Rock: taxpayer repayment delayed
The Treasury still talks about looking for a private sector solution to the woes of Northern Rock.
But it’s no longer demanding that any private-sector rescuer repay more than £10bn of taxpayers’ loans to the Rock at the moment of taking control of the business.
What Gordon Brown has in effect decided is that the Government will go into a long-term business relationship with one of the groups vying for control of the troubled bank.
It's what he might call a public private partnership
The heart of the plan is the conversion of taxpayers' loans to the Rock of about £25bn into bonds for sale to international investors.
But these bonds would be sold off only in dribs and drabs as conditions improve in money markets - and they would be guaranteed by the Government.
What is means is that taxpayers would be supporting the Rock to the tune of many billions of pounds for years.
Even that doesn't guarantee that nationalisation of the Rock can be avoided.
But it massively reduces the prospects for nationalisation.
The biggest risks are that any deal would breach EU rules banning state aid - and that opposition politicians will accuse the Government of using taxpayers funds to subsidise future gains for the Rock's private-sector controllers.
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This is mad. Northern Rock has some of the dodgiest mortgages in the UK market, many surviving only because they allow "payment holidays". To take the risk of the collapse of that pyramid scheme and give it to the tax payer is reckless insanity.
'opposition politicians will accuse the Government of using taxpayers funds to subsidise future gains for the Rock's private-sector controllers.'
And if they fail to support the government in a hybrid private/public sector resuce AND oppose nationalisation the opposition parties will allow Brown to say they never had any plans other than o oppose for the sake of opposing.
But Robert, after days of predicting nationalisation and stating bond conversion was out of the question because of reinsurer costs aren't you prepared to find even a single word of praise for finding another way forward.
I believe a good definition of bankruptcy is, when you can neither pay your bills, nor have any likely prospect of paying your bills.
It is worth remembering, because there are those who would like to forget it.
It is time to do the right thing.
The right thing it to put a detailed financial statement online and hold an auction. The proceeds of said auction to then be divided between all the creditors of the Rock according to how their legal lien against Rock assets plays out in court.
The BOE just as other financial institutions, could offer financing for any potential buyer of the Rock who surfaced during such an auction.
But, it would be advisable to require a minimum of a 20% down payment with very stiff loan terms including customary penalties for default and late payment.
Short of this process, a very common process, it seems British taxpayers already own the Rock.
They are surely footing all those bills that couldn't otherwise be paid.
Don Robertson, The American Philosopher
This is mad. Northern Rock has some of the dodgiest mortgages in the UK market, many surviving only because they allow "payment holidays".
To take the risk of the collapse of that pyramid scheme and give it to the tax payer is reckless insanity.
The Conservatives nationalised Rolls Royce for a time and it worked out all right in the end. It's a shame that a Labour government finds it so difficult to do the same for Northern Rock. It does not seem to matter what is the best solution for the country. It's more like what gives the opposition the least amount of ammunition at Prime Minister's questions,we can hide the numbers.
3 things I feel have been largely missed in the debate on N. Rock.
1. Its assets are well in excess of its liabilities and it would take a massive housing downturn to reverse that;
2. Shareholders have taken a complete bath so it would generally take massive upside to even recoup losses;
3. Part of the problem was weak regulation which, while no excuse for NR management, is something of an excuse for a shareholder....not many would have expected the UK to facilitate a run on a bank. And its not fair to expect shareholders to outperform regulators in terms of oversight, given the complexity of the financial world.
I'm not saying lots of the negative commentary does not make valid points and no point repeating all those but the overall balance of commentary has been too negative.
Overall, I don't think there's enormous risk to taxpayers money, given the wide asset/liability gap, and fees for guarantees and interest payments will be significant. On balance, and particularly with an eye on the importance of the UK's financial reputation, this looks like the right path.
This is another Goldman wheeze, which seems to have been thought up by almost everyone else before Goldman (£100m better off from theb fee), so why not do it earlier.
The key is a problem with EU rules on state aid and perhaps rather overlooked thus far, the fact that this aid will have to be on the Government's books, (no Enron-esque fiddles are permitted), so we can see just how much we, the taxpayers, will be losing to save NR and more importantly a few seats for GB.
I suspect that the only remaining solution is that the Bank of England goes on lending Northern Rock all it needs until all depositors are repaid - don't allow any renewal of deposits and repay all non-notice deposits at once. That would leave the Government as the only lender to the mortgage book.
Thereafter they could pay someone to run the loans off - could take twenty years, but that's lending for you.
The big problem comes with the bad debts (and there will be plenty). Is Gordon Brown prepared to be the Prime Minister who forecloses on poor people in the North East? I doubt it, so he would have no choice but to sell the book to some tough nuts for a song, and let them take the hard decisions.
Whatever happens - the Bank of England (ie, us) drops a fortune. That's now inescapable.
In reply to John:
Northern Rock actually has a sound mortgage book with an average loan-to-value ratio of around 59% - Which is far from being "dodgy".
As for the allegation that many are "...surviving only because they allow 'payment holidays'", well here are the facts: Payment holidays are only allowed to be taken once for every nine consecutive payments made, and only one holiday per calender year. Hardly propping up a pyramid scheme.
Try getting your facts straight before storming into a debate you know nothing about.
And thanks for the informative article, Robert.
Yee-haa.
Though I was expecting GB to return from Beijing with a piece of paper to wave indicating he had found a new source of peace and funding.
If the goverment and taxpayer are to guarantee these bonds then we need to know the risk of what is being guaranteed.
For instance how many mortgages are 90-100% borrowed against the house interest only mortgages with people making no capital repayments?
How many mortgages are 1 or more month in arrears?
How many mortgage holders are likely to default when the cheap 2/3 year deal they have comes to an end this year?
This is vital information if the goverment is going to guarantee bond holders they will get the investment bond with no risk as it means the goverment and taxpayer will have to pay for any losses that happen.
And why is a Labour government shying away from saying that they should not be entitled to some of the banks future profits if a private company takes over if taxpayers are going to be forced to take all the risks right now for several years costing billions of pounds that could have been spent elsewhere on public services rather than underpinning a banks losses and selling bonds that it may well lose money on if mortgage payers can't afford to repay loans as interest rates go up.
In reply to Chris
"Northern Rock actually has a sound mortgage book with an average loan-to-value ratio of around 59% - Which is far from being "dodgy"....yes as at today but prices are at long last falling from their ridiculous peaks..what will tomorrows loan to value ratio be? Especially if we follow the US lead in house prices. I suspect the loan to value ratio in a year/two years time will be a lot less.
As for the quality of the mortgage book-I work with an ex mortgage broker - he told me that his firm, like many others, if they couldn't place a deal anywhere else could always find a home for it at Northern Crock. I guess only time will tell on that point...and time is running out.
It would be intersting if we could get some up-to-date-figures for the Rock - expedite the year-end figures please. What other assets does the Rock own beside the mortgage protfolio - not the book value but market value? The intermim figures looked great - is NR still as profitable? Is the problem purely related to liquidty? What about the other fundamental figures, eg price-earnings ratio?
Incidentally, is there any risk that your scaremongering contributors are sponsored by some interested party as part of a PR (spin) campaign?
James of York
Chris, the 'average' loan to value is meaningless. Sure, some people have nearly paid their mortgage off and will be no problem, but saying the average is 59% is not a useful number.
When someone who has borrowed 110% defaults, and the house is only worth 80% at auction, you can't ask someone who only owes 10% of their home value to stump up the extra 30% to make up the difference!
It's the percentage of mortgages which are risky that matters, not a mathematical average.
Look on financial distress messageboards on the internet, at people begging for help working out how to pay their mortgage. Look at repossession proceedings in any county court. Northern Rock are massively overrepresented in both.
#9 Chris: Northern Rock actually has a sound mortgage book with an average loan-to-value ratio of around 59% - Which is far from being "dodgy".
The thing about averages is (aside from there being three ways to devise one) that they represent the middle of a spread, the top of which could be quite large and have a significant dodgy component especially as NR has been the most aggressive lender over the past couple of years, the mortgages in that period being potentially the most dodgy of all.
But then surely the EU would accuse Britain of an unfair subsidy?
Only, if, firstly, a commercial rate of interest was charged on the loan, and secondly, the Rock paid the government a commercial rate to act as a guarantor (travel companies pay about 4% per year) over and above this, it could be argued that this was commercially 'fair'
But paying the government a truly commercial rate for its 'propping' would make it much less attractive to a purchaser.
So back to square one, then: put it on ebay.
To Chris:
'Northern Rock actually has a sound mortgage book with an average loan-to-value ratio of around 59% - Which is far from being "dodgy".'
But isn't a general loan-to-value ratio across the whole lending book largely meaningless?
After all you can't reposess the houses of good borrowers to meet the debts of bad ones...
Not sure if this is the correct forum to post this comment but does anyone know if any money has, is or will be paid to Newcastle United football club or other sponsorship committments NR has?
I feel it to be totally unacceptabel that public funds be used for any kind of sponsorship especially in the manner and cost fottball sponsorship does..
I'd appreciate any comments....