³ÉÈËÂÛ̳

The £75bn would only be at risk if every person with a Northern Rock mortgage defaulted, and every property those mortgages held a charge against were valued at £0. As the Northern Rock's default rate of their mortgages is the lowest of high street lenders, this scenario does look a little like scare mongering.

Robert

it just goes to show, how when politicians make business decisions, for political reasons, it backfires dramatically.

Northern Rock like any business should have been allowed to fall on its sword. The depositors should have been protected but that is it.

I have never ever thought Gordon Brown was a good chancellor, he would not know how to balance the books.

The Rock needs to be Nationalised and the assets, need to be owned by the taxpayer.

If only they had listen to Vince Cable in the first place??

In response to the first post, what happens if there is a 50% drop in house prices and there are mass defaults? Just look at the value of packaged bonds already in the US - some of them are priced at a few cents on the dollar. Maybe Northern Rock's loans aren't quite so bad as the worst over there but as with over there, we only really get to find out the truth once house prices start to decline and those most stretched quickly go underwater.

Whichever way you look at it, there is a huge risk of massive losses - maybe not the whole amount but certain billions. And what happens if / when other banks start getting into trouble?

Oh no, I forgot, it could never happen here.

Network Rail debt, PFI/PPP contract debt and London Underground debt, not to mention public sector pension liabilities, have been accounted for with a bewidering and flattering set of accounting principles which would be unacceptable in the private sector.Now Northern Rock is simply following the pattern.

The Golden Rule was, in reality, shattered years ago but the fact has simply been hidden by our "open and transparent" Government.

Your argument can be compared to excluding mortgage expenditure from CPI

Flawed argument. You can remove the items from your balance sheet that skew it in order to make it look good.

That is FRAUD

The accounting for national debt is seriously flawed and is a barrier to sensible decision making. From the point of the golden rule or the arbitrary limitation of debt to 40% of GDP, it makes no difference if the debt is wholly unsecured, and unlikely to be repaid, or completely secured. That is obviously nonsense and some discrimination is required in the national accounts.

I always find it odd that you always bang on about £100bn of liabilities with 'the rock' as though the extent of the mortgaged assets were completely worthless.

This article is no different; you have a single sentance about the assets agaisnt which the liability is held.

Surely we are only talking here about the 'net' liability - and as far as I know; there is on average 50% equity across the entire UK mortgage book - lets assume The Rock is half that (as they went lending-crazy over the last 5 years) - there are still net assets here.

Or have I missed something?

[David, comment 1:
The £75bn would only be at risk if every person with a Northern Rock mortgage defaulted, and every property those mortgages held a charge against were valued at £0.]

OK, then let's get NR's assets risk-assessed - publicly - so that this figure can be adjusted to reflect the level of risk.

While we're at it, how about also including an accurate - as opposed to fiddled - estimate of public sector pension liabilities:

?

Sick of cover-ups, sick of being told this doesn't concern me, sick of fiddled figures.

I agree that there is some risk in this situation, however looking over a long period house prices have tended to be a good investment - and there is a national housing shortage. For the Government to take a substancial, high quality mortgage portfolio onto it's books would not seem to me to be a major cause for alarm. There may be some short term pain, but also opportunity for longer term benefit.
I would have thought that the whole debate about how to present this is relatively academic as everybody knows about the situation and anybody who wants to analyse the numbers has the necessary information - unlike when looking at a Bank's or Company balance sheet (is this right ?).

Short termism is finally going to get found out.
Funny isn't that how NR got into trouble in the first place?

I wouldn't get to worried about it because the 'money' involved isn't real anyway. It is created and removed by a stroke of the accountant's pen. Yes, the rules are ebeing broken which is the cause of worry to those who are required to care about them, but this doesn't mean we should.
If you accept that debt is money (which seems to be the basis of the modern economy) then the actual amount of 'money' (whatever that is) in circulation varies enormously with trading conditions. The ultimate test is whether the economy is inflating or deflating.
With energy prices and household bills going up at around 10% pa and most people incomes fixed at 0%, the reality is that none of the inflation figures make any sense anyway. Some prices are inflating (energy, tax), some are deflating (clothes and electrical goods), and the UK and ES economies are moving into recession. Trying to control all this by targetting interest rates on the basis of the flawed inflation measures looks pretty hopeless to me.
But what else can the Bank do without changing their economic model again?

Personally I'd like to see inflation return to 10% because it is a great leveling force - inflation is a tax on money. Those with money pay the tax whether they have fancy accountants or not. Those deeply in debt (like me) get our debts reduced. Anyone struggling to pay their mortgage does especially well because houses are inflation-proof.

The low-inflation regime beloved of monetarists has been great for the city whizz-kids but lousy for the rest of us. Time for a change?

Please See post 1.

Robert, you are a scare mongering muppet, who will be much better at writing fiction like the Davinci Code, than actual business stories.

Its a disgrace that my TV licence fee is being paid to produce your drivel.

Can someone at the ³ÉÈËÂÛ̳ fire him?

These amounts are staggering.
I see that Northern Rock is still advertising very high rates for savers - over 6% compared to 5% elsewhere - these rates are now being subsidised by the taxpayers.

NR should have been absorbed into National Savings (where rates average well below 5%).

Interest rates don't just control consumer spending in order to adjust consumer inflation. They also affect the value of sterling. If a dominant contributer to inflation is the price of imports, particularly imported energy commodities, then a strong pound will depress the cost of this imports and hence the consequential impact on consumer prices.

Of course if we are faced with global inflation then this would in the end price us completely out of the market but I guess this just illustrates the complexity of the decisions that the MPC has to take.

Of course the politically motivated protection of the Labour darling NR was still the stupid idea that becoming increasingly evident.

The ONS's treatment of Northern Rock liabilities looks reasonably transparent and sensible to me. These liabilities will work themselves out of the system over the next few years. Even if the tax payer has to meet the bill regarding above average mortgage defaults in the near future, the price is well worth paying. Otherwise the Rock's problems may have proved contagious. More newsworthy is the decision of the BoE not to be stampeded into a drammatic cut in interest rates. The stock market may not like it in the short term but it's good to know that the MPC is intent on keeping a check on inflation. In this respect I think the Fed, in cutting rates so quickly and so drammatically, has behaved disgracefully, storing up problems for the future.

The government should not have got involved in the first place. Northern Rock is a business and should be allowed to fail like many others have done before and will do in the future. For the shareholders that would have lost money, this would be unfortunate, but such is the risk of holding shares.

Protecting savers (and the latest increase in the amount of that protection) is about the only good thing about this fiasco which, IMO has been caused by banks (and individuals) reckless borrowing.

Suffering is good for the soul. Maybe the coming shock of 'poor' people not being able to go on foreign holidays twice a year is just what the doctor ordered.

This is so mad it beggars belief in reading.
What really gets my goat, you have had buisiness men and women on big wages making very poor judgements and blinded by greed of the USA.
Its not defaulting mortgages you have to worry about its where Northen Rock put their money hedge funds ect.
People in this country have no idea about what really goes on with politics and banks and the way they transact.
100Bn whats that a household in tax £1,900 that has to be repaid but with interest, em I think mortgages are zero of the worry!!!!!

i wouldn't trust the rocks figures on defaults - their call centers do a very good line in capping many months arears in exchange for 1 month or so payment (usually just before annual reports etc) therefore they can say they have few arrears on the accounts when inreality the arrears process is just restarting all over again - this also accounts for the reason 95% of their mortgage staff have been transferred to debt management to neutralise the arrears...

Robert

All this is dwarfed by the un-funded pensions liabilities that are not on the balance sheet.

I think the last estimate was over a trillion pounds - I think this is one thousand billion pounds.

There is also a long list of PFI / PPP projects that are on no-one's balance sheet.

Not Carillion ; Balfour Beatty or any other private sector provider

Not UK government or any other public sector taker

Nowhere at all !

The ONS, OECD, IMF, accounting institutes, IFRS, and all the other acronyms have not agreed the treatment of a great deal of the above.

So JK-style derivatives accounting and behaviour, meets UK government accounting

Put it off....in the long run we are all dead

I find it strange that the government rescues N Rock, yet forced Railtrack into administration by witholding promised line upgrade funds and effectively created another stealth tax on the shareholders.... Mr & Mrs Middle England.

Why are N Rock shareholders so protected, could it be they vote Labour?

With each passing day, the news gets worse. This is why as I said in another post, anyone in the private sector thinking about taking on this mess as their own investment would do well to take a long hard look at it first to see if it can ever be salvaged and turned into a profit. This must be done with independent eyes whose vision is not skewed by the prism of complicity for the mess. And given the size of the risk, without government guarantees, the acquisition of the entire risk in the private sector might be a suicide pill.

"However, here’s the grisly truth: it’s impossible to assess that risk of loss with scientific precision."

This is why accountants must look at the worst case scenario. You cannot make an intelligent decision on risk with new money unless you assume the worst will happen and you still can expect to come out of it with an acceptable profit. Given the enormity of the risk, there had better be a very bright light of likely profit at the end of the tunnel.

"That’s one of the reasons why the Chancellor agreed to provide up to £40bn of new Government-guaranteed bonds to the Rock: he knew that the troubled bank was about to bust Gordon Brown’s cherished fiscal rules, the belt that is supposed to keep the public finances looking trim."

Actually, the risk is not that the flab would stick out but that his pants would fall down.

David #1

"The £75bn would only be at risk if every person with a Northern Rock mortgage defaulted, and every property those mortgages held a charge against were valued at £0. As the Northern Rock's default rate of their mortgages is the lowest of high street lenders, this scenario does look a little like scare mongering."

The scare mongers are the accountants who discovered the loss. This is not about appealing to emotion, this is about open reporting of the facts. And who was it they scared? BOE who is hardly subject to speculative problems which might arise. They have responded with extreme measures because that is their only choice as they saw it. The consequences of doing otherwise would have been even worse.

How does real estate which is supposed to have an intrinsic value as opposed to say internet stocks which are only backed by expectations of profits from advertising become worthless? Simple, there is suddenly no market for it.

"That said, the ONS insists that international standards prevent it from including the contingent liabilities on the public-sector balance sheet, which means that common sense cannot prevail."

"And the ONS has dropped a further bombshell."

"It says the whole of the Bank of England’s balance sheet needs to be included within the public sector finances."

On the face of it, this appears to be a contradiction.

"When assessing the fundamental health of the nation’s finances, would be it right to regard the Rock and Bank of England as special cases?"

The question seems to answer itself. Who owns the Bank of England? Who has to pay in additional money to cover its liabilities. If the answer is the British taxpayer, it's hard to see how it could not be included in an accounting of public finances.

So what is the answer? As in the US, the liquidity of the financial sector is absolutely paramount. Failure to keep it liquid will result in severe economic depression, that is the lesson of 1929 and its aftermath. The answer at least for the US is when decreasing interest rates and other stimuli such as tax rebates don't work, the only effective way to created liquidity rapidly is to print money like it's going out of style. Fortunately for Britain it still has sovereignty over its own currency and is not tied to the Euro. Or is it? The ability of the government to determine the value of its currency may be limited to a narrow band by the EU treaty. In this case Britain will face a stark choice, get out of the EU and regain independence or face a very hard fall. Either way there will be much pain but one way endures the psychological pain of political ambitions of some going unrealized, the other way means very real financial pain for a lot of people who might otherwise be spared. Your choice.

When this started I suggested it was let go bust. Can ANYONE tell me now what the upside of this massive subsidy is -'cos I can't for the life of me can't

Please read again comments nos 1, 7 & 12 as these are the most true of all the rubbish written. Did you know that 67.9% of statistics are made up on the spot out of thin air ? ?
That one was and so have all of Mr Pestons since he started the run on the bank.

#18 Mr e you are very correct (though i think people will understand capitalising rather than capping)and this is underreported. I dont know how they can/could get away with it. Mr P - maybe you could have a dig around on this subject. Seeing as one of the main indicators of the health of a mortgage book is the default rate, how tdo they continue to get away with reporting misleading figures.

"We have to have some secrets, don't we Darling?"

So, we are getting into a situation where we will be making a big dent in our country's budget because
1. our politicians can't stomach the political fallout from nationalization, and/or
2. afraid of some selfish deluded whining shareholders/employees.

NR is broken. If the government hasn't intervened, it is not worth anything at all. In my books, the shareholders have no say in how NR is to be disposed of/dismantled; the employees should be thankful that they are still paid some wages while the rest of the workers in the city are getting laid off; the depositors should NOT get the benefit of 100% deposit guarantee AND the benefit of hugely inflated interest gained.

It is ultimately my taxes, your taxes and possibly your children's future taxes that will be funding this foolish government's mis-step.

"Our battles are directed?"

From what I've read Virgin Wreck's plan is to shrink the mortgage book. If they do that, they will experience a loss of income (assuming there is any profit to be made with their current model). So how will they be able to pay back HMT (even if it is "only" £25bn).

Is the current share price above zero because people are taking a punt on Virgin taking over the Wreck, then the credit market unfreezing by enough to enable Virgin Wreck to sell new bonds to pay off HMT? As if the credit market remains expensive, the current plan is merely putting off a fight between the FSA (who will finally be worried about the Wreck's liquidity, so may prevent a payback of HMT) and HMT who want their money back.

What a load of hysterical, distorted rubbish Mr Peston writes. An informed assessment of financial exposure to the UK taxpayer is some hundreds of millions of pounds, not £100 Billion. Even this assumes that there is an increased impairment charge on assets and treble the current level of mortgage defaults.

Please stop your ridiculous exploitation of the public's ignorance of finance & accounting. I have yet to hear from you if you are willing to face me in a live debate on TV. Have you got the guts?

With due respect to Anon on the net, I thought this inspired message could be communicated to those making financial decisions affecting all of our pockets regarding NR, toxic debt et al. Who knows what the National Debt is now. Anyway, Mandarins and City boys please take note!

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for £10 each.

The villagers seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at £10 and as supply started to diminish, the villagers stopped their effort.

He further announced that he would now buy at £20. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to £25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at £50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at £35 and when the man returns from the city, you can sell them to him for £50 each."

The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere!

Now you have a better understanding of how the stock market works.

Lindsay Allen on post 4 hits the nail on the head. The government has for years been paying huge excess premium to fund public projects off balance sheet through the use of PFI. This wastes taxpayer's money because the governement has to pay a far greater rate of return to the private sector in PFI deals than it would if it were to fund the projects with public debt at gilt rates. I hope Robert Peston can look into this issue as it is in the public interest and will no doubt make a mockery of Brown's "prudence".

I think Lindsay Allen (post4) has it covered.

Plus let's not forget the change from RPI to CPI (2004) to combat and massage the inflation figures, the start of the new economic cycle was pushed back by two years so as not to break the 'Golden Rule' and there is the huge public sector pension shortfall that has been kept off the books (most estimate the current liability to stand between £700 million - £1 trillion). Let's also not forget Gordon's rush to sell the country's gold by pre-announcing it to the market at the lowest prices in 23 years! (A loss of $9.4 billion at today's rate).

All hail Great Gordon! The iron chancellor. Heck, with the ability to massage the figures as he has done would make me the best chancellor the country will ever see.

"Bankers and accountants tell me this is economically illiterate."

Tried to post this yesterday but the site kept crashing.

Bankers might be telling you it's economically illiterate, but I doubt accountants have. The differing treatment between the BoE and Granite liabilities and the guarantee to other entities makes perfect sense.

For a while now it is clear that the Government has effective control over Northern Rock, and for that reason it (and its trust, Granite) should be consolidated into the public sector balance sheet. The loans from BoE and the monies owed by Granite via bond issues are real liabilities - i.e. money will definitely have to be transferred to settle them. Thus these liabilities should be shown as the government's.

The guarantee to pay off £30bn of liabilities should NRK default is not a strict liability, but a contingent one (i.e. money only gets paid if NRK default). Thus it, like all contingent liabilities, will have to be disclosed in government accounts, but not added to the balance sheet. This is like all government guarantees and is basic accounting.

Seems to me that the ONS decision makes perfect sense.

Why should the depositors have been protected other than to the extent of the deposit insurance scheme? I chose to put my money in a lower yielding, lower risk account - and now I have to fund those who earnt higher interest with as it transpires zero risk.

Dear Robert
£3000 pound per head of population in tne UK is waht it means for Britain,
£100,000,000,000,000,.BUT this will pale into insignificance once P.F.I. starts to bite.

Your analysis is mostly spot on and delivered in a way that no one requires a rocket science degree to understand.
What all this has shown is that the Brown halo or prudence and due diligence was as we all really knew total and unadulterated spin.
Now teh NR debt fiasco is being ushered in as a necessity to protect the financial health of the country and our standing in international circles
What a disgraceful joke!. Bankers don't care and Brown is now trying to get China to buy up anything ( which it wont) to stop sterling collapsing.
We need this incompetent government out asap and all its representatives sent as far away as possible before this fiasco becomes unresolveable.
To protec useless companies with taxpayers money until the inevitable happens (they are given away) is patheti.
Giving Brown a slight break he was teh designer of all this mess but Blair was the first Lord of the Treasury and equally responsible.

All we have to do is get rid of Brown and Co and this problem will get solved the way it always should have. NR has become an insulting joke and what now abundantly clear is that this government has shown its true colours of incompetance and uselessness

What a load of hysterical rubbish Robert Peston writes: distortion, economical with the truth, abd exploitation of people's fear and ignorance of finance.

The real exposure to the taxpayer is in hundreds of millions of pounds NOT £100 Billion. Try to present a balanced,calm analysis that informs and promotes understanding.

Everyone is complaining about the exposure to the tax payers money, does anyone realise that this is the first time in the last 150 years a bank has had to go through this type of situation.

Plus the shareholders when buying shares are always in for a gamble as that is the way the ftse works, one big gambling betting shop and you take the risk. Also the majority of shares owned within Northern Rock by people were given to them free when the company was doing well over the last 5 years, so for many people to turn around and say they have lost all this money. It was free money in the form of shares anyway so that just boils down to greed.

What about the Northern Rock employees who are having to endure countless days of criticism and concern by the poeple who don't realise unless you live outside the North East how much Northern Rock has done for the region. It contributes heavily to charities plus every Northern Rock employee pays tax on their earnings as well. Adding the pressure on the 6000 odd employees who were just doing their everyday jobs in admin centres and call centres and branches which would be affected directly if anything bad was to happen through job cuts etc.

Plus the fsa is accountable here as they had to approve Northern Rocks business model of lending money the way it did.

It would be splashed all over headline news with analyst etc. saying how unfortunate it was for all these people to loose their jobs or whatever other circumstances may arrise. Yet they were the ones only giving negative feedback when times were hard.

The amount of borrowed is at £25billion and not £100billion. The exposure is up to that, so if the 25 can be sorted out as quickly as possible then that would save it from going up to £100billion.

Imagine also if the bank did go bust without the protection of the government/fsa and Bank Of England before the guarantees were put in place to actually save peoples money that was already in the bank how much money would have actually been lost. The national outcry would have been far grander and devastating if the Government did nothing and let all that money just simple in a matter of term disappear to nothing.

The main focus is to get that money paid back as quickly as possible and safeguard as many jobs as possible. The money because it is a debt and the jobs because all employees are tax payers too, probablies more than the big wig accountant who will find every loophole to avoid paying tax on their balance sheets who are only too happy to criticise the way things have happened

I know some pretty hard-faced businessmen, one of whom, I naively asked why they were piling their money into PFI projects.

His blunt answer "Where else can we get a guaranteed 30% pa for the next 25 to 30 years?".

I reflected on this and concluded that the English PAYE taxpayer really is the biggest-mug-of-all-time.

Big change from your figures of 55 billion to rise to 100. What went wrong?

As for the NR, they aren't the best risk of the high street. They were offering 125% loans to value for starters.

Even Loan to value ratio is a useless measure. If someone with a 75% loan to value defaults, then NR get 100% of their loan back, which is not the same as saying you get 100% of the value of the property back. 25% is owned by the owner. NR isn't as secure as people make out.

Your next task should be to investigate the other off balance sheet tricks used by the government.

For example, if a bank takes deposits and promises to pay them back with interest in 20 years, it appears on their book as a liability. They will match this by buying some asset.

However, when the government takes money from people for their state pension, it says its income, and spends it. The money it has to pay out in pensions later, is defined as future spending. Then the little wheeze is that a government can't be held to the spending promises of a past government, it doesn't have to book it as a liability. However, can you ever foresee a government saying you can't have any state pension? i.e. The state pension meets the duck test. If something looks like a duck, quacks like a duck, waddles like a duck, its a duck.

The state pension is a government liability and should appear on the books.

Nick

Why is Brown not on the rack for the Metronet fiasco? Is it because it's only £2 billion of taxpayers' money down the drain? The story seems to have just been slipped out and only made page 14 of yesterday's Times! What a shambles! £2 billion - with Northern Rock at the extraordinary £100 billion level I suppose it is only spare change - what a country we are living in. Prudence must be turning in her grave!

Post #37: Pradeep Chand

Sorry Pradeep, but the UK tax payer's exposure is c.£100bn. That is a fact.

In 2007 Northern Rock were undercutting all other banks with ridiculous offers. How did they do this? By cutting corners. Lending at phenomenal LTVs etc etc

Robert is reporting the news, don't shoot the messenger.

We have gorged on cheap credit for too long. Now is the time to diet, and no one likes celery.

If anyone still believes that the £75bn is not real money, remember that if the BoE loans had not been made then either NR would have had to borrow £75bn from somewhere else, or it would have gone bust and existing money market lenders to NR would have had to write off their loans. Either way the BoE loan is a real injection of money/liquidity into the financial markets.

Now it may well be that the current economic situation does warrant a massive Keynsian-style injection of money by the Government to balance the drying up of liquidity in the private sector. The US authorities certainly think so. However while the Americans have taken the approach of tax cuts and improvments in pensions etc, we've just given money to the banks.

So it's the opportunity cost of the BoE loans that is so depressing. If the situation requires public money to be pumped into the system, we could also have done it via pension increases, tax cuts, or investing in the country's infrastructure, but instead we've just bailed out the very banks that are the cause of our current problems.

The angle that seems to have been missed throughout the whole debate on NR is: Why did other banks close off the credit tap to NR - the mortgage book is a lot safer than most out there apparently? Could it be that apart from being over-reactive, those same banks thought: Here is an opportunity to pick up good business from one of our biggest competitors? In the shark infested waters of the financial centres, such thoughts cannot be far from bankers minds.

MR PRADEEP CHAND #37

"What a load of hysterical, distorted rubbish Mr Peston writes. An informed assessment of financial exposure to the UK taxpayer is some hundreds of millions of pounds, not £100 Billion. Even this assumes that there is an increased impairment charge on assets and treble the current level of mortgage defaults."

If we assume the average mortgage to be £100,000 then £100 million would only constitute 1000 houses and this entire issue would not exist. Go back to your abacus. Is £100 billion a lot of money? From what I recall it's about 10% of the UK's annual GDP. If the worst happens, at the recent rate of growth this is the equal of around 2,3, even 4 years of recession all by itself. A further slowdown in the world's economy and the UK's with it will only make matters even worse. That is why the BOE is alarmed. What's more it seems the entire thing came out of nowhere overnight. Who knows what other financial time bombs are out there just ticking away.

Robert

You are a very good at scare mongering, and story telling. If only everything you said was true. I totally agree with comment 7. It was YOU who started the run on the bank by leaking the story in the first place. Have you personally accepted some of the responsibility for what you have done? - CLEARLY NOT. The way the media (not just the ³ÉÈËÂÛ̳) has covered the crisis has contributed and compounded the problem, in, I think as equal a proportion as all the other parties (BOE FSA Treasury etc) invloved in the crisis. So shoulder some of the resposnibility please.

how as an ordinary taxpayer can i invest in private finance initiatives?

Its all an accountancy fiddle. Nothing unusual there. One can make the numbers show whatever they want. How about including the value of all govt owned land and property in the figures. If we were really hard up we could become a republic and confiscate the Queens property. She has a few billion stuffed under the bed.

While I understand that it is highly unlikely the taxpayer would have to cough up £100 billion, I cannot ignore the fact that the total PFI liabilities are massive as well.

The last Labour Government bankrupt the country, and it may happen again.

PFI is a greater danger: the simple explanation is that under PFI, the Government does not own the property, be it schools, hospitals etc.

So, if the Government defaults on a payment, the owner can legally close the building. It is happening in a minor way already. PFI schools which are no longer needed are standing idle, because the local council does not own the building, and the owner has no legal requirement to use the building for other purposes.

Because of the massive credit crunch now affecting banks, this could potentially come and bite the Government on the backside. If the Government decides to fork out too much money, but without any further borrowing ability, some bills will not be paid. Where does the Chancellor begin? Afghanistan? Iraq? NHS?

True inflation figures are rocketing, and I worry that the Government is burying its head in the sand.

no matter what the politics, if a business - and let's all be honest, a bank is a businses just like any other, nothing special - gets into trouble, it is restructured, liquidated or put into receivership. If NR gets up to £100bn of public support because it's stragegy was fundamentally unsound - which has been clear for at least two years, using the money market to raise finance to lend to people who wish to raise finance is Ponzi-ish to be polite - can my friend's company that sells ice cubes to Eskimos (or indeed, coals to Newcastle) claim one percent of that please? NR is no more deserving of special treatment than thw guy from whom I just bought a tube ticket: depositors knew exactly what they were getting into, it's simple stuff - put things in ship thats heading wrong way, it might sink, it might not - either way, there is no sustainable and logical arguement for subsidising wrong-headed strategies. If publuic funds are to be used to bail-out just one business because of poor strategy then unless public funds are going to be used to bailout every business that makes mistakes, that is either unfair or simply wrong.

Robert, Some of the stuff you write is useful, this is pure rubbish. Why make such a big deal about accounting entries when all along the real money actually lent to the Rock has not topped 25Billion. I am not sure what your goal is but it no longer seems to be to inform but rather to try and perpetuate your own notoriety obtained through this crisis.

I was involved in managing the dismemberment and sale of a fairly large and somewhat diversified commercial bank in the early 1990's. (Not a UK bank; but incorporated in a jurisdiction with similar laws). It was an elective decision, but once made, the issues facing the institutional shareholder then and the Government now are strikingly similar. In that case, a trade sale could not be arranged on suitable terms, and guarantees for the bank's liabilities to underpin confidence and suitable standby funding (- in the event not much drawn upon) had to be arranged. Then the action became an semi-orderly asset sale to contain and recover as much value as possible.

Even if the Rock is sold, underneath all the spin and rhetoric, the new owners will be looking at the same sort of programme as the Government will be forced to organise if it is not.

In either case there will be a highly-organised and rapid triage of the mortgage portfolio, staff and operations, with very focused 'keep', 'sell', and 'firesale' templates for the assets, accompanied by deep operational and staff cuts.

[What the buyers really want, surely, is the customer list for marketing other products, and the 50% or so of the mortgage book that is seasoned and demonstrably well-written business]

If the Rock's recent lending has been as aggressive as we are led to believe, there will have been inevitable corners cut in documentation and husbandry of the loans made if not as well the underlying quality of some of the assets . This will only add to the challenge in analysis required for the triage and widen the gap between the buyer's and the Government's book value.

I would predict any 'deal' will have also some interesting risk sharing provisions built into it, with at the least (probably very subtle) 'wiggle room' for the buyers.

Whatever happens, the taxpayer is going to take a hit.
When and how much are dependent on how the Government manages the value containment exercise - which it will be involved in for years to come whether a sale is made or not.

If i had a small plumbing company anfd it went bust, would the government sort it out for me?
There something well funny going on here, the rock goes down, another bank loses £4bn????
theres something going on here, and this
is why your council tax is 4% higher this year, oh, and it never goes down!

I think some of the commenters on this blog have missed the point. This article is less about the Rock and more about Gordon Brown's golden rule.

Since it will now be smashed to pieces, the economic miracle will be revealed as being less like turning water into wine and more like a shoddy Paul Daniels card trick.

This government have fed the economy poison over the past ten years because it tasted good in the people's mouths. Unfortunately the bellyache is starting to kick in...

What puzzles me is the Euro/Pound rate that moved approx the same time as the NR failure / cash injections .

Have the BOE been keeping the pound to euro strong and now no longer have any spare money to splay with ?

I see that in an article at the weekend warning about the situation with some Icelandic Banks, AWD Chase de Vere also stated that apart from these 'offshore' banks, it was recommending to clients that they did hold more than £35K (FSCS limit) in any UK banks either!

Obviously, there are some very dark under-currents swirling about at present.

I'm totally confused by this now. 27k people defaulted on their mortgage last year(CML). Let's say that increases to 100k this year. What % of these are NR mortgages (say 10%) which is disproportionately high). Now lets say the loss on each house was an average of 100K (which would be a huge loss given we were supposed to need to build 3m extra houses in the UK to cope with the demand about 6 months ago. So 10k *100k, could someone please explain to me in simple terms, how this is £100 billion or anywhere near it?

I for one am really hoping you accept Pradeep Chand's challenge for a 'live debate on TV' (comment 28). I think it would be hysterical - in one corner the ³ÉÈËÂÛ̳'s Business Editor, opposed by in the other corner 'PRADEEP CHAND'! I'd tune in for sure. Keep up the good work Mr Peston.

i always thought to put it into "accelerated run off". put the interest rate up by 4% as each fixed rate matured and immediately on all floating rate loans.
the good loans would immediately repay and move elsewhere - thus reducing the funding requirement of the bank by billions over the next 2 years.the bad loans would be a problem - as they will be anyway. the jobs lost would realistically be absorbed by other banks in the locality over time - but - yes,the people would feel unemployment for an intervening period.is this a bad thing? why should they be a protected species (other than being in a labour heartland)

The initial problem was the Northern Rock running a business model, that in a Newcastle saying was "Aal for coat and nee knickers "

This drama quickly turned into a crisis when for 4 days nobody in authority in the company, Government or Regulatory bodies bothered to come back from their weekends off.

The crisis has then slowly turned into a proper, fully organised disaster starting on day four when it seems Mr Micawber was put in charge to ensure it looked like things were happening when in fact everyone was sitting around waiting for something to turn up.

The fact that something---in the shape of RBS, Lloyds TSB, or some other white knight---didn't turn up exposed plan A as a failure and confirmed there was no plan B-- hence the consideration being given to Virgin and the Management team scheme now--- if someone with a balloon on a stick and hat with bells on made a bid it couldn't get much funnier .

However I think one of the many chances that was missed was one to properly organise this and show the breadth of vision and powers of execution that Europe can offer the 21st Century Global population looking for someone to safeguard the modest savings in their Sovereign wealth funds.

Had only every effort been made to offer preferential terms to Societe Generale last autumn; We might now have had an epoch defining full sized debacle involving two governments, two currencies---- and excuses in two languages.

Perhaps Gordon Brown should take a look at what Northern Rock is offering even today - a quote from their website reads "We also offer our together mortgage, which can allow you to borrow up to 125% of your home’s value as a combination of secured and unsecured borrowing"

Seems like good common sense at the taxpayers expense.
Oh dear...here we go again..

So they are now up to £100 billion, and no doubt still rising as we speak
Can't anyone set a realistic figure on anything nowadays?
Running the economy - they couldn't run a bath!

I am sure our "neighbourhood watch" friend Mr Branson and Virgin Money are interested in NR as part of their spirited public duty to help Lame Ducks. If you believe that garbage then this drivel by R Peston probably makes sense to you.
NR is a good oportunity to make lots of money and all these totally inacurate gloom and doom stories will help Virgin "steal" NR for a pittance. We all know Mr Branson is well known for being stupid !?
The best outcome would be nationalisation - run the mortgage book (at a nice profit)- any defaulters - sell the property to the local council and use it as council housing (are they still sitting on the money they made from all the sales - or has that gone into the "were all right jack" council pension pot?).
This may seem a bit too sensible - but - will avoid the queues of NR mortgage holders at Robert Peston's office door waiting for the keys to their FREE HOUSE.
I , personaly, am sure that given the liquid funds - even i could "TRADE" NR out of their current crisis. Which is after all just classic "overtrading".
All this scaremongering and hype by Robert Peston is what we have all come to expect of modern journalism - groundless sensationalism based on insulting the intelligence of the public by assuming we are all stupid.

The Northern Rock is just a convenient diversion from the real scandal - the billions that have been lost by the major banks. And lost in the true sense that their loans in the form of CMOs in the US will never be repaid. Unlike NR's generally high quality loan book. The credit and risk management of the major banks has been shown to be abysmal, and yet they have paid out the usual generous bonuses and not a head has rolled. And none of the economics correspondents has homed in on this. They've all run after the NR story like kids after a football.

This what we should really be worrying about - NR is just a symptom and a diversion. And while we are at it, NR is one of the most efficient operators (look at their cost/income) with a high reputation for customer service. A stark contrast to the big high street banks. So its very convenient for them to see a strong competitor go to the wall. And to make that happen by closing the wholesale credit markets.

But that is a Machiavellian thought...

The cosy club that is the City of London lives on