepared to buy it, then it is worth nothing, and that is what the Government should pay if there is no private sector buyer!
SRM will do huge damage to the Hedge Fund industry's reputation if they continue with their wrecking tactics.
Surely if an overseas based, significant shareholder is threatening such legal action the Treasury should withdraw its support and let the shareholders sort out the mess themselves. The prospect of even more taxpayer money being wasted is disgraceful. Isn't that the obvious conclusion from your article?
Hi Robert,
I have to say I'm amazed at these 2 Hedge funds for being so stong in the belief that the courts and legel system will come to their aid, to make a bad investment pay off..
Firstly - the obvious answer is that the Govt get an independent valuation of the Rock done by say Goldman Sachs, based on the open sale price of it's current assets, less loans to be repaid & transaction costs - and as if by magic the answer would come out at any number the Govt wants it to be (25p per share for example)..
Second they seem to think the Human Rights would be applied by the courts to shareholders in the same was as individuals facing unfair treatment by State.. This is a very daft view to take - I can't see any UK court taking their side, given that we all know how the Rock got into this mess..
I too think that Nationalisation is the most likely outcome..
Firstly, why the last balance sheet date? Given that the letter was penned before Christmas, the then last balance sheet date would be 31 December 2006. If so, I see no justification as to why this date - who would write a 'backwards' contract, to corrupt the derivative term. Indeed, I believe that SRM were purchasing shares long after 31 December 2006.
If 31 December 2007, then again, I can see no reasonable justification for this, unless the accounts were prepared on a break-up basis, factoring in the heavy discount that the market would apply if the banks assets were suddenly dumped on the market.
Indeed the only basis for any money going back to the shareholderss would be if the debt holders of the company, including the Treasury, could be paid back in full. Unless, of course, SRM is alleging that Alastair has been acting as a shadow director. Which would be an entirely different matter.
Well I'm sure that the Chancellor had considered that before he gave the guarantees. He would of course have taken full legal advice prior to entering into any obligation so as not to leave himself open to the charge of misfeasance; the same charge was made with the nationalisation of Railtrack.
What a mess the taxpayer is getting into.
if you are a customer of northern rock, or work for the company ,the last thing you want is for it to collapse and disapear,all in all it was bad managment that leaves it where it is at the moment.give it a new name ,new managment ,and start fresh.and im sure public confidence will return.after all a lot of people are depending on a sale outcome..
if you are a customer of northern rock, or work for the company ,the last thing you want is for it to collapse and disapear,all in all it was bad managment that leaves it where it is at the moment.give it a new name ,new managment ,and start fresh.and im sure public confidence will return.after all a lot of people are depending on a sale outcome..
I suspect that, in such cases, one solution might be for an open auction...
... but with the government having an OPTION (not an obligation) to buy at 10% over the best bid within 24 hours of the auction closing. (Of that 10%, 5% going to the shareholders of the company being bought, and 5% going to the "winning bidder" as compensation for their effort / risk.)
Whether it can be reconciled with the LAW is another question, but it certainly has a certain "natural justice" about it.
Bidders would be incentivised to bid up to their limits, because the winning bidder would either get the asset at the price they liked, or a guaranteed 5% profit, cash (despite not having put any cash down.)
No-one would over-bid, because the government might choose to let them win :-) (OK, no more than in any other auction.)
I must remember this argument next time I'm not happy with a pay offer. Evidently this would be a breach of my human rights following SRM's logic! Pathetic.
It's hard to imagine how anyone can have the hide of this hedge fund. The bottom line is, had the government not bailed out this business, it would have gone bust and they would have been left with absolutely nothing.
They should consider themselves lucky if they get anything.
Roy,
I don't know who you work for but I hope you lose YOUR job, since you spend so much time saying you hope I lose mine.
I must remember this argument next time I'm not happy with a pay offer. Evidently this would be a breach of my human rights following SRM's logic! Pathetic.
We, the British taxpayer have bankrolled this company to the tune of Billions - making things like the Trident replacement program look like small change!
I think that it is time the Government took such threats from the companies shareholders and tell them to stuff it. Surely, the British taxpayer is now the major shareholder in this sorry company, and it should be nationalised immediately without any bail out to the current shareholders.
What about the human rights of the staff - they've been put through hell over the last few months and have done nothing to deserve it.
All the people who so airly talk about letting the "rotten rock sink" etc. should remember it's real people's lives and jobs they are talking about.
Show the staff some respect they are human beings too you know.
What's stopping the Govt announcing that the guarantee for depositors is only good for another 30 days? That ought to bring things to a head for the cheeky buggers who wrote the letter.
Having made a bad investment in a failing bank whose shares are almost certainly worth nothing, the hedge funds SRM and RAB Capital are only making themselves look foolish by their desperate attempts to extricate themselves. They certainly do not have a leg to stand on because Northern Rock's doors are only still open because of government support, and if the Treasury cut its credit lines the bank would fail immediately.
Before we feel too sorry for Jon Wood of SRM, and Philip Richards of RAB, we should remember that these two have each personally clocked up tens of millions in bonuses in recent years. You win some, you lose some.
This is a true British farce.
I swear you couldn't make this story up.
Headless chickens running hither and dither, pressure coming from all directions - who's going to be the first to crack?
I suspect Mr out-of-his-depth Darling will be shuffled shortly, due to supposed ill-health or family problems. Watch the spin.
SRM’s veiled threat to us taxpayers, seems laughable.
If the hedge fund bought their shares for less than 400p, are they not implicating themselves as having broken the human rights act?
These hedge funds, trying to throw around a bit of weight, just because they tried and failed to make a quick quid on the unfortunate demise of the Rock I think are acting in a very un-ethical way.
I would like to know what happens when it comes round to end of year figures and the possibility of dividends? Will the company be allowed to pay dividends to its shareholders, or would they block that move aswell, I think not???
why give headline treatment to someone who owns less than 10% of the company? You clearly overstate their importance for the sake of maintaining the story.
The holiday period was peaceful and joyful without it.
No matter how many times you try to suggest it these hedge funds will not scupper any plans the Treasury have for NR, or indeed may have already decided.
Please move on.
... and we all thought that this affair couldn't descend any further into utter farce.
Shareholders suing the Government who are currently financing the banks operation, something which the Government had no legal or moral obligation to get tax-payer's pounds involved in.
It is beyond comprehension as to just how much of a mess this tawdry affair is, not just for the tax payer, but for the incumbent Chancellor, his PM. And that's without even mentioning the potential ramifications of the Government (and potentially the significant shareholders) decisions upon the wider Square Mile.
They'd have done well to allow the commercial animals to maul Northern Rock's carcass, it would have served as a valuable warning - instead there is now precedent for the tax payer to have to support any institution who's poor business decisions lead them into trouble in the future: and with the world's financial waters being so rough at the moment, I'm not entirely comfortable with the idea of that precedent being called upon.
Forgive me if i'm wrong, but didn't railtrack (as was) shareholder try this, and lose?
That shareholders have more legal rights than the workers at Northern Rock says everything about New Labour...
It comes as the government makes clear its intention to ban prison officers from taking industrial action and impose three-year pay caps on public sector pay.
Surely Labour could be sued for false advertising? It truly is the party of Capital.
This is what hedge funds (or vulture funds, as the case is here) do. They buy basket case companies and bully management and banks into giving them a better deal.
Captain Darling should demand repayment of the taxpayers money and when they can't pay send in a receiver to take control of the asset book leaving damn all for the shareholders (bad news for the shareholders and employees but I'm afraid that's capitalism), or he would if he knew how to run a business and wasn't using pots of our money to buy votes in the labour constituencies where most of this bank's staff are located....
If shareholders aren't happy with the price offered then it's time for the treasury to call in its loans and recover the £57bn pounds from the shareholders.
Sadly I can see where post 10 is coming from.
I love my job and want to keep it, and have worked many, many long hours at NR since September 13th.
My Chairman, CEO and several Non-Exec directors have taken the blame for this situation and have all paid for their mistakes with their jobs. The new people at the top were not involved in the mess and are now doing their best to sort everything out.
Are comments such as Roy's (post 1) helpful? Informed? Intelligent? Or just unnecessary and mean?
I hope the majority of readers will take a step back from the media frenzy of the last few months and consider that point carefully.
No one is personally out of pocket, no government projects have been cancelled because of the loans we have had to take, and the interest rate is favourable to the government and supported by good assets.
What is the motivation of people like Roy? They aren't personally affected, so why be so obnoxious? Do you really want to see a British company go to the wall due to the credit crunch?
Shares can go up as well as down.
Personally I think the Government should take control of the bank based on the fact that they have already poured 20bn+ into the bank and tell the Shareholders that their shares are worth nothing.
That is the Stock Market, these companies want to 'risk' investing, without any of the risk.
It is like going to the casino and sending the Government a letter that if you lose it is a breach of your human rights.
It is a joke.
The correct price is the market price. I am sure that SRM is just trying it on, as anyone would in their position. The problem for the shareholders is that the correct market price at nationalisation should be effectively zero since nationalisation means there is no market based solution prior to the State aid cutoff in February. The only reason why NR trades above this price is that it represents a call option on the business, which given the right circumstances (lower interest rates, stable housing market) would be worth a lot more (400p per share +?). Of course, it might be worth a lot less, and the big issue is who is going to put up the risk capital. Clearly the shareholders would like the government to continue to pony up, or another new equity investor (Olivant or Virgin). The problem is that the new equity on offer doesnt appear to be enough to persuade banks to lend. Odds shortening on nationalisation.
I really don't see what they are aiming to achieve here. Surely it leaves the government with no choice.
Sometime in February the BofE loans become illegal under European law. No one is rushing to purchase the company so at some point in the near future NR will end up in administration.
Perhaps someone should explain this in simple terms to anyone who still has deposits in the bank.
Human rights mean nothing where money is concerned. The Bank of England chose to extend credit to Northern Rock to keep it afloat in order to maintain confidence in the banking industry - sadly too late. But the BofE has no legal liability to maintain the credit line and can remove it at any time - in which case Northern Rock is insolvent. The sooner shareholders realise this the better. Their shares are worthless.
The Human Rights Act is a complete joke. Whether or not the claim in this case is correct, the Act is used to intimidate, and to avoid discussing whether things are right or wrong. All that matters now is whether your lawyer can convince a judge whether this ludicrous act has been breached. The ability to judge issues on their own merits has been ruined, and nothing has been done to improve human rights.
Andy,
You needn't worry, as the Treasury are unlikely to safeguard the company I work for with guarantees of tens of billions of pounds.
However, if they did, and the owners of the company had the audacity to raise threats of allegations of human rights violations, then I certainly wouldn't expect you, or the rest of the nation, to feel compelled to pay the ransom demand over the prospect of my losing a job.
why give a fund that only owns less than 10% of the company so much overstated importance, unless you want to retain this story in the headlines?
it was so much quieter and peaceful over the xmas period without it.
do you really think they will stop the Treasury from deciding what will happen to NR, if indeed they have not already decided?
Please move on.
Interesting take the representatives of SRM have on the reality of the situation. If the government had not stepped into the Northern Rock debacle and let the free market take its natural, non-interventionist course, it would have gone the way of all badly managed businesses - to the wall. If they were such fantastic investors, they would have done their homework like Warren Buffett and spotted that here was a company that was mis-managed, short on equity as of January 2007, and operating in a bubble market. Using their logic, I would be able to claim my human rights violated if a book keeper didn't give me my money back when I bet on a nag. No, I don't think so.
So let me get this straight:
1) SRM are shareholders in Northern Rock. In other words, they part-own it, as owners are partly responsible for it, and benefit from its activities.
2) As shareholders they participate in appointing and approving a management board to run their property (their NR shareholding) on their behalf.
3) the management board takes rash risks, without any restraint (in fact, probably with encouragement) from SRM (co-owners), and on SRM's behalf in order to maximise shareholder value and profit for SRM
4) NR suffers from the credit crunch and goes cap-in-hand to the Bank of England, who have now lent it GBP57 billion: more than a grand for each inhabitant of the UK.
5) No word of SRM, the co-owners, the people who benefit from NR's profits, loaning any money to NR, their property, to help keep it afloat.
6) if NR ends up being nationalised, SRM want GBP4 per share or will claim that their human rights have been abused.
7) I'm a UK taxpayer. On my behalf, the Chancellor has just lent SRM's property NR more than a grand of my tax money, without asking me first.
8) GBP4 a share. How many shares has NR issued? How much more cash is that, to come out of my tax pocket? And what about the grand out of my pocket that they've already had?
9) What about my human rights, then?
10) SRM: f**k off.
i would love to see the government to call SRM into the treasury and tell tem to get f***ed - after all they have bought the vast majority of their stake for around 85p and now they are demanding £4 for each of the 85p shares - all the while the british taxpayer is propping the crock up.
just a few weeks ago there was the national outrage about the small posibility of Richard Branson making huge profits at he expense of the taxpayer yet here we have SRM demanding a 470% profit funded by guess who - the british taxpayer...
the simple fact is the crock was bankrupt back in september and was only saved by the emergency funding from the BOE, therefore any shares bought after that date (ie about 90% of SRM's current holding)should be valued at exactly what they were bought for - if you invest money in a bankrupt you can't go crying to mummy when you dont get it back - simple!
the other thing that puzzles me about SRM - they claim the crock is a viable company and should keep trading as-is - if thats the case why dont we see them heading up a take-over consortium? could it be this is just part of a plan to drive the rock into insolvency, buy up the remaining assets and sell them on for a huge profit? - just as the september takeover stories hinted at...
also has srm forgot about the pre-collapse lloyds takeover where apparently the rock agreed to sell its self for around £3 a share when they were still trading well over £7 - if they were prepared to do that when the company was still worth something how little will they take now they are just a shell?
hex
Surely the government could just call in its debt, make Northern Rock insolvent and appoint administrators. This is what happens in the normal world. The creditors (ie the government) own this company now.
Clearly this is a big issue for SRM and RAB - 400p instead of 90p nets them a combined additional £200M, which might go some way to appeasing their original disastrous investment. If this does go to court, expect a lengthy, expensive legal battle. Another great use of taxpayers' money!
Also, isn't it a bit of a conflict of interest for RAB to buy another 250,000 shares at the same time as pressuring the government by legal means to pay a >300% premium for these very shares?
Surely we know what the shares are worth? Nothing? I, as a taxpayer, am paying a lot of money to keep Northern Rock afloat and I want a return. If SRM have their way, they will get a return but I won't. Sorry, my money is in there and I want it out now.
Amazing, SRM value the shares at 400p. one simple question why haven't SRM bought the whole of NR and repaided the loans at today's value. Surely if they offered 400p a share the shareholders would vote through their offer. Please and take this sorry mess away from the UK taxpayer.
The claim on the Human Rights Act by SRM is dubious. As SRM operates out of Monaco, a tax-haven that is not a member of the EU, it is doubtful whether they would have the same claim on the Human Rights Act as Railtrack did, either here in the UK or in the EU jurisdiction. They are just bluffing and the government needs to call their bluff - now.
As for employees of NR complaining that we lack compassion for their plight: I assume you were happy to take large annual bonuses while the rest of us were struggling along on normal salaries that were earned honestly? Working in the private sector has its ups and downs as the rest of us who work in technology, food production, pharma, oil etc etc can confirm. Sometimes companies go bust and fire their employees: that's the free market. Why is it that NR shareholders and employees seem to be unable to grasp basic economics such as the free market?
Re #22 Neil Evans
Shareholders suing the Government who are currently financing the banks operation, something which the Government had no legal or moral obligation to get tax-payer's pounds involved in.
Not so. Northern Rock, as a financial business, was tightly regulated. The Regulator implicitly condoned its business model and therefore the Bank of England was obliged to step in, in its role as Lender of Last Resort, to support NR in its time of crisis caused by factors beyond its control (the credit crunch arising from the US Subprime fiasco). Note that on several occasions various of the tri-partite membes have stated that NR's mortgage book is of very good quality, it is simply that they were permitted to over-extend themselves on the mortgage-lending front.
They'd have done well to allow the commercial animals to maul Northern Rock's carcass, it would have served as a valuable warning - instead there is now precedent for the tax payer to have to support any institution who's poor business decisions lead them into trouble in the future: and with the world's financial waters being so rough at the moment, I'm not entirely comfortable with the idea of that precedent being called upon.
Again, your displeasure should be focussed on the FSA and the Government for allowing Northern Rock to operate such a business model.
When SRM and RAB threaten the government, they threaten us the taxpayer.
The government should now nationalise at current market value (90p per share)... or give into what amounts to financial terrorism.
Dave (post 27)
Unfortunately your bosses at NR have been rather naughty, and made some very risky decisions based on unsustainable strategies, and now the price is being paid. We'd like to be more sympathetic, but unfortunately the government has taken that decision for us and lent your business over £1000 from every man, woman and child in the UK. This will translate to inflationary pressures for at least the next 5 years - after all we all know what happened to the German economy when they started to simply print money to get out of a recession in 1925, and that's exactly what Gordon and Alistair have done.
We have therefore already given you more than sympathy - we've given you our money (albeit involuntarily). So be grateful that you've come this far and don't whine when your P45 arrives.
Many thanks and regards
The UK Taxpayer
Call me cynical but the whole letter to Darling was just to get him to commit in writing that nationalisation is on the cards ;)
#43, Ms Kirkwood stating the same false comment over and over doesn't make it true. Every limited company is "regulated" in that it has to show it is solvent. A PLC has to have its accounts audited every quarter to make sure it is solvent too. Does that mean the government should step in offer unlimited loans at base everytime a company runs into trouble?
NR didn't get into trouble over the quality of its assets, it ran into a liquidity crunch just like Enron - unlike Enron, there is no suggestion they were hiding bad debts - and could not roll over their commercial paper. Like a consumer who assumes he can always increase his limit on his credit card, NR assumed it could always tap the money markets.
They were wrong and this is the consequence. The BoE has no more "obligation" to step in than it did when Barings screwed itself over its business model.
#27, Dave at NR, I hope you are not typical of your fellow employees. Junior subordinate lending at base when the commercial rate is a point higher to a company that cannot even raise capital at that level is not "favourable" by a very long stretch. If you think it is then can I borrow 570,000GBP at base from you?
I don't buy the whole 'but think about the poor employees!' line, and I suspect neither will many others.
Companies (including those that have been a lot less reckless with other people's money) go out of business every day. People losing their jobs is a painful fact of life. It happens.
I don't appreciate the suggestion that the taxpayer should throw good money after a heck of a lot of bad, just to save a few people's jobs.
And don't get started on the 'oh but they do a lot for the community' spin.
They gambled, they got rich, and we lost.
Dear Sir
Having read the above comments, I am taken back by the immature attitude towards the situation at hand.
The Government's involvement was never about Northern Rock alone.
Letting Northern Rock 'hit the wall' in true capitalist fashion would inevitably have lead to 6000 job losses, another lost British Institution and a Banking system once envied by the world in chaos.
The tri-partite bodies have responded in a reasonable manner. They have bought time for a private solution.
While the Government has provided 25 billion to Northern Rock, lets not forget that 75 billion pounds has been loaned by other creditors.
These are all loans and will be paid back over time with interest.
As far as the human rights issue - this is a technical point and is unlikely to be used as a trump card in future proceedings.
Despite Robert Peston's sceptical views, I still believe that Northern Rock does have a future as a profitable company - but this however will take patience, re-structuring and a world class management team.
If I was a betting man: Olivant to take control before the end of January.
Regards
Sivan
SRM are publicly saying 'we allowed the directors of the company to make reckless investments on their behalf'. Where would their share value be if the Treasury allowed the bank to fail? Zero. They are happy that the bottomless pockets of the Government bound by the laws of human Rights have been attached to their failing investment so they have an outside chance of recouping their loss through preposterous litigation.
Good advert SRM! I'm sure the residence of Monaco are all now aware of your short-sightedness. Maybe you are experiencing a run of your own?
Interesting take the representatives of SRM have on the reality of the situation. If the government had not stepped into the Northern Rock debacle and let the free market take its natural, non-interventionist course, it would have gone the way of all badly managed businesses - to the wall. If they were such fantastic investors, they would have done their homework like Warren Buffett and spotted that here was a company that was mis-managed, short on equity as of January 2007, and operating in a bubble market. Using their logic, I would be able to claim my human rights violated if a book keeper didn't give me my money back when I bet on a nag. No, I don't think so.
Re: #47 Danny
#43, Ms Kirkwood stating the same false comment over and over doesn't make it true.
Well, it would appear that a Treasury Select Committee disagrees with you. And if there weren't so many dim people posting such idiotic, prejudiced opinions I wouldn't need to keep repeating myself...
Every limited company is "regulated" in that it has to show it is solvent.
Indeed, but companies in the Financial Services sector are regulated VERY TIGHTLY, and have to have their manner of operation approved by various authorities. They are not afforded the luzury of simply showing that they are solvent.
NR didn't get into trouble over the quality of its assets, it ran into a liquidity crunch just like Enron - unlike Enron, there is no suggestion they were hiding bad debts - and could not roll over their commercial paper. Like a consumer who assumes he can always increase his limit on his credit card, NR assumed it could always tap the money markets.
They were wrong and this is the consequence. The BoE has no more "obligation" to step in than it did when Barings screwed itself over its business model.
So now you are comparing Enron and Barings - both of which were companies that went bankrupt owing to massive fraudlent activities - to Northern Rock? Talk about getting desperate.