³ÉÈËÂÛ̳

Further erosion of mortgage supply. Ignoring whether or not consumers want to invest in property as a home or buy to let, there is simply a shrinkage in liquidity which will lead to falling house prices.

Let's also not forget that it was loose liquidity that drove property prices past rational market pricing in the first place and they need to come down, strap yourself in this will be a bumpy ride the next few years

And the Bank of England is not cutting rates. It appears the BOE is totally detached from reality. If Merv had any sense he ought to cut rates. But I suppose hearing talk like this make people like Merv King only stronger in their "hold the line" opinion. I cant believe they are more worried about inflation in the current scenario. They should worry about the UK economy and not on short term swings in currency markets, if that is what is bothering them.

Robert, you're such a drama queen - whatever happens, you write with the same bemused-negative tone...

It really is a call on what you think of the NR brand now. It has a lot of loyalty especially in the North East.

You would have to truly believe it is dead to pay £250 for Virgin Money and royalty payments every year just to use the Virgin brand.

Unless it's dead why not just let those who took the downside share whatever upside there might be, ie existing shareholders and the government?

It would pay existing shareholders to put in whatever funding is needed to prevent massive dilution.

Can those managers lined up in case of nationalisation not just be recruited to NR anyway?

NR's Management team's bid was always a non starter.
That means we have a two horse race. Branson versus nationalisation.
Branson will be hoping that he will be able to charm his friends into giving him the bank. He knows that he will always be able to con the government into giving him extra support later on anyway. In secret even.

Nationalisation should be the odds on favourite.
But then again politicians are the starters and the course stewards..

Looks like the Rock is going to go to Virgin for a song. Mind you what would it be worth when we do have the tsunami in the city. Many people seem to believe that things will get better, but not until they get worse. The stock market in general has alot further to fall maybe another 1000 points plus as Goverments cut interest rates and prop up the market with extra cash reserves. Its just a short term solution to the pending recession. Remember its not profit until the cheque has cleared.

Lets see now - 3 years - when did you say the next election was likely ?

You are implying that NR kept the rates down previously to be competitive.

That may well be so - hence their position now.

Greed to lend money and therefore make more, so offered higher income multipliers etc. No thought for the future.

Therefore house prices rocketed and now are unaffordable based on average income levels.

cheers

Or is there just the slightest possibility that this is all a cover to keep NR off the government's books and that in three years time Virgin or whoever will say "Oops, we can't pay you back right now. We need another three years." By which time it'll be Cameron's problem rather than Brown's!

Start of it all.
Middle of it all.
End of it all.

Political decisions to save NuLab.

What a farce.

Nothing will save NuLab now.

is it such very bad news that Olivant are out of the 'race' Robert? - is competition so crucial to good decisions? - and does the market work so well that it is a necessary condition to have competing bids for a positive outcome for the economy as a whole? it is not clear to me - i think it is also the responsibility of commentators not to lead market sentiment by making grandiose statements

Luqman Arnold wanted to get in at the bottom and ride it up, as he did Abbey. Small loss he's out of the bidding.

As a member of NR staff, a shareholder and a tax payer, given the choice I hope Virgin take over rather than the current NR board. The current board are more or less the same people who caused this disaster in the first place (less Applegarth, Ridley and one or two others who took 'early retirement'). I find it disgraceful that the board are still in charge filling their own pockets with 'retention' payments of up to £25K a quarter on top of their salary! As if any other company would want to employ the people of the board who destroyed NR.

Sounds like Olivant were stitched up right from the start. Iirc they had to fight to get equal access to info early on, and now allegedly they are only told of the payment rescheduling from 5 years to 3 years on Friday, 3 days before the deadline. Dirty tricks or what?

But surely Olivant would HAVE to say that they were putting in a bid. Not to have done so would have been like sending Richard Branson an email saying 'Put in the lowest bid you like, sonny, we are out of the game'..

And no one, but no one, in the financial game hands their competitors free money like that.

Or have I misunderstood what is going on here ? Would Branson have known before the deadline that an Olivant bid was conspicuous by its absence ?

Do tell - this seems crucial to the poker game currently going on.

Just wait until we see the revelation that the UK has more than three times the proportion of subprime as the US (self-certified, interest-only, 125%, Buy-To-Let, 8x salary mortgage anyone?), with an awful lot of it on The Crock's books, and then the haggling will really begin. Not pretty. The UK's housing boom is well and truly bust.

I do not think you should under estimate Paul Thompson in all this. He is the lead manager and will stamp his imprint on the revised management team. He has achieved a turn round once with Britannic and will give this a good shot. Don't think Branson has the either the experience or capability to do it.

I spent all my working life in companies that were in virtually permanent crisis. There are few people around with the ability to rescue companies. It is a different skill set needed to either an entrepreneur or a maintenance manager.

Robert
Surely NR is hardly a major player in the mortgage market, yes redundancies must come or at least natural wastage but that will bring it back to where is should be.
Just a shame it cannot be taken back to being a building society.

Mervyn King spoke about moral hazard and not wishing to make it too easy for banks in trouble to come to the BOE as lender of last resort. Well, I doubt that any bank would want to ask for a lifeline now seeing as how Northern Rock has been crucified by his theoretical position. Forget the hype - Northern Rock grew quickly by tapping cheap funding sources AND passing those benefits on to its customers - it wasn't making excessive profits. It made a huge mistake (hindsight is a wonderful thing isn't it)in not securing its funding lines as well as it should but mortgage payers generally will pay more interest on their loans in the future with the demise of the Rock. In one respect I should be happy - no mortgage and increased interest on my savings - but I doubt many would see the positives in all this and it needn't have happened. Ponder that - it needn't have happened - and few except the shorters of NR shares have benefitted. Blame the authorities, the government and the Board of NR, but ask yourself whether the difficulties NR faced merited the decimation of the company that has resulted.

When economics and politics collide, we can see that in this case, politics clearly wins, in the short term anyway.

A lot of political maneouvering seems to be about trying to put off difficult decisions so that it eventually becomes 'somebody else's problem'.

I'm still fascinated by the ability of the BoE (and now the Fed over the last few weeks) to inject huge sums of money into the economy when required.

Hey, its only numbers in a computer, and afterall, who is really carefully counting what is pumped out into the economy and what is withdrawn.

It seems to be in no ones interest to look too closely at this, or the 'spell' might be broken and then where would we be?

Reading through the comments about Northern Rock & house prices, and the Societe Generale scandal, inflation, deflation, the Fed, failing US banks, the Bank of England etc etc etc, it strikes me that irrespective of politics one is likely to have mixed views about the state of the financial system and what if anything should be done about it.

The "strong force" within one's view or attitude depends very much on whether one is a net saver or borrower.
The "weak force" within one's view or attitude depends on whether one is a bull or a bear.
Both "strong" & "weak" forces may coexist in the same individual.

Whether or not the financial system is in crisis, it seems to me valid to treat shareholders and depositors differently. Ideally the latter should have 100% protection while the former should not.

Such protection for depositors would not be morally hazardous if sensible lending rules were applied and policed by an authority with teeth.

All shareholders understand shares go up and down and they aim for truly profitable gains from informed speculation in the private sector.
The nature of savers & savings is very different: a slow & steady return, sometimes little or no better than inflation being acceptible, as long as it is safe & secure.

Given a government has the (OK, limited) ability to set the rate of inflation, that it is likely savings have been hard earned after tax, that it beneficial for the state to have savers, & that the interest generated is taxed again, it has a responsibility not abandon them to the 'downside'of the economy when they were not a part of its 'upside.'

Whether or not the mixed economy is the right place for deposits depends of the degree of protection afforded them.

Finally, despite (or because of) Robert Peston's excellent reporting, I for one am no wiser whether banks such as Alliance & Leicester, Bradford & Bingley, Halifax Bank of Scotland and so on are "safe" for substantial depositors, though I appreciate any such comments may be destabilising.

When economics and politics collide, we can see that in this case, politics clearly wins, in the short term anyway.

A lot of political maneouvering seems to be about trying to put off difficult decisions so that it eventually becomes 'somebody else's problem'.

I'm still fascinated by the ability of the BoE (and now the Fed over the last few weeks) to inject huge sums of money, literally from 'thin air', into the economy when required.

Hey, its only numbers in a computer, and afterall, who is really carefully counting what is pumped out into the economy and what is withdrawn.

It seems to be in no ones interest to look too closely at this, or the 'spell' might be broken and then where would we be?

It's going to be a two horse race. The government knows it, Richard Branson knows it. Shareholders are not going to vote for Richard Branson. So what will be the future of Northern Rock? Nationalisation is the best solution for the business, the employees, the taxpayers and shareholders. If they don't get much, they'll know that their money will have gone to good causes.

Just shows, NRK isn't a commercial proposition unless younhave an agenda. Branson has. He wants to take on the big four UK banks in a quasi-monopolistic situation. And he is willing to pay to get into the game.

The big four have stuffed the account holders big time for years, and time is up for them now. Good on yer,Richard, give em hell.

I AM STILL VERY CONCERNED THAT PROPING UP NR TO THE TUNE OF 55 BILLION LEAVES THE EXCHEQOUR IN A TIGHT SPOT, IN THE NEXT COUPLE OF MONTHS AS THINGS GET INCREASINGLY DIFFICULT IN THIS COUNTRY,WITH LESS SPENDING,LESS TAXES COMMING IN,THIS DOES NOT FORBODE WELL FOR THE GUY ON THE STREET.

Why should taxpayers be propping up Olivant's proft? or Northern Rocks for that matter.

If Northern Rock can be self sufficient in 3 years without making a profit, nationalise it and do that.

Why should I as a taxpayer fork out so that Olivant, Virgin or any other financial group can make a profit at my expense?

ROBERT I APPRECIATE YOUR STRAIGHT FORWARDED,NO NONENSE,MATTER OF FACT APPROACH YOU HAVE BEEN SPOT ON IN YOUR SUMMATIONS AND REPORTATING ON THE NR FIASCO WAS WELL BEFORE ANYBODY ELSE,KEEP UP THE BLUE CHIP INVESTAGATIVE JOURNALISM.I HOPE THIS BRINGS A SMILE TO YOUR FACE.WHATS THE DEFINATION BETWEEN A RECESSION AND A DEPRESSION.NO NOT THE TEXTBOOK ONE THE STREET VERSION.WELL A RECESSION IS WHEN YOUR BEST FRIEND GETS LAID OFF, GETS HIS HOUSE REPOSESED AND HIS FAMILY ARE OUT IN THE STREET, AND A DEPRESSION IS WHEN YOU GET LAID OFF AND YOU GET YOUR HOUSE REPOSESED AND YOUR FAMILY ARE OUT IN THE STREET.AMERICA IS IN A DEPRESSION AND NOBODYS TELLING THE TRUTH,AND LETS PRAY WE DONT GET IT AS BAD.

The problem for NR is that no matter who runs the numbers, the bottom line always comes out the same. Without the BOE guarantees, this is a very bad deal. As I said in a previous post, nobody in their right mind would take on this risk with just their own money, someone else has to assume a good part of it and that will only be the BOE. Perhaps the consortium would feel otherwise but taking on a broken company at high risk should include a new management team which can start fresh to assess the mess and come up with a viable plan to clean it up. If they are smart, they will do this first BEFORE they make any definite commitments because it is possible no viable plan could be devised. In that event, either the bank would be nationalized or it would go out of business in bankruptcy, its remaining assets liquidated after its creditors are paid off.

Brian Golden #4
"It would pay existing shareholders to put in whatever funding is needed to prevent massive dilution."

This is what is called throwing good money after bad. When you make a losing bet, the instinct is to try to win it back by playing double or nothing on the next round. What professional gamblers know but those addicted to gambling never learn is that it's a sucker's bet. That's how gambling addicts wind up leaving casinos broke. Smart people do not put all of their eggs in one basket, they spread their risk on different assets and different classes of assets because they know that any investment has the possibility of being a total loss. As for depositors, they have the misfortune to live in a society which has never paid attention to the lessons the US learned from the great depression when there were also runs on banks because of fear they would close their doors forever. By insuring deposits up to a fixed amount in each bank and then setting the rules those banks with insured accounts must follow, the risk is minimized. For those banks (we call investment banks in the US) where accounts are not insured, they must pay a proportionally greater return for the added risk. That lesson was learned in America 79 years ago.

Dear Robert
There is only one contender for the race for NR, Virgin, and that is far from absolute.
The Board MUST never be allowed to control the Bank, beause it is they who got the bank into problems in the first place.Wait until Germany releases its sub prime mortgage levels, there is plenty more to come yet.

#2 Is it not Mervyn Kings mandate to control inflation? He may well want to stimulate the economy by cutting interest rates, but that's not for him to decide.

Mark B, if you're genuinely a member of staff - how come you don't know that not one single member of the board is on a retention bonus?

The people on a retention bonus are from AD down - none of whom would struggle to get a new job, and none of whom were responsible for our problems. I don't agree with the retention bonus but we have enough people smashing NR, without one of our own sticking the boot in.

And no, I'm not on one either - I'm a keyboard monkey at best!

Well done, Robert. Your update quite rightly recognises that something's not quite all it seems with Arnold's late withdrawal.

Much is happening backstage at the moment.

Watch this space...

27, The retention bonuses were paid from Management Board down to M7 level within the company.

If you search online, you should be easily able to find a list of the top ten or so names - Management Board and Operational Directors got the biggest chunks.

The idea that some clerical staff got the bonus is just daft. If they were that key to the company.. they wouldn't be accepting a clerical wage!

It seems to me that the key issues are these:
1. NR's business model needed around 60% of its mortgage lending to be funded by short-term commercial loans. Being short term, these fall due regularly. With the drying up of this market NR can't replace or roll these loans over easily - hence their desperate need for cash. Other lenders have around 20-30% in commercial loans and the bulding societies mostly 10% or less.
2. In the absence of a sudden improvement in the commercial paper market any viable rescue package will have to provide either a source for this missing cash or else some means of reducing the need for it - such as securitising more of their mortgages and selling them off to provide the cash needed.
3. Doing the latter (to get back to 30% or less in commercial funding) is shrinking the business and relies on just the kind of securitisation which created the USA's probelms, though the NR's mortgages may be of much better quality.
4. The UK housing market is seriously overheated if you believe charts of historical performance. A significant issue is the bubble in buy-to-let which has boomed on averacious and often naiive investors (as always) looking for somewhere to put their
cash (or sometimes, other peoples). As Panorama pointed out last night another cause was unscrupulous companies who allowed buyers to avoid paying the deposits, which obviously increases enormously the number of people able to buy to let. Evidence was presented that many of these properties are now selling for less than half their original declared selling price (which was itself inflated). The ratchet effect has accounted for much of the increase in prices and pushed people into making optimistic assessments of the amount they can afford to borrow. Does this sound familiar?
5. The buy-to-let market bubble put far more homes on the to-let market than there were buyers. prices have dropped, and many buy-to-letters face foreclosure. In many cases they will be bankrupt, which is not only a tragedy for them but means the banks that lent to them will lose their expected income and (with negative equity) much of their capital.
6. The buy-to-let market targetted precisely the same people as the first time buyers. Few first-time buyers in the Uk can afford to put more than 10% deposit so a drop in the value will leave milions more in negative equity. This may not effect those who don't need to move but some will. Are their homes even salable? Are they morgageable?
7. The second-time buyers don;t suffer the same problems but everyone is feeling the pinch in reduced disposable income so this sector of the market is likely to decline too.
8. Overall the banks who lend on property will face severe pressure on the value of their loans just as their sources of cash are drying up.
9. In better market conditions many banks would be interested in buying NR's shops and staff, but in a declining market who really needs them, except someone like Virgin trying to move into a new business area?
10. Buying the mortgage book means taking a huge gamble on the near and medium-term future conditions of several different markets (housing, money, stock, etc). Anyone taking on that risk needs a big incentive which means big potential profits. They arne't in business as a charity. So the question remains: How keen is the government to get rid of the NR millstone?

Some Comments about the "busted" brand of Northern Rock that compare the management offer with a Richard Branson "re-naming" using the licensed "Virgin" name seem to not address the idea that not only is the "brand" busted---but the actual business model is.

As the plan always seems to revolve around the commonsense idea--I saw many people advocate on this blog months ago...of forcing the mortgage holders away and getting "their repayments" in the form of one big lump to clear the debt.

Resulting in a smaller company somehow "stabilising" and 'moving on'--- I don't see how something as so obviously cosmetic as a rebrand with another letter heading affects this underlying dynamic in any way UNTIL the underlying situation IS stable in fact.

For sure, at that point, take what is there and offer it for sale then, even re-brand it...and if conditions are benign maybe a 60% fee can be received for a 40% sized company.

It's sticking a "Virgin" fly poster right now over an inevitable process that is the baffling part ---- the capital being injected is getting smaller and smaller so for the Treausry shouldn't Nationalisation be just "In for a pound..in for (another) penny?

As I write I am listening to Robert Peston on Five Live, talking about his awareness of the early problems with Northern Rock.
What exactly were NR doing wrong? They (it was said) were funding mortgages by borrowing at, say, 5%, and lending at 7% - rather than waiting for the public to deposit money with them. Provided the wholesale markets continued, what was wrong with that?
Most people have said that the NR mortgage book was a very good book.
So, what is the problem? Was it not simply that they were caught out by the drying up of the wholesale money market? Was that their fault?
I have no involvement with NR.

Mike, post 37 the short answer is as follows.

Northern Rock has grown considerably over the past few years. Traditionally Building Societies fund mortgage lending from savers deposits. In order to grow more quickly NR decided to borrow the money on the financial markets rather than savers.

Two or three years ago banks could borrow money at approximately 4% and were able to lend that out at between 4.75 and 5.25% on mortgages.

Most of these mortgages were on fixed term rates i.e. you pay the same rate for the period of the fix. NR however to fund these mortgages had to "roll over" its borrowinngs on a regular basis. Look at it as applying for a new low interest credit card and transferring the debt to them from your old card.

This worked fine for a couple of years. Last summer when the credit crunch hit NR found it couldn't get similar deals to roll over its debts and actually many lenders wanted their money back and were unable or unwilling to relend to NR.

In order to pay their loans they had to go to the lender of last resort i.e. the Bank of England at a rate of approximately 1% over base rate or 6.75%.

In simple Micawber economics borrow at 4% lend at 5.25% result profit for bank. Have to borrow at 6.75% and still only able to get 5.25% back from the mortgagees result disaster.

This is a great simplification of it all but gives you the general idea of what went wrong.

I commend all the above bloggers who have cited the problems with 'reviving' Northern Rock's "business model" as the chief obstacle to any private public partnership 'rescue' (ie. disguised closure).

I would only add that NRock's "business model" was a global pyramid scheme of vast proportions plain and simple, and, like all pyramid schemes, it has now collapsed forever leaving the people who set it up (New Labour & Applegarth) and the first-in participants (New Labour's friends?) all the richer, but all the rest of us standing on the lower keystones looking decidely wobbly.

As Roger Lowenstein points out in "Origins of the Crash" the decade-long credit bubble that 'balance-transferred' NRock into existence was blown up by politicians ultimately following those in Washington, virtually all of whom were schooled at the knees of the scoundrels running Enron.

When the dot-com boom collapsed America switched belately to the British interpretation of its 'dot-com' mania - ragingly unsustainable house-prices.

But Blair and Brown had demutualised NRock long before America discovered it could no longer sell the public shares in empty cyber-air. Blair and Brown had pioneered the idea of bombarding unemployed council tenants day and night with adverts for crazy right-to-buy, and daytime property development programmes for the penniless. This had been going on for 6 years before America caught on to the 'potential' for ninja mortgages, so which nation do you think is now potentially in the most trouble from sub-prime? After all we can't print dollars to get ourselves out of it can we?

And as for NRock's mortgage book being of 'good quality' check out the excellent analysis of Aldrick & Griffiths in the Telegraph 22.1.08:

Andy the NR monkey... "bonuses were for ADs and below"...

173 are on retention bonus, 163 ADs and ODs (check for "Director" in the internal phonebook)... you go figure how many below senior management are involved. This was only dressed up as "key staff" once it was publicly leaked.

More realistically this was a scheme devised by the Treasury [who have made all of the real decisions since they blocked the Lloyds proposals in August] to retain the operational management structure in order to make the company still look attractive to any prospective buyer. Rational perhaps, but not at 100% levels.

"None of whom would struggle to get a job...."

I beg to differ, this is not the City of London. There is no glut of jobs available in the north-east at present, especially not senior management positions.

Don't fret though, Andy, your organ grinder will be back along to wind you up again soon...

p.s. the mortgage book is sound, that's why the govt guarantees are in place.

p.p.s. NR did do risk analysis, albeit very poorly. It was perceived that if wholesale markets dried up in the US, the company would seek alternative funding from elsewhere in Europe, or failing that, the Far East. Not an alternative strategy as such but utilising alternative sources as the whole world's credit markets were not expected to grind to a halt...

Mark #29

I appreciate that you have a different view on the future of NR but frankly your reply is over the top....I have to respond given what it says :)

Just because someone has a different view to you does not mean they are akin to an out of control gambler that needs very basic lessons in investing and to be told what smart people do.

I would make a call that NR assets are well in excess of liabilities but that the problem is liquiditating assets in the short-term....its not that barmy an idea.

I might be wrong but my track record in my (already diversified!) portfolio isn't bad.

One lesson I have learnt from investing is that nothing is for definite and it is dangerous to be so confident that other views are dismissed as disillusional.

40 - Plese dont assume that all of the 163 OD's and AD's received a retention bonus (I assure you they didn't).

Those bonuses were an absolute disgrace and a kick in the teeth for the remaining 6300+ staff who have worked their socks off for the company.

Lets hope the new Chairman has seen the light, and withdraws the bonuses with immediate effect (without the three months notice period).