Rock: risk doubled
Although Northern Rock has been heading for nationalisation for some time – and I wrote and broadcast last Tuesday that the Treasury viewed public ownership as preferable to either of the rescue plans – the formal announcement was still momentous.
It is the biggest decision made yet by this prime minister (except perhaps for opting not to have an autumn general election).
And it will reverberate for months and years – not least because shareholders are planning to sue for very substantial reparations.
The decision seems to have been made for two reasons.
First, neither the nor a management team were offering as much as the Treasury wanted in fees for tens of billions of pounds of continuing taxpayer support.
I am told there was a £40m gap between what Virgin said it could afford to pay and what the Treasury was demanding, which is big as an absolute number but is peanuts in the context of the Rock’s £110bn balance sheet.
Second, the Treasury was unhappy that Virgin and its co-investors would have made a profit of about £1.2bn – a return of around 75% – before taxpayers received a penny in capital gains for all the financial help we would have been giving.
So although an ultimate profit of about £200m to taxpayers – which is what Virgin thought it could deliver – may seem attractive, the Treasury thought it inadequate give the scale of the risks that would have been shouldered by the Exchequer on behalf of us all.
The prime minister has in the end decided that if taxpayers are going to provide financial support to the Rock for years to come – which we would have done, on the basis of either of the rescue plans on the table – then we deserve all the potential rewards.
The only way to secure those potential rewards is to nationalise.
Put like that, it sounds like common sense.
But here is why nationalisation could turn out to be the boldest decision that the prime minister will ever make.
If he wants all the rewards for all of us, he has to take all the risks.
In nationalising, he has increased the liabilities of taxpayers from £55bn – in direct loans through the Bank of England and guarantees to other Rock lenders – to £110bn, or the entirety of the Rock’s balance sheet.
He has doubled the financial risk for all of us to just over £3,500 per tax payer.
Now the point about the Virgin and management plans is that they would have significantly reduced the risks for taxpayers.
They each offered a cushion of new equity, so that – if the worst came to the worst – they would have suffered in any first round of losses, if the Rock’s business were to run into difficulties.
In Virgin’s case, it would have put in £1bn of new cash equity and the management team was promising £700m.
Given that this cash would have been exposed to potential losses – and would have provided protection to taxpayers against those losses falling back on all of us – they understandably wanted first dibs on any profits that would be made.
So let’s not fall into the trap of assuming that somehow the potential rescuers were rejected because they were being appallingly greedy.
They needed to make a return to justify the substantial investments they were proposing.
If anything, their rejection shows that Gordon Brown is perhaps less comfortable with a market solution than many might have expected.
There is another way of looking at all of this, which is simply that financial markets are so dysfunctional right now that it was impossible to construct a deal at a de facto price that made good commercial sense for taxpayers.
But that was a judgement that the Treasury could have made weeks ago – and it is therefore vulnerable to the charge that by pursuing negotiations with Virgin et al till yesterday it was guilty of a Micawberish refusal to see the harsh economic reality.
Where do we go from here?
Well it looks as though the management team of a nationalised bank, led by Ron Sandler, will more-or-less adopt the reconstruction plan put together by the Rock’s own management team.
That means he will shrink the size of the bank by more than half.
There are likely to be significant job losses.
And Sandler will probably jack up mortgage rates, to encourage Rock borrowers to take their custom elsewhere.
There would be political dangers for the government in being seen to be responsible for the financial pain of homeowners and job losses in the North East.
But it is difficult to see how it can escape them.
Then there is the £110bn question.
Can taxpayers avoid a loss on all those liabilities?
Well that depends on whether the current gentle downturn in the economy turns into something worse.
If unemployment were to rise significantly, if large numbers of homeowners started to have difficulty repaying mortgages, then the bank which lent most aggressively during the last phase of the bull market in housing would probably be most at risk to losses in the downturn.
That bank, lest we forget, is Northern Rock.
And if it all goes horribly wrong, it is now taxpayers who will pick up the whole bill.
UPDATE 08:48 The Rock is now, arguably, the safest bank in the UK. Will savers now flock to put money back in, to take advantage of its wholly risk-free, fairly high savings rates?
At a time of almost unprecedented unease about the health of the banking system, the Rock has a massive competitive advantage as part of the public sector.
Its rivals will be very unhappy about the competitive threat. They are desperate for funds – and won’t want to see deposits gravitating to what is now an offshoot of HM Treasury.
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What I don't understand, is the statement 'embarrassment for the governemnt!'
The governemnet are looking after our supposed investment - the taxpayer - and as such if this is the best way forward how is it embarrassing???
Also NB shareholders: as it says on the ³ÉÈËÂÛ̳ explaination of the NB crisis and what nationalisation is: "Northern Rock got itself into financial difficulties last year because its business model left it ill-prepared for the global credit crunch." Thus, the shares were overvalued as they were based on a lie essentially, a model that was not robust eneough to cope when the times got tough...So you takes the rough with the smooth!
I have no problem with the government taking this on, with a hand picked management team of people who have been there, done that, got the t-shirt etc...Who will guide it through and hopefully, unlike past deals (and may be this is where the problems of embarrasment occur)...Sell it for what it is worth plus a premium, instead of on the cheap!!!
I may be naive here, and naybody who can explain properly why it is 'embarrassing,' then pray tell...
Don't worry you know that hard Labour knows better then us how to spend OUR money. Also remember just how successful nationalised industries were before, but of course that was when they typically were monopolies.
So what is know now that wasn't known months ago or is it just that Brown is a complete ditherer? How are they going to manage the much bigger looming crisis of Peak Oil?
Why wasn't it just put into bankruptcy with the government buying it back and paying out the savers and selling off the mortgage book? There wouldn't have been any problems over shareholders suing. OK the shareholders would have lost all but that is the risk everyone takes when buying shares. They should have had their eye on what the management were doing. Staff would have lost jobs but that is the nature of life.
Please, Mr. Preston, what nonsense is this about nationalising NR ?? The government bearing *ANY* risk ?? Of course not !! Comes the next election it will be someone else's nightmare; in effect, it is a poisoned chalice or a roadside bomb (in modern terms) !!
Hmm, seems to me that there is a consumer opportunity here, if the government wants to take it. There has been a lot of criticism of the nationalisation decision, but there are examples of state owned mortgage banks doing very well. One such is SBAB in Sweden, which has as part of its charter a duty to offer lower mortgage rates and higher savings rates than other banks, thus helping to keep the other (larger) banks a little more honest in their dealings with the consumer. SBAB is run commercially, so no government subsidies are involved and so the bank (and Swedish state) do not fall foul of EU rules. Is there any good reason why the Northern Rock disaster cannot be turned round and put to good use in a similar way in the UK?
Well balanced and excellent post, Robert. Nationalisation is still the best solution though. Employment under RB or in-house team may be squeezed even harder under private ownership. If Ron Sandler is successful in getting our money back in full with interest, how much will it help GB in the next election?
Presumably as every tax payer now has an investment in this bank, any eventual losses on this investment can be offset against any capital gains on one's tax return ??!!!!
I love Robert Peston's blog: feisty, relevant and insightful. Move over The Economist
Very interesting post Rikard
Didn't I hear Declan on ³ÉÈËÂÛ̳ Breakfast News one day last week declaring that the Northern Rock was in one of the three worst mortgage lenders with repossessions going through court at present? Or did I dream it!
The point about SBAB and EU law is interesting.
Northern Rock is an undertaking and thus open to challenge on the grounds of state aid. The assurance of deposits by HM Treasury constitutes an enormous competititive advantage and surely NR/HMT will be open to challenge from the other banks?
Now it's a public body can we see its mortgage book under the Freedom of Information Act? I'd be prepared to bet Britain's own subprime crisis is already well underway and visible in defaults and arrears on the Wreck's books.
Good summing up in my opinion.However, everyone seems to be ignoring WHY this was allowed to happen in the first place. Should the FSA not have stepped in when the bank first started to shout abouts its "inovative" new methods, in other words, flying in the face of good business practice and tried and tested formula. Many are calling for Brown and Darling to resign ! Before they do perhaps they could fire the FSA mandarins who were asleep to the Rocks looming failure and also put in place proceedings against the Directors to investigate their responsibilty in creating the current situation. Then Brown can resign and we can rebuild a shattered Britain. Grumpy BoB
I still wonder how Darling plans to reduce the size of the Rock's stock book. Jacking up rates will only affect those borrowers on a variable rate. A lot of people opted for Rock mortgages because they offered long term fixed rate deals. These customers are in a good position personally but are a liability from the point of view of anyone taking over the Rock (including the Government).
The nationalised Rock may left with a hardcore of borrowers on long term fixed rate mortgages which are cheaper for them than anything else on the market. These are effectively the least profitable customers and also the ones least likely to want to tranfser their mortgage to another provider.
Will the Government effectively have to offer to buy out their mortgages at less than full value in order to shrink the Rock's stock book by the amount they require? Will this amount to another hidden cost that the taxpayer will end up shouldering? I guess only an insider could state with any confidence what proportion of the Rock's stock book is made up of these fixed rate mortgages. I suspect that these 5-10 year fixed rate deals that the Rock was so keen to push last year may end up being a millstone around the Government's neck.
Imagine down the line 2 years ahead.
Northern Rock sold off at a nice big profit for NuLab (sorry UK). Sold to some long haired bloke for some figure or other and oh I forgot, vote for me.
As someone with a NR mortgage, I'll be interested to see what their rates look like in the future, particularly if Mr Sandler wants to encourage me to move elsewhere.
On a related issue, NR is still - presumably - going to be borrowing money to fund its business from the BoE. At what rate? How will that rate compare with the cost of funds on the open market? Will any rate disparity fall foul of the EU's competition rules?
I agree that NR shareholders need to get a life. Shares go up and down. Businesses fail. NR is worth little now. But if I were a shareholder I'd be thinking, the Government could have got a deal with Lloyds TSB way back in September if it had been prepared to offer, er, exactly the same kind of guarantees it is giving NR now. How much would the shares have been worth then? Perhaps Robert could enlighten us with an outline of the various legal issues that will come into play when the shareholder groups' writs land on Mr Darling's doormat.
According to Reuters, SBAB made a $4.25 billion loss in the last quarter of 2007 and 4 times that level in the preceeding quarter. It is possibly about to be sold off by the Swedish Government.
Perhaps not a good example after all.
The Government have been using taxpayers money for what they saw as Labour Party advantage (jobs in the NE, Labour financing through the Smith Instute and lots more). NR should have gone straight into administration. At least now Mr Brown has got egg all over his face. Later on Today there was an item on Panda pornography. Should Mr Brown and his fall guy/pet panda, Mr Darling, be shown clips of Ken Clarke to show him how to run and economy?
Is £110Bn at risk? No, of course not.
This represents the entire value of the Northern Rock mortgages. These are secured against the houses that the mortgage payers have - which arguably are now owned by the government.
There is no possibility that all this money will be lost. For that to happen, every single house NR has lent money against would have to become worthless and the owners would have to stop paying their mortgages. Clearly this is a ludicrous situation. Talking about a £110Bn risk is using a technical accountancy term out of context. It's not as if the money has been bet on a horse.
I'm not a fan of this (or any other governement, for that matter) but it would be nice to see some clear-headed reporting, with realistic data explained in layman's terms rather than this scare-mongering in order to get a juicy headline that misleads people.
Good article, for once seeing the up and downsides to a situation.
We have all forgotten that the government could have avoided this entirely if it had done what other central banks across the globe (the Fed, ECB and even Australia's RBA) did in allowing banks to repo RMBS (residential mortgage backed securities).
Northern Rock would have been able to fund itself if the BoE had accepted it's assets as collateral, and there would have been no run on deposits.
Tax payers have ended up owning all of the assets anyway, so nationalisation is the final admittance of failure of the Treasury, Bank of England and FSA.
Failure to act soon enough and with the right response.
Imagine for a second that we are in the fantasy world that sees NR´s shares worth £4.25 each. Someone with the demutualisation holding of 500 shares will see their share of the taxpayer support reduced to £1,375 (plus the cost of compensation).
So anything NR shareholders receive means that they are responsible for less than the rest of us who had NOTHING to do with it.
In passing, I assume that Nationalised Rock will close it´s Guernsey subsidiary. Why should the taxpayer own a financial entity in a tax haven.
#1 - This is an embarrasment for the government because several people spotted several months ago that everything about the private rock rescue bids was unviable without the tax payer taking on huge risk for sub-commercial compensation. I also pointed out several months ago that whilst most bidders will be interested in getting a cash return (and cash only), the taxpayer is largely neutral about whether it gets value back in the form of cash or housing following a reposession. This is because the rock's target market is largely people who, 20 years ago, would have been in council housing, and so by buying the rock, the government has either got a right to money back further down the line, or a right to reposess the housing that will be required to house 'victims' of reposession. Plus the debtors will still be on the hook for any shortfall.
So, having sold all the council houses at a poor price well before the peak of the market, by nationalising the rock, they have guaranteed themselves a buy at the bottom of the market with a right to the cash paid at the peak of the market (in most cases) with only a credit risk over the difference.
Now, if lots of individuals have worked this out, published it in publicly available sources and it STILL takes government a few months to catch up, that's embarrasing.
I do so hate being right.
Robert
we seem to have some form of closure here. Any chance of stopping using NR as some form of political punchbag for a few months and letting the staff and new management get on and run the business and give the government a nice fat profit when it is eventually sold off.
By the way I hate how you play with the numbers. You happily talk about liabilities as if the assets don't exist. It is acknowledged by the banking industry that the quality of its loan book is amongst the best around - it has no sub prime (this is on someone elses books)and its arrears level are significantly lower than the rest of the market
Government intervention never works in business failure situations as history shows. The government might be between a rock and a hard place but the market rules o.k? Remember black wednesday? How much did that cost us tax payers. Who sold our gold reserves at knock down prices? Bring out the Branson!
Mr Peston. You know perfectly well that if the economy turns down to the extent that all £110 billion were to be lost you would be presenting your reports with a megaphone from the top of a large hill.
You are scaremongering again.
By the way, did it ever occur to you that the nice gentleman who originally told you about the BOE loan might have had an agenda ?
Do you think you now have a place in history as the man who single handedly broke the bank of Newcastle ? Did the possible ramifications not occur to you or your producer ?
On a positive not, I don't have a TV but watched your News 24 report online and it was very entertaining(in a good way).
There are
'Its rivals will be very unhappy about the competitive threat. They are desperate for funds – and won’t want to see deposits gravitating to what is now an offshoot of HM Treasury.' - I think National Savings has been around for some time but given the Government can't run the economy, NHS, schools etc, I'd be suprised if people will be beating down the doors of Northern Rock.
The real question is where does Pestonomics go now? There's probably a week at most left in this story for the time being. Will we go back to general 'dark days for the UK economy' articles or is there another company out there waiting for the ³ÉÈËÂÛ̳'s very own Grim Reaper?
When are you going to do some 'proper' reporting, you make it sound like every person in the country will be due a tax rebate at the end of this, and that is simply not the case!!!, how much of our 'taxpayers's money is spent on legal aid for criminals, disability payments for people who claim they cant work, keeping illegal immigrants in british jails instead of deporting them??? I would rather my taxpayers money was spent helping hard working british tax payers to keep their jobs!...... please step outside the box and look at the bigger picture
Hi. I am novice to market shares but just want to ask everyone here that will the nationalisation affect NR shares price? I mean will share price go up or down now? As its share price was 90p last Friday? I am asking because my wife spent a lot of money in buying NR shares just few weeks before upon her friend's advice. Thanks.
What I want to know is, is there any way a fixed rate mortgage can be varied in advance of the end of the fixed term and whether there can then be a exit penalty other than anything agreed to at the outset with NR?
Put simply are NR mortagees at any additional risk?
Simon
Nationalisation has been effectively in place in all but name now for weeks.Rather than pay cash now for the worthless shares, I do wonder whether the treasury might be well advised to try to avoid endless and costly litigation devising a scheme of 'partnership' with the Treasury, whereby the existing shareholders exchange their shares for a 'warrant' entitling them to subscribe at nominal cost for new shares in the reprivatised Bank, provided they do not in the meantime sue for compensation!
One to throw into the pot - NR management were responsiblefor their funding strategy and the rest is history... what will happen to the decision makers at SRM and RAB. They continued to 'plunder' company (inc other peoples pensions') money into NR - isn't it time that they now face the music - imagine how you would fine on this brisk morning if you work for (HM) NR and were only a few years from retirement - theres now a chance you could be out of a job, lost considerable amount of money in share (backing your company), a tax payer.. and have investments in portfolios managed by RAB and SRM, could be worse.. you could also support the local football team.. hey ho ....
In nationalising, he has increased the liabilities of taxpayers from £55bn – in direct loans through the Bank of England and guarantees to other Rock lenders – to £110bn, or the entirety of the Rock’s balance sheet.
He has doubled the financial risk for all of us to just over £3,500 per tax payer.
Come on, be real! The £110bn liabilities of NR are balanced by £110bn of assets. The risk to the taxpayer is confined to how much the £110bn of assets may need to be written down to what they're actually worth. For this to be the entire £110bn would mean that NR's mortgage loans, in their entirety, were non-collectable, and also that the value of the underlying collateral is no greater than the costs of repossession and sale.
Completely ridiculous, as I'm sure you will agree, so why not be properly informative, and say that the worst, the very worst, scenario imaginable is write downs of £5bn. And also to say that if the economic situation deteriorates far enough for this to be the reality, then NR will be but a minor part of our worries.
How much do you think the search for understanding is helped by the public being fed the preposterous nonsense of tabloid sensationalism?
Hi Robert.
So, nationalisation for Northern Rock it is then. What a pity no such alternative was put forward when BCCI went bust, or when Equitable Life failed, or when pension mis-selling condemned our financial services industry to years of costly angst?
One conspicuous absence from all of the discussions heard so far, is the role of that nest of overpaid freeloaders at Canary Wharf, the FSA.
Since the advent of the original Financial Services Act in 1987, we have had Maxwell, pensions mis-selling, BCCI, Equitable Life, Independent Insurance, and now Northern Rock. Our retail financial services industry is over-regulated in the name of consumer protection, but cannot deliver.
If the Country wants a model of how state ownership fails every time, then it need look no further than the FSA. God help all those connected with Northern Rock.
Paul Carter
PS Sandler was also appointed for an FSA review in 2002, which cocked-up the with-profits savings market. He is obviously well qualified to take on the Rock.
Such a pleasant irony that outgoing NR chairman, academic and doctrinaire writer Matt Ridley, on the theory of why nationalisation was a Bad Thing
I feel sorry for Ron Sandler.. He's only being paid £90k/mth.
All the rewards all the risk.
That seems to me a better bet than allowing a bunch of tax dodging hedge fund managers to clean up at our expense. No rewards, most of the risk.
The Tories brought Rolls Royce into public ownership - a good strategic decision. The private sector had a short term horizon and would not support the RB211 project. These days the private sector still thinks that manufacturing means devising exotic financial instruments linked to US mortgages. Why does the ³ÉÈËÂÛ̳ prefer to run BL film? Why don't you run film of Railtrack and Hatfield as the definitive example of the private sector in operation?
Stop pushing the line "public bad, private good". or is Murdoch really better than the ³ÉÈËÂÛ̳?
Booking potential profits from nationalisation is not a prudent policy for determining business decisions. Many enterprises fail for this reason. Northern Rock was always going to end this way.
The Gov. surely must pay at least 90p a share to shareholders. This is the closing price before their expropriation of the assets of NR when the markets were closed.As far as I am aware The BOE did not withdraw support and to do so with no warning is not equitable.
I think perhaps Mr Peston understates two important points. Firstly, it isn't the government's money - governments neither own nor make money, but spend it. This is our £110bn, our risk, our (undoubted) loss. Secondly, shareholders invested in NR with a view to gain. Unfortunately, shares can go down as well as up and that is a simple commercial risk (although I fully understand why the government had to intervene).
NR shareholders want it both ways - they can't rescue themselves, they don't like the private bids and yet they seek to go to law to get their failed commercial venture bailed out with someone else's money (ours). If they need to be rescued, it can't be on their terms.
Also, I have great faith in Mr Sandler's abilities, but I fear that a politically-set remit and terms of reference may impede him.
The whole NR affair would be currently more pallatable if the Government would drop the pretence of coming out of it with credibility and any self-belief that they took the right decisions in a timely fashion.
As mentioned by #15, a Lloyds TSB deal should have been put through in September, with every arm of government and financial regulatory bodies putting their support behind that bid as soon as the scale of the problems at NR became clear.
5 months later and yesterday's announcement - as an individual voter it puts paid to the government's line that it trots out to any crisis, that at least it's the party to lead on / manage the economy.
"He has doubled the financial risk for all of us to just over £3,500 per tax payer."
I normally like these articles, but this is popular finance taken a little bit too far. There is exposure and there is exposure, you cannot simply add up the total amount and call it risk, there is significant double counting here.
Risk is exposure weighted by probability. So you cannot on the one side say that a private equity cushion would reduce the risk to the guaranteed loans, but a public equity cushion would not. Every penny the public sector puts in as equity takes them one penny away from needing to pay out on the guarantee. The overall *risk weighted* exposure stays exactly the same, because it *only* relates to the asset side of the balance sheet and cash flows derived from it. If you're financing it all, doesn't much matter how you do it (although the audit office might not agree).
If someone else put in equity, your overall risk would be reduced. The question is simply how much they would charge for the risk that they take on. And that is simply down to how big they perceive the risk to be. The absence of bidders suggests that most assess the risk to be on the high side, ie. not worth the price tag the government wants.
Oh and 75m is peanuts compared to the NR balance sheet, but Virgin isn't buying the balance sheet. Its just buying 1bn worth of equity. 75m is still less than 1%, but you have to draw the line somewhere (and who knows what the starting point was?)
This simply boils down to one thing. All parties are gambling with other peoples money. But voters will forget sooner than shareholders. Now if Gordon took all the NR shares and distributed them evenly among UK taxpayers, that would be much braver.
Oh dear. I really didn't think they would be this stupid, but in effect, the government is trying to rip off Northern Rock in order to try to make a profit later. It's a highly, highly, risky move, and borders on criminal.
The Treasury also continues to perpetuate this mythical risk to the taxpayer. The taxpayer has nothing to do with this, and no one noticed that Alistair Darling actually admitted this in his statement yesterday. Northern Rock is still solvent and still working, and any loans are a matter for the BofE and NR. What the government should have done was taken a complete back seat, let NR and the BofE work out loan repayment and give any encouragement they could to any proposed takeover, if it would help.
What we're going to get now is shareholders taking legal action, and in all honesty, I think they'll have a pretty good case. This is going to get exceptionally messy for the government, and it is a situation entirely of their own making - ably assisted by the media and various people banging away on their blogs.
Who has calculated these "taxpayers" new liabilities? To get to the £3,500 the enormous number of non taxpayers/benefit recipients should be excluded but I suspect that the indebtedness is just divided by a figure pulled out of the air like the government ususally does and is thus grossly understated. I feel that we taxpayers are an exploited shrinking cash cow lied to with impunity
pain in back side of taxpayers
For the first time in my history on this planet I am really impressed with the Government decision. Take away all the press panic and 'worst case scenario' painting and what you have is simple. It's not a good time to sell, the offers on the table aren't good enough - the Gvt doesn't have to rush to sell (show me any investment that has no outstanding liability). If this was my bank - I would be doing the same - nice one GB + AD. Also this is not a return to the 70's as my City AM suggested this morning. In fact quite the contrary, I see this as yet another demonstration of free market theory falling apart. How can anyone (i.e. the Tories) moan about nationalisation when it was the 'greed' of the free market that caused the mess in the first place.
Robert,
In previous postings I have hoped that something good will eventually fall out of the NR disaster.
There is no dispute to the causes of the NR demise, flawed business model, lack of government controls, feel good factor, BoE, FSA etc. etc.
The common element in this whole mess has been Brown as Chancellor and now Brown as Prime Minister, he in his government offices has had the ultimate responsibility to deal with the NR problem earlier.
The good derived from this mess will be Brown's resignation and an election to deal with the nations total confusion and dis-satisfaction at this governments incompetences.
The largely hostile reaction to nationalization shows how the private=good, public=bad sentiment runs deep in the British psyche.
Geroge Osborne calls nationalization a 'catastophe'. Yet he (and very few others) fail to mention that Johnson Matthey bank was bought for £1 by the short-term-gain-for-long-term-pain Thatcher government in 1984 after getting into trouble by being a bit too keen to lend money (sound familiar?)
This is not a return to the 1940s nor even the 1970s. Northern Rock is in a critical condition and the Bank of England is its life support system. Eventually the patient will recover.
....oh and in addition to my previous post, I forgot the best part. RAB capital and the other 'poor hedge funds' can moan all they like. Did they not realise that 'investments can go down as well as up' when they bought such a large share in NR? They should shut up and take it like ordinary shareholders will have to. If they hit finanical difficulty as a result then it will clearly demonstrate the need for diversification across your investments. All claims should be headed off at the pass to avoid costly legal defence by the Government with tax payers money. Don't think the hedge funds are your friends and certainly don't feel pity for them.
The last point is the most important.
Acting rationally, savers would now choose 'The Rock' over any other UK bank.
Now that is ironic.
The argument that nationalisation has increased the liabilities of each individual in the UK is nonsense in an environment where the Government has shown clearly, by its actions, that it was not prepared to let NR fail. In other words, as soon as the Government took that view, the UK taxpayer had a contingent risk on NR whether privately or publicly owned. Sandler is probably not the best man for the job - he showed how poor he was a director of a bank when at NatWest. A better person would probably have been Paul Thompson, but he sided with management. I can't believe this will end well and there will be big job losses in the NE.
i am still waiting for darling or brown to answer the question, why NR?A great deal of companies have gone to the wall during this governments watch, what was so special about NR? What about the precedent this sets? i presume if Tesco or Glaxo get into financial difficulties darling & brown will step in to save them!
Is it worth pointing out that Northern Rock were not given the opportunity to communicate the current situation with their customers before the information regarding the BOE loan was released by the press? Had Northern Rock been given the opportunity to make the announcement itself, in good time and with adequate proof to back up any claims, then perhaps the situation the bank is in would not be as critical, we all know that many other banks are in a similar situation, but they have dealt with it all in-house, Northern Rock was not given that luxury. Good Job Mr Peston, I wouldn't recommend any vacations to the North East any time soon.
How much did the incompetent previous chief exec of NR receive as a pay-off/reward for failure?
Since 1997 (when a 'socialist' government came to power) the obscenity of huge severance payments as a reward for failure has increased exponentially.
And now we are paying a rich banker £90,000 per month to dismantle NR, and lay-off most of its employees.
No wonder people are emigrating.
Couple of points.
1. What were the non-execs doing prior to collapse? Whose interests were THEY looking after?
2. NR has effectively been in public dependence, if not full ownership, for months. The shareholders may moan, but presumably the alternative (which the Tories seem to gloss over) is that NR would be in administration long since, with shareholders getting next to nothing. That's the nature of the equity market - high returns for higher risk - may go wrong of course. Perhaps they should have put their money into a deposit account at a bank / building society?
It is not surprising that the government couldn’t manage the complex stakeholder requirements. It was one of those “no win†situations where whatever they did someone (possibly everyone) would have been been unhappy. One of those lessons that we keep re-learning about public-private partnerships is that the stakeholders have to want to work together and clearly this was not the case.
What surprises me is that people keep talking about nationalisation as being the only option left i.e. if a private sector solution won’t work then the public sector has to pick it up. What they seem to have forgot is that there is a 3rd sector, the mutual and co-ops, e.g. John Lewis and Co-op Bank, that run reasonably good businesses. This is ironic given that Northern Rock was a mutual in the first place.
By this I mean that if taxpayer’s money is being used to prop up the bank I think that it is only fair that taxpayers have a direct vote on how the business is run. This one vote per investor, irrespective of size of investment, is the hallmark of a co-op/mutual
It would be reasonable to ask how this might happen and perhaps the only way might be via nationalisation i.e. government passes legislation to nationalise, restructures it as a mutual and then issues “shares†to all UK taxpayers.
This would have the additional benefit of minimising political interference in the running of the Northern Rock (building society).
Common sense isn’t it? The people who provide the investment controlling the investment. However because it is common sense it won’t happen.
Whilst not ideal, I would like to know whether the scale of the NR issue might be akin to the argument against Nationalisation, namely inefficiency? That said is this not an opportunity to take the one of the oldest savings institutions (the Post Office) and merge their activities with those of NR? Not entirely sure of the amount of capital (deposit) inflows this might create but the effect could bring a little more transparency to the Post Office and assist in de-coupling savings institutions (and lenders) from the Govt in the long run?
As a small shareholder I am feeling rotten. I invested once before in a company which basically went belly up and didn't feel half as bad.
I can't help but feel that those who set up the failed tripartite system, deposit insurance scheme and allowed a full-scale bank run made the situation way worse than it should have been.
Yet they have confiscated my shares and robbed me of any opportunity of recovery for those failures.
I really respected Northern Rock but I am closing my account. I need as few reminders of this episode as possible and I am certainly not going to support those who confiscated my shares.
Jon Wood, head of the Monaco-based hedge fund, SRM Global, said it was "a very sad day for the stock market, banking industry and the reputation of the UK as a financial centre".
Hmmmm, I see the footsie's been on the up and up since opening and is currently having a good day up 105. With Barclays leading the charge.
The government is right to nationalise
Northern Rock. At least this way if things turn out well the taxpayer will receive a payday for their huge commitment.
The management team can now set about shrinking this business and our collective exposure. The shareholders should receive nothing because that is what their shares were worth without £50b of our money propping up their insolvent company. Lets not forget that the various hedge fund managers were buying shares even as late as last week - months after this disaster occured - They specualted and lost - Tough.
Nationalising NR is about as sensible a decision as taking a tow from the Titantic. But is was inevitable due to the dithering strategies pursued by BOE and the Treasury. The bank should have been axed from state interference in January at the very latest. It is a very bad move. It sends confusing signals to the market about government policy. NR will almost certainly end up paying more for money paradoxically rather than less,since its loan book will have to go long due to the uncertainty over when it may be 'denationalised'. Will anyone want to buyt it then? Think of the Royal Mail as a reference point. Why the governemtn did not agree to a private offer is baffling given teh huge exposure facing NR and the continuing uncertainty in the money markets over rates. It is likely that rates will drop between one and one and a half per cent in teh next four quarters. Assuming this scenario is plausible, it made much more sense for the bank to go private. A private vehicel is predictable. It has a familiar shape and form. A state bank (they exist in many EU countries) is a untested model in the UK. I think it will be an expensive trial.
This is just not being spun right! We all now have a share in a sovereign wealth fund that has invested in mortgages in a crowded island's bricks and mortar – should be a nice little earner!
Robert,
for the last 24 hours you have been repeating the statement that 'taxpayers liabilities have doubled to £110bn.' But not once have you mentioned that taxpayers assets have just increased - as we have been assured that the bank is solvent it must have assets of more than £110bn, so all other things being equal we stand to make a profit. Virgin were prepared to inject £1bn (via in large part a rights issue, so not their money) and wanted a return of £750m (75%)before giving any capital gain to taxpayers but they wanted the taxpayer to stay on the hook for £55bn in return for a possible upside of £200m (0.4% .... cf 75%!). On the available information it sounds like nationalisation in one form or another was the least bad option.
Surely this all begs a more worrying question: If they have taken this long to decide over such a small situation, what happens, and how long will it take, when bigger issues are tabled? Would you want these men at the helm when the recession hits? Do we have a choice?
If you have talent and a flair for matters financial will it do your career any good to stay on at NR? This is the real price of a political solution, mediocrity.
So 3,000 people are set to lose their jobs at Northern Crock after nationalisation. Wasn't the idea of propping up the Crock that it would save jobs? It would have been far cheaper to have sacked them all and given each of them a million quid for their trouble.
#33 Paul Carter .. is almost certainly an IFA.
I suspect this because Paul's comments on the FSA are almost identical to those I have heard from a number of IFA's.
The FSA truly is the monkey-on-the-back of small IFA's.
Their life seems to be quite miserable these days thanks in large part to the FSA.
PS. These IFA's have to pay for the priviledge too, in that a levy on them (financial sector) funds the FSA. Salt in wounds, indeed.
The return of State Housing by an unusual route. If defaults rise on NRs mortgages; THE TEST - will there be successful political pressure to prevent repossessions? If the answer is yes, then we have truly returned to the 1970s!
The more I read about the NR issue and indeed about the behaviour of the banks in general the more I'm becoming convinced that a complete overhaul of the entire sector is well overdue.
When Thatcher deregulated the City in the 80s she didn't do it on the basis that the City had to agree to support the UK's interests and its industry but effectively gave it carte blanche to do what it wanted. That can now be seen to be entirely the wrong move and the "agreement" between the City and Govt or the nation if you like has to be reexamined.
Darling talks about rebalancing the economy which of course means more manufacturing. But, we all know that the City has spent the past twenty something years de-industrialising the UK as fast as it can.
Will it change its spots? I doubt it.. At least not without some major changes in regulation.
The nationalisation of Northern Rock's marks the end of 'Crash' a work of art created after the bank originally crashed. A 'drawing' dictated by NRK share prices 'Crash' - a collaboration by artists Fehler and Fairchild Semiconductor - is now complete.
What irked me the most was the Chancellor's refusal to even hazard a quantification of how long 'temporary' might be in terms of NR's public ownership. History students amongst you may recall that income tax was a 'temporary' measure introduced to fund our campaigns against Napoleon...
I don't know the in's and out's of the costs, but the private company Connex lost its rail franshise and it was returned to public hands, ran by a private sector CEO.
During this time not only did it balance the books, but trains ran on time, were cleaned regularly, got refurbished, new trains were ordered and stations refurbished.
So bad luck investors, you win some you lose some, but for tax payers/customers this should be a good deal.
Come on Richard. You are not a quitter. Sweeten the deal, take on the challenges, build something amazing from this sad situation. Be a hero
1. Robert is right in qualifying £110bn as risk. It is not about whether these mortgages will default, it is about finding the money to honour those mortgages and servicing the fees on those borrowings.
2. Having said that why should the Sandler not be good for NR? Well, even at 90k/mnth where is his incentive to get the best out of NR? Will he do it out of duty for his country?!
3. Now imagine for one moment that Sadler does do a fabulous job of trimming the company down to its bear knuckles and the market recovers enough that a profit is made and NR can be sold at a profit; do you think for one moment that any profit will be redistributed to taxpayers or will it more likely be used to temporarily fill some gvmt created black-hole?
4. This is really Brown's political gambit. If this works, his credibility is enhanced and he has a chance at the next election. He might even bring it forward as a result. If it fails, he was anyhow behind in opinion polls and would then be somebody else's problem. The worrying thing is that Brown is an eternal optimist that as a chancellor gave us continuous inflated GDP growth forecasts and who is now hoping that the economy will see an upturn early enough to rescue not just NR, but his political career.
56 I share your sentiment entirely and Robert if you can't quote figures in a intelligent and rational manner then don't bother reporting them at all. How you came to rise to a position of such prominence is beyond me.
Seems two questions arise; where is safe for deposits, other than the CRock?
Also if another bank - say A&L or B&B got into trouble - what would Brown and his Darling do then? Presumably they have spent all our money and there is none left?
This suggests that NRock should have been allowed to go bust. The decision to prop it up was wrong. The cost to the taxpayer and UK financial services has now to be paid. Better to have not dithered and sold to LloydsTSB on day one.
There are a number of people coming on here giving the party political viewpoint and reiterating the Tory line of 'disaster in every way' without really considering the causes. I accept the FSA should possibly have seen this coming but ultimately the blame lies elsewhere. Surely the principle causes involve the 'profit at any cost' American loan businesses that espouse capitalist values that would sit very comfortably on most Tory dinner tables. Their's was a profit is everything attitude to life and unfortunately others are suffering for their profilgacy. To me its this aggresive capitalism thats to blame and the Govt has had to pick up some of the pieces. I have no particular poititcal allegiance and believe in the capitalist system provided it is exercised with some compassion and common sense.
I am a Rock mortgage holder with a 10 year fixed and I assure you the new owners Im going nowhere by the way.
I think there is a general, albeit grudging acceptance that nationalisation was the only real answer for NR on the basis of what we know today. In fact, for NR to be a nationalised concern is something of a far cry away from what were once state-owned industries that were eventually privatised. We can't quite talk about NR in the same way we once talked about British Leyland; and bodies like the Shareholder Executive - a commercially oriented arm of Government - seek to maximise return on capital on Government-owned concerns; there are a multitude of ways to maximise value from an entity that could - at an operational level- be profitable. Whether NR should have been nationalised or whether administration or restructuring could have been better, well that's for the financiers to talk about. To my mind, to the extent there is culpability on the Government's part it is this: for Government to increase public spending by £200billion since 1997 (excluding the £100+billion commitments on the Private Finance Initiative)meant encouraging a consumer-led boom fuelled by cheap credit where all the risks stayed with the banks. The "insolvency-lite" system of individual voluntary arrangements, very cleverly timed just ahead of this credit boom, led to a whole slew of very irritating and quite obscene TV advertisements which said that a Government scheme exists whereby you can lose up to 75% of your debts. Fantastic. What a lark. And even the increase in public spending did not lead to proportional increases in productivity - far from it. The NR shareholders will surely be feeling very bruised, but at the end of the day it was taxpayers money propping NR up and it was a decision for Government to take.
There have been a number of comments stating that NR's liabilities of £110Bn are matched by equivalent assets. This stupendous fact has incredibly been overlooked by Branson, et al, who could have made better offers, if only they had also thought of this!
Robert , I have a question. If you believe that Sandler will hike mortgatge rates so that people go elsewhere, then there's another issue here as well because all those with mortgages will have to stump up £1000's of pounds in fees to move them elsewhere. Where's the justice in that ?
SRM Global and RAB Capital should know better. NR shares are worthless. Without HM Government intervention with our money NR would not be worth anything so why should we pay out anything to shareholders. I lost nearly 100% on Marconi - I was very stupid and didn't sell at the right time but I've made money on others and will continue to invest in stocks knowing that the value can go down as well as up. I read today that the value could be as high as £4 a share (based upon net asset value)- no way in my book, but then I am sure the value will be determined by politics rather than a truly independent valuer. Anyone know who the 'Independent valuer' is??
Its a pure political strategy by Brown & Darling. Nationalise NR and limit RS's scope to cut jobs in order to retain votes for the next election. We see now why Branson's bid failed, he couldn't give any guarantees on job losses despite being a Nu Labour golden boy.
The interesting thing about all this is actually Network Rail (bear with me).
Many years after the last Government venture into 'nationalising' a business (apparently Network Rail - let's not abbreviate to NR! - was something clever, but not a nationalisation), NetRail is finally going to throw off the shackles of subsidised government borrowing and start borrowing on a 'private' basis.
Interesting how NetRail comes off balance sheet (if it was ever on) just in time to start funding NR.
Anyone in government getting worried about all this debt coming 'on balance sheet'...?
We currently are standing perilously close to entering a recession induced by a global property bubble deflating. It does not strike me that taking ownership of a mortgage lender that aggressively expanded it's business at the height of this bubble would be the best use of public funds. If we do enter a recession and we subsequently find out that houses in the North of England are not worth 200k+ and 3 bedroom semi's in the home counties don't represent good value at 700k.
should people fall behind in mortgage payments especially those in Labour's heartland will the chancellor be happy evicting them from their homes or is he likely to use the public funds tied up in Northern Rock to support Gordon Brown's election campaign by allowing them to keep their homes.
Since Maggie Thatcher banged on about a share owning democracy we have been lectured to about the healthiness of free markets.
So how are we suddenly involved when things go wrong?
"Protecting the taxpayer" - how come we were put at risk in the first place?!!
Above all else I find it obscene that public money is used to prop up a failing financial "free" system, when our troops are sent into battle with inadequate equipment and our elderly are unable to receive adequate health care.
Free markets over our reducing quality of life - What planet are the politicians on these days?
for the last 24 hours you have been repeating the statement that 'taxpayers liabilities have doubled to £110bn
Paul, this is a figure pulled right out of thin air, and it's a lie basically. There seems to be this perception that some people want to give that the government had no option but to forcibly nationalise in order to 'get value for the taxpayer'. This is simply false, as taxpayer's money was never involved.
I can't help but feel that this is going to come back and bite the government pretty hard.
Can we kiss good bye to the "Golden rule?" Since 110Bn is now on the public books does this not mean that we are over the "Golden Rule"??
Perhaps you could comment Robert?
#57
The FTSE has gone up because the oil price hit $96 this morning.
Ah yes... Energy.. That's something else Brown is dithering over.
Can someone please explain on what grounds the current shareholders of Northern Rock are planning to launch legal action against Nationalisation?
Surely, SRM and co made the decision to invest in what turned out to be a fundamentally flawed business model and must bear the consequences? They are meant to be highly paid, highly informed managers of risky investments and they can't go crying to the courts when it blows up in their face.
Prior to nationalisation they were whinging that they were not going to receive a fair share price in the event of a private sale, and now they are whinging that the government compensation will not be adequate. They seem to be blaming everyone but themselves for making a bad decision in the first place.
The Government was right to reject the offers from the private sector for NR. If the report is correct then all that Branson and the management team would have lost if the bank subsequently went belly up is the £1.7 billion of equity they proposed to inject. They still expected to rely on tax payer provided guarantees to depositors on the back of which they would probably make several billion pounds. As for those shareholders bleating about the loss of their investment, but for the BOE/treasury intervention the Company would now be in administration which most likely would result in a zero return to those investors. Those same investors were unwilling or incapable of providing the funds to allow the bank to continue to trade into the future and realise the undoubtedly valuable assets the bank owns. As for Jon Wood and SRM Global they should be sent packing before they incur tax payers in additional unnecessary legal costs. Wood's parasitic activity is what gives capitalism such a bad name.
If I read you right, leave Northern Rock to a private buyer and walk. Surely the same scenario [job losses, higher mortgage rates etc] could and probably would apply. And although properties could become worthless - along with their mortgage book, if that happened, we would all be in there with Northan Rock anyway.
I am a taxpayer and I am feeling pretty good about this one.
Although I agree with post #19 that the government could have easily avoided this, at the end of the day we should all be better off.
Consider now that (1) deposits are effecitvely government guaranteed, and the safest in the land (2) NR's own liabilities are government debt, so they should be able to fund at base rate. With spreads on assets rising due to risk aversion, this can only mean one thing - improving profits.
Another act of grandstanding largesse with tax payers' money from a party bankrupt of any idea other than 'control'. What a surprise
At 09:59 AM on 18 Feb 2008, Mike wrote:
Hi. I am novice to market shares but just want to ask everyone here that will the nationalisation affect NR shares price? I mean will share price go up or down now? As its share price was 90p last Friday? I am asking because my wife spent a lot of money in buying NR shares just few weeks before upon her friend's advice. Thanks.
The shares have been suspended as the NR is now owned by the Government. Effectvely they have no value. I doubt they will have any value if/when NR is sold in the future.
TheMauritania wrote:
What I don't understand, is the statement 'embarrassment for the governemnt!'
It's embarassing for the Government that despite all of the regulation in the Financial Services sector, that such an institution could end up in this situation under the noses of those responsible for its policing.
The 18th of February 2008 will go down as the day the Conservatives lost the next election thanks to the gross misjudgement of Osborne (and presumably Cameron). Osborne's ranting about financial disaster in the Commons may play well with his supporters but it makes him look ridiculous in the eyes of financial institutions and the city. When the Government adopts a policy advocated by the Financial Times and The Economist the wise shadow chancellor might employ some forensic probing of the details and leave the exagerration to tabloid headline writers. Osborne's inability to control himself will turn out to be the real disaster of the day.
We hear from Mr Osbourne and Mr Cameron that nationalisation is the worst of all worlds! Whether it is or is not they do not appear to have put forward an alternative, given the treasury has rejected the two private offers for northern rock. Could they please do as they promised when they were elected to their posts and abandon the " old politics" and be somewhat more constructive.
Just remember that there are 148000 shareholders - the vast majority small depositors/ mortgage lenders in the North East of England.
This is a significant number of possibly disillusioned labour voters.
So what sweetener will be offered to buy back their votes?
There was an alternative to 'going-concern' nationalisation: The NR should have been put into Special Administration with the following consequences:
1. All the branches should have been closed and staff laid off with the minimum payouts allowable. The HQ staff shold be retained for the work-out
2. No further deposits or loans should be sanctioned
3. the rump of the bank should be managed as a work-out with the mortgage income of the loan book being used to fund the loan repayments - that's where the guarantees should be used
4. the shareholders equity should have been forfeit.
the nationalisation puts economic illiterate ministers, a compliant chair (Sandler) and our money in bed together. Neither the Government nor Sandler have a downside, only taxpayers today and tomorrow
Like many other taxpayers I believe the governments 'bold' decision to announce they were taking full responsibility for the running of NR (in the short to medium term) was the right decision to make and now only time will tell how good their judgement was.
I do not happen to agree with those critics who sneeringly say this course of action should be seen as nationalisation and the government could have done this sooner, had they had been so incompetent and dithered and dallied for so long.
There are several reasons why I believe Alistair Darling was right to wait and see if a suitable offer was forthcoming from the private sector. One that would meet the finacial crieria set out by the Treasury Department, in order to reduce the taxpayers long term exposure.
* Had the government made this decision when it first became evident that NR (NOT THE GOVERNMENT) had got itself into financial difficulties, then their critics would have rounded on them straight away by accusing them (a Labour government) of rushing into nationalisation at the first opportuntiy when things are going wrong in the economy.
* Instead the government took a more sensible view and decided to investigate ways to see if an acceptable offer might be forthcoming from the private sector. It also gave them time to take a closer look at the extent of the problem and how bad or how viable the NR business was.
* It also gave the government time to look for and appoint a suitable to oversee the running of NR until the markets have settled and then to hopefully sell it off as a viable concern, with little or no cost to the taxpayers.
* I strongly suspect that the government would have taken up Virgin's offer but instead decided against this because the NR shareholders will, probably for years to come, try and stall any decisions the new management team might wish to make to improve the fortunes of the new company. Thus making it much more difficult to bring about the necessary changes.
Do I feel sorry for the shareholders who will be losing out, of course I do but that unfortunately is a risk associated with being a shareholder.
Do I feel sorry for those employees who are about to lose their jobs through no fault of their own, of course I do and I hope they will receive the full ammount they are entitled to and I wish them well in the future. I to have experienced their pain.
I think that people are looking in the wrong direction and they are not thinking through the political incentives for Nationalisation.
Many of the NR mortgages are at risk and Brown may well feel it worthwhile sheltering them 'on the taxpayer' rather than a raft of re-possed properties coming on to the market - all will be blamed on 'the markets' over the next year or two.
But there is another reason why Brown might want hos grubby mitts on NR as it has long-term mortagages aprticularly those with the elderly on home equity schemes. Brown has long wanted to move property loans towards the 25yr fixed US model and this acquisition may allow him to do it.
Wait for a State FannyMae to appear - 'buy' the longer fixed mortgages from NR and sell bonds against them. If Brown is clever he'll use a wad of existing bonds that he can transfer at any price almost he likes to a new entity to get long-term fixed loans going.
Interesting strategy, surely there is a risk though that the only ones that can leave the bank are the ones credit worthy enough to be able to get a mortgage in the current climate.
Meaning that the reduced Nothern Rock is left with the high risk borrowers with a higher rate of default.
Hmm, seems like a good investment strategy to me.
Surely a better practice would be to have a higher savings rate and try to get people to actively deposit money in an effort to make the books balance. This would also require an increase of staff so no redundancies and after a period of say 10 years float the bank back onto the market with a healthy deposit business and a deposit backed mortgage book.
To John post 20
The answer to 'why NR' is that- unlike other companies that have been allowed to go under, NR is a highly profitable business with assets that outstrip it's liabilities. Despite the best efforts of Robert and others to stir up paranoia, there is very little real prospect of the BoE loan not being repaid- with interest.
Robert,
Why was your new book "Who Runs Britain?" not produced as a programme by the ³ÉÈËÂÛ̳? It involves important subjects that need public discussion now. Since I live north of Northern Rock and my library does not stock it yet and it is really grim up north, please send me a free copy so that I can read it then eat it or set it on fire to fortify me.
Just realised we now have now solved the council house problem with all these houses on the government books !
I've opened a Fixed Access Bond that yields 6.35% and deposited 13% of my cash assets. I definitely could find a more competitive rate but now that it is nationalised, NR is not the safest place to put my money.
When I walked in there was no queue and the staff outnumbered the customers. I got in, was seen to and then got out. So so easy; no hassle!!
I wish Abbey and Halifax are like this.
Erm, sorry Robert, but this is not adding up.
You say the current exposure to the tax payer is £55m. Okay, got that.
Under nationalisation, it increases to £110m. Right, got that too. (You then quote a figure of £3,500 per taxpayer for that £110m, which I'll come back to later).
You then try to credit Virgin with "significantly" reducing the risk to the taxpayer because they will provide new equity to the tune of...
£1²ú²Ô.
What?
How is £1bn remotely significant in this context? You're trying to give Virgin a large amount of credit for being willing to take on *less than a single percent* of the entire risk here. Sorry, but that's not remotely enough for them to get any kind of serious credit.
Going back to the figures above, Virgin's £1bn exposure would translate to less than 35 quid per taxpayer. Or to put it yet another way, under the Virgin plan, Virgin was willing to shoulder less than one fiftieth of the cited £55bn exposure the taxpayer would have had.
Either there's something wrong with the figures you included, or the argument that Virgin should be credited for taking on a 'significant' part of the risk is hardly credible.
Did I really hear Alistair Darling say 'thank you very much indeed'at the end of his interview with John Humphries on the Today programme this morning?
JH gave the Chancellor absolutely no room for obfuscation and it was painful to listen to, particularly when then Chancellor appeared to be slipping in and out of a prepared script when allowed, which wasn't often.
Some things in life are best not seen.....or heard. Shocker. Right up there with Lamont's Lament.
I've opened a Fixed Access Bond that yields 6.35% and deposited 13% of my cash assets. I definitely could find a more competitive rate but now that it is nationalised, NR is not the safest place to put my money.
When I walked in there was no queue and the staff outnumbered the customers. I got in, was seen to and then got out. So so easy; no hassle!!
I wish Abbey and Halifax are like this.
its goot to see RAB and SRM s***ing bricks over the last 2 days events - they are as much to blame for the NR fiasco than anyone else
they bought most their stake after the rocks shares crashed and have gone their ends to try and disrupt the sale - from stirring up the slam shareholders to threatening legal action - if they were that botheed why didnt we see them as part of any rescue consortium?
secondly id bet thatthe rocks assets are no longer anywhee near the 110bn at that start of the crisis - they basically havent provided mortgages, new or otherwise since september so its a fair bet a lot of customers have either gone elsewhere or been reposessed in the meantime
hexa
Reducing the size of NR's book will inevitably mean losing the best customers: those on variable rates (profitable) and as deals come to an end, those least likely to default (attactive to other providers). What's going to be left are the people most likely to default. I can see the attractions of nationalisation but I fear that it could be expensive. The private sector was willing to take that risk (and the profit if that risk worked out, fair enough). But not sure that's the right gamble for taxpayers.
also, now the crock is nationalised does that mean the sponsorship of newcastle united comes to an end or it the tax payer going to be supporting assorted newcastle based sports teams too?
withdrawl of the newcastle sponsorship would be warmly welcomed be the employees based in sunderland!
maybe there will be the tinyest hint of good news in all of this (for mackems anyway...)
Can we be reminded that these risks that we are exposed to are backed by bricks and mortar? In other words, very low risk indeed.
Without this information, the news that the public's "risk exposure" has doubled to £110bn can only be received with horror. With it, a rational assessment is possible. I thought ³ÉÈËÂÛ̳ journalism was intended to promote understanding, not milk opportunities for scare mongering.
Has anyone noticed that alot of banks have lost BILLIONS this year and some lost around 50% or more of there share value. I bet when Sandlers puts up the rock motgage rate these banks will be thinking "thats nice" and pick up these mortgages. If this is the case that Sandlers deliberatly puts up mortgage rates to discourage people remortgaging with the Northern Rock , then he is deliberatly influencing the markets in favour of the other banks. So the tax payer is subsidising the opposition. Ofcourse Robert you wont pick up on this will you.
Simon (#16) said
"According to Reuters, SBAB made a $4.25 billion loss in the last quarter of 2007 and 4 times that level in the preceeding quarter. It is possibly about to be sold off by the Swedish Government. Perhaps not a good example after all."
Perhaps we should get the facts right before we debate whether a state owned bank is a good or bad thing? In fact, SBAB made a profit of SEK 258 million (about £20 million) for the year ending 31 December 2007 after one-off charges of SEK 616 million to cover changes in the value of the short term liquidity portfolio. To quote SBAB "SBAB has liquidity reserves that correspond to liquidity requirements for 30 days or more. The liquidity portfolio has no exposure to the US residential mortgage market or to sub-prime loans in any other market. The portfolio amounted to SEK 31.0 billion as per 31 December 2007. The bonds in the portfolio can be pledged at the Riksbank or the European Central Bank. SBAB values each security individually at market value and reports the change in value in the income statement. Consequently, the unrealised change in market value affects the net operating income. The change in market value as per 31 December 2007 amounted to SEK -616 million and is a result of the financial turbulence that affected the credit market during the second half of 2007."
Perhaps if other banks and agencies had been equally conservative in their portfolio valuations some of the current mess might have been avoided?
There is an elephant in the room that nobody appears to be paying much attention to.
Don't forget that NR is primarily a mortgage bank. The vast sums of money that we as taxpayers have stumped up has not gone to support jobs in Newcastle or Sunderland or anywhere else that NR has offices. It has already been spent. It has been paid to the folk who sold their houses to NR's customers. NR is not like a traditional industry that has fallen on hard times and needs an injection of cash. It is a bank and its business is money.
It has no money of its own and it has needed the BoE to bail it out.
NR's customers are still repaying their mortgages and a percentage of their payments are paying the staff. All well and good but it does not change the fact that NR is bankrupt.
In the short term at least the staff will be kept busy. Very busy in fact as they will be needed to persuade and process customers to go to other lenders. In reality that is the only way that NR will be able to pay back the huge BoE loans.
If that does not happen then the other lenders will call foul and complain to the Office of Fair Trading and others.
There will no doubt be some nifty footwork as all this happens since the government will be anxious not to let the mortgage banking sector catch a cold.
But please do not describe this nationalization as a Newcastle bailout. If anything it was a bailout months ago of the institutions that were repaid with BoE money when NR could not raise other loans.
Embarrasing for the government because
they set up the fsa which was supposed to stress test regulate and stop this whole fiasco in the first place.
Previously when the banks provided asset backed loans through the money markets, those same banks did not own NRK. And now , just because the Bof E is loaning money to NRK they too do not own it; Whats being done now is illegal and the rolling across of 50 Billion of mortgages to other banks hands them increased mortgage book without them having to employ a single salesman. Have the other banks acted in concert by not lending to NRK and other such businesses, with the precise intention to grab their Mortgage books. Illegality all round!
"There is another way of looking at all of this, which is simply that financial markets are so dysfunctional right now that it was impossible to construct a deal at a de facto price that made good commercial sense for taxpayers."
Actually the financial markets were functioning perfectly, that is until the BOE intervened. The message was clear, the markets' penalty for gross mismanagement and failure to anticipate the markets correctly is ultimately bankruptcy. This is what markets are about, not rewarding incompetence and stupidity. NR apparantly placed a heavy bet on the idea that short term interest rates would remain low forever and that their credit was so strong that they could always borrow what they needed at low rates no matter how much that was. WRONG, WRONG, WRONG! (They are hardly the first to have arrogantly made this fatal mistake.) Now by stepping into it, it is the BOE which is interfering with the function of the markets by putting those competitor banks which did not make this error at least not to the same degree as NR at a disadvantage. Instead of being rewarded by acquiring its assets and customers, they are being penalized. Perhaps the BOE action of saving NR will create more bankruptcies by stealing enough customers away from banks which were well run to cause them to get into trouble too. As for the share holders, well, they are the last on the list to get anything when they invest in a badly run enterprise. What business owner in private industry is guaranteed anything except a fair chance to make a profit (which in this case, the BOE is robbing from NR's competitors.)
As bad as things were, BOE made a huge blunder by not conducting a thorough forensic audit of NR's books immediately to see exactly how much trouble the bank was in so we wake up today to find the liability is double what we thought it was yesterday and who knows maybe tomorrow it will double again. This is why I said in another blog entry below that any private investor would be nuts to get involved by risking money on a prospect whose risk is unknown, it's throwing good money after bad.
The best thing that could have come of this was for NR to go belly up, its viable assets sold off, its depositors' money returned, and its bad debt written off by the government with the hope of some day recouping at least some of the losses. Fortunately for Britain, it has printing presses which can still print out pounds. Of course the resulting inflation will cause interest rates to climb and the pound to weaken against other currencies but that is what happens in this part of the business cycle, that is when markets are allowed to function properly. Of course depending on what cached or arcane deals the UK has committed to in relinquishing its sovereignty to the EU it may have to face the tough choice of renegotiating with the EU Bank or dropping out of the EU altogether but at least it has that option. Imagine what would have happened if it had adopted the Euro and didn't have even that option.
Tax payers liability is not equal as RP suggests. It is split in the ratio that each tax payer's annual payment bears to the total annual tax intake. High tax payers therefore bear the brunt of the burden remote though it may be
FB
Gordon Brown must be rubbing his hands in glee. It has been the dream of Socialists for 100 years to nationalise the banks. Don't expect Northern Rock to return to private ownership any time soon, unless we get another Conservative government!
Robert,
please stop with your unbelievably patronizing tone on the ten o'clock news on ³ÉÈËÂÛ̳1 news at ten.
I have to turn you off.
Your blog is illuminating
your credentials are first class
please stop dumbing down for the 10 o'clock news.
thanks
helen