Rock or crock?
The good news is that the , the and the don't believe is an unviable business.
If they thought the Rock – or Northern Crock as it’s been dubbed in the markets – was an intrinisically bad bank, they would not have agreed to rescue it by providing emergency funding.
Such the was unambiguous implication of the Bank Governor’s statement to the on Wednesday on the circumstances in which the Bank is prepared to act as lender of last resort to a troubled institution.
But that’s the end of the good news.
What also said is that the Bank will only provide funds to a troubled institution in this way if the risk of a collapse could lead to “serious economic damage”.
Certainly Northern Rock – with £24bn of retail depositors’ funds and £113bn of loans and other assets on its books – is big enough to wreak a fair amount of havoc, were it to fall over.
Anyway, none of us – not even Northern Rock’s depositors – probably need to panic that the Bank has had to step in.
But does that mean that Northern’s customers and shareholders have no reason to feel aggrieved at Northern’s management?
Is it anyone’s fault that Northern fears it cannot raise sufficient funds from its traditional commercial sources right now?
Well, Northern is the victim of exceptional market conditions.
Few could have predicted that problems thousands of miles away in the US housing market – notably the losses on loans to American homebuyers with dodgy credit histories – would have made investors and financial institutions wary about financing Northern Rock’s very different and very British homeloans business.
But actually that doesn’t let Northern’s management off the hook.
Banks have to expect the unexpected in the way they manage their balance sheets.
To use the ghastly City jargon, they are supposed to “stress test” their businesses all the time to ensure they can survive the market’s equivalent of a nuclear strike.
Northern’s stress tests were not stressful enough.
But perhaps the biggest criticism to be made of this bank is it massively increased its mortgage lending at the beginning of this year, when most economists were forecasting a slowdown in the housing market and when interest rates were already rising in a way that squeezed its profit margins.
In the first six months of 2007, its net lending rose 47 per cent to just under £11bn. And at June 30, it had a further £6.2bn pipeline of loans that had been agreed with customers but not yet delivered.
So it is unsurprising that other financial institutions might feel that these mortgages were provided too late in the housing-market cycle to be quite as rock solid as loans made a few years ago.
What’s perhaps even more embarrassing for Northern is that in its interim statement made earlier this summer, it was explicit that it continued to lend even as the interest rate environment turned against it.
So Northern Rock may not be going bust.
But its reputation has been badly damaged.
Which normally means that there will be a clear out of top management and also that the business may well be sold.
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"...Northern Rock’s very different and very British homeloans business."
What rot. I don't know if the 鶹ҳ have a statutory duty to play the "everything will be OK" role at times like this, but to claim the problems in the US are "very different" to what has been happening in UK lending is ridiculous. If anyone from the Beeb had bothered to even visit Northern Rock's home page they would have seen, emblazoned across the top in flashing graphics, the proud boast "Open to sub-prime business."
The Money Programme reported Northern Rock and others dodgy lending practices a few years ago and was roundly ignored. The UK is up to its neck in sub-prime and a credit boom, and the bust has just arrived. No more boom and bust? We'll not forget that claim, Gordon Brown.
Why should the bank bail out Northern Rock??
Thy took the decision to keep loaning sub-prime morgages in the face of rising interest rate, record high UK debts, record high house prices, low interest rates, record high morgage multiples or 125% morgages or self cert morgages or any other fraudulent schemes to keep this pyramid housing scheme on the go.
House prices need to drop by 50%, interest rates need to rise to combat inflation and the FSA needs to put more stringent leashes on these banks to stop them lending ridiculous money to people who will never pay it back..
About time this all crashed down ..and not just UK..but globally
As a curious non-expert watching the financial world turn itself inside out I am annoyed by these reports. It seems that carefree lending has resulted in overvalued markets (housing, stocks etc) which could now affect pension funds, bankrupt homeowners, reduce the flow of capital etc.
Does this mean that markets need to be regulated more strongly, because they are not capable of taking care of themselves?
And has anyone actually profitted from this mess?
Given that real physical world resources have not changed significantly, it seems to me that the markets are detached from reality, and if we really use them to govern so much about our lives, somebody needs to discipline them a little.
the victim of exceptional market conditions" - Really? We've been taking bets on its demise since July.
Northern Rock may be financially solvent: it is not, however, morally solvent. Its credibility is shot, and as part of the problem it met the MPC's criteria for not being supported.
That being said, the Bank had to recognise the political reality that failing to be there in last resort would reopen the gaping pit of the Great Crash, that investors would have no cetainty their investment in the banking sector would be safe and that a flight to quality would follow. In this respect, the MPC's earlier announcement was unfortunate, however comprehensible it may have been considering the costs of such support.
And that's the problem: the fear of the consequences has caused a kind of political paralysis in planning which rather more resembles the plight of a rabbit in front of a python than a well-managed economy.
Faced with such a problem, the Government has failed to force the banking sector to clean up its act by immediately recognising the potential losses and clarifying the uncertainty caused by allowing them complete confidentiality: an awareness of where the problems actually lie would seem to be an essential prerequisite for the Bank's decision-making, and that's justr not happening.
All the Bank's doing is adding ;ore air to the bubble, which will simply make a bigger bang when it finally pops, possibly taking the Bank with it.
Later this day we'll find out if there's a run on Northern Rock, and the Bank of England haven't said how far they'll support the Bank.
My main concern is that Northern Rock is an indicator; the structure of its business quickly and visibly responded to a vulnerability which many other banks share. Its just other banks can hide it better. For the moment.
But if I had money in Northern Rock, I'd be in the queue outside their door this morning, whatever the reassuring words!
This is poor financial management, plain and simple, and I really hope the BOE punitive rate is just that. It has been clear for many months now that borrowing short to lend long was beginning to unravel, and for NR to increase their position on this was just simple bad management.
I think the biggest issue facing the global financial industry is not the rather predictable cyclic down turns, but the lack of high calibre employees to run these big organisations and funds. The whole industry needs smarter people in charge, rather than the second rate British bank managers that it mostly has in place now. It would be ok if their mistakes were contained to their own balance sheets - but in this globalised world their mistakes have too much of an impact on everyone else.
The current crisis at Northern Rock underlines the risk of on-line savings accounts. No doubt because of a large number of depositors wishing to access their accounts in light of Northern Rock's predicament and, probably also, to thwart a run on the bank's resources by withdrawals, it is impossible to access Northern Rock savings accounts at the moment!
Alternative methods of accessing on-line accounts are not available.
Well unfortunately this is what happens when a bank lends beyond it's means to such an extent, eg money they don't have in deposits. No-one wants Northern Rock to go bust, the shock wave would be tremendous, however there comes a point when the central bank has to step back and say 'this is your mess, get yourself out of it'.
If they're left to carry on scott free, it's going to be a kick in the teeth to the more cautious, banks who haven't got themselves into this trouble in search of big profits. Also, the default on the debt would go some way to remove the excess cash from the capital markets that we saw before the credit crunch and do something put the brakes on the cash rich/speculative society we currently live in.
The root of this particular problem lies in the Fanancial Services Act which allowed Building Societies to become Banks and Banks to take over Estate Agencies. Several of the new Banks remained Building Societies at heart and could not swim in the banking world and were taken over. Of this the Abbey National was a good example. Estate Agencies were bought at the hight of a housing boom providing the previous owners with excellent pensions. Being bought mainly to sell mortgages rather than property, they tried to set up national networks, not understanding that it was primarily a local service. With predictable results when the house market fall. I understand that one Building Society paid 100 million on aquisitions and sold the whole lot for one pound.
17 years ago my landlord didn't pay his mortgage to the Northern Rock, and lost the flat. The NR was very aggressive in getting their mitts on the property, and I was left homeless (luckily I was a single chap with a job, not a single mother, so it was a setback rather than disaster). I was not impressed with the way they conducted themselves and their business.
When it was time for me to get a mortgage 5 years later, they were easily the cheapest option. But I remembered how they had behaved, and decided (much to the IFA's bewilderment) to use a more expensive option.
Good call.
I'm just sorry if my tax money has to be wasted to stop the rot their irresponsible emphasis on profit over professionalism could start.
Non financial businesses go bankrupt not because they have made losses due to either bad management or unforseen economic changes but simply because theyrun out of cashflow to meet their obligations. Unfortunately the banks are the usual culprits who pull the rug,closely followed bytheGovernments
tax authorities.
If you are a bank however...You get to enjoy an unlimited credit line from the bank of england.ie unlimited cashflow so technically the bank cannot go bust. This action by the BOE however simply hides from the populace that the bank in question has no meaningful depositers funds left to meet its liabilities.
I would also like to point out that over the last month Billions of pounds of "Bank Bail out" money has been created by central banks across the world.This money is not existing taxpayers money but simply printed out of thin air. This "Inflation" of
the money supply feeds through to other asset classes from the intended target.
Today this cental bank created inflation is feeding into commodities
so food prices in the future will be much higher.
I fear the medicine is worse than the illness
At the heart of this problem is the fact that bankers never learn from the past and keep making the same mistakes. Like most hedge activities, sub-prime lending is effectively a gamble, taking an unaffordable and unacceptable level of risk.
It didn't take too much for Barings to fall but then that was not exactly a high street bank. I sold my house and NR financed the buyers mortgage. I sold when buyers had some clout and I sold cheaper to get rid. No regrets now I don't have a mortgage or any loans, but I shall certainly be watching for trouble where my current funds lay. The housing bubbles are about to burst in not only the US but other countries too. As for selling off NR, I cannot see any other banks at this time rushing in they all have problems of their own. The Central Bank in the EU is injecting billions of Euros into the system in Europe. A sure sign of trouble. I guess like fuel prices the price of borrowing is going to increase. This is a reality and NR had the gain and now it has the pain. Who's next?
Where are the Financial Services Authority in all this? They seem to be very good at giving us information AFTER financial misdoings have taken place. I have £5000 to put on deposit somewhere next week. Where do I find out which building societies are financialy safe? The government want people to save - and we have always been told that building societies are safe places for our money. Why hav'nt the FSA been regulating these building socieities. I have money in Northern Rock and although it is covered by the Financial Services Scheme not all of peoples deposits are paid back if the comapnay goes under. I think perhaps my £5000 would be better off under my mattress until honesty and transparancy are returned to a greedy, irresponsable financial system. Once again people who are trying to be responsible and save a little are going to suffer for the irresposable who have been allowed to borrow too much. This is just the thoughts of a pensioner whose values don't seem to count in the modern world. If anyone could suggest a safe building society?
Where are the Financial Services Authority in all this? They seem to be very good at giving us information AFTER financial misdoings have taken place. I have £5000 to put on deposit somewhere next week. Where do I find out which building societies are financialy safe? The government want people to save - and we have always been told that building societies are safe places for our money. Why hav'nt the FSA been regulating these building socieities. I have money in Northern Rock and although it is covered by the Financial Services Scheme not all of peoples deposits are paid back if the company goes under. I think perhaps my £5000 would be better off under my mattress until honesty and transparancy are returned to a greedy, irresponsable financial system. Once again people who are trying to be responsible and save a little are going to suffer for the irresposable who have been allowed to borrow too much. This is just the thoughts of a pensioner whose values don't seem to count in the modern world. If anyone could suggest a safe building society?
I am a large saver with NR. I'll hang on in there as who can tell if any of the other institutions are any better or worse - all institutions MUST urgently disclose their liabilities to the US sub-prime situation. - then the interbank situation will resolve. NR appears to have very little exposure and a good quality loan book.
Who would have thought that lending large sums of money to people who cannot affoard to repay it would lead to banks solvency problems. Life is full of surprises.
Paraphrasing Paxman - I'd be wondering why this lying bank is lying to me:
This (their latest statement):
says they only do prime lending but then there's this:
which describes their new range of sub-prime mortgages.
Surely if you have a mortgage with Northern Rock you want it to go bust and then you have nobody to pay and your house is your own ?
Is this correct ?
The article above is remarkably vapid.
Northern Rock's lending practices have been remarkably similar to those employed by the subprime lenders in the US.
The use of low teaser rates combined with high penalties for exiting the loan during the much higher variable rate period must mean that many of its borrowers are currently being hit with massive hikes in their mortgage repayments - hikes that many might find difficult to afford, given Northern Rock's willingness to push the envelope of creditworthiness farther than other mortgage lenders.
It will be interesting to find out whether the default rate on their loans has risen as more and more of these teaser rates expire. In any case, it was precisely this dynamic that wiped out the market for CDOs in the US and has left so many banks sitting on unpriceable paper.
Shouldn't the 鶹ҳ be discussing exactly the question of whether this is a momentary blip or a deeper systemic problem in the financial markets, rather than saying that there's nothing to worry about and the Bank will bail us all out again?
Especially given that most central bankers are pretty adamant that they do not want to repeat the Greenspan Put that incentivised riskier lending in the first place.
This is no surprise. NR warned of problems back in June but ever since, it maintained radio silence.
Some shareholders will be rightly annoyed that it failed to communicate meaningful corporate information during the last few weeks when it knew what was going on in the wholesale debt markets; other shareholders didn't stick around to find out, the share price has fallen by 40% since April.
It seems like another case of what economists call moral hazard. NR has grabbed market share this year, issuing billions of pounds worth of mortgages. If it had pulled this off in calm market conditions, the management would have been well rewarded. The failure to spot clouds on the horizon, to assume the plain sailing would go on for ever has now cost them plenty.
Who's next? Paragon? Alliance & Leicester? Bradford & Bingley?
You can be pretty sure that whoever suffers from this, it won't be the directors of Northern Rock. They will already be directors of several other corporate boards and will find new jobs easily when the crunch comes. The people who pay for this will be the small time savers who have their life savings in Northern Rock. I'm tempted to move my money out of my own building society account, but where is safe?
What about the moral hazard argument? If the BoE bails out Northern Rock because they are exposed to sub-prime loans in the US, then next time other mortgage lenders will feel able to expose their balance sheet to whatever is the investement fad of the day. They will be safe in the knowledge of a bail-out should things go wrong. I thought the whole point of capitalism was that the market punishes poor business decisions.
Unfortunately should NR go to the wall it will not be the directors who will be left homeless, and not necessairly the current NR mortgage payers, these will be bought up by other banks. No it is those many "miles" away from the centre of the catstrophe who suffer the worst, when the shockwave hits the econmoy it will be companies completely unconnected to NR who go bust because of the financial impact and it will be their staff made unemployed, who will then find themselves potentially homeless. It is now upto the shareholders of NR to make a stand and bring the management to account as it is you will lose out first and foremost.
Several thoughts...
A number of posters comment on the Northern Rock's 'sub-prime' lending. There is a factual innacuracy here as NR doesn't lend on a sub-prime basis and in fact its current arrears level is about half that of its peer group. The sub-prime issue was the cause of the problem that saw wholesale market liquidity dry up for all players - including the prime lenders such as NR.
The 'old' rules that used to govern lending and restrict it to a multiple of deposits held are long gone. In effect, the banks can fund as much lending as they please providing they can fund it either from liquid assets held - cash, deposits etc - or by obtaining cash funds from the money markets and then, once the cash has been lent to the man in the street, wrapping up bits of their loan books into parcels and selling them back to the market. The problem with this is that it has allowed relatively small players to lend on a huge scale.
Good or bad thing - well, before we all hark back to the old days and say that banks shouldn't be allowed to lend money they don't have on deposit, it is worth considering what impact these changes had on the consumer. Think back twenty or thirty years and consider how much more competitive the mortgage market is nowadays and how the stranglehold of the big lenders has been loosened. Customers now have choice and mobility - many of them could not have obtained mortgages at all in a less competitive market.
I normally enjoy Peston's Picks, finding them easy to understand and informative. However, I get the feeling that the 鶹ҳ is now doing the "establishment" thing and trying to gloss over what is happening. The harsh reality is that the credit boom which has been financing UK growth (and Government spending) has come to an abrupt halt - the consequence will be much lower growth or even a recession. That will put the cat among the pigeons, since Gordon Brown as Chancellor abandoned prudence and went on a borrowing and spending binge himself. The sad fact is that the UK is now broke!
I took out a 'promise' mortgage 9 years ago as it was a VERY low rate. Then , just before it reverted back to Base Rate I changed my product , was not warned about Early Redemtion charges nor the small print ,and was tied in for another 7 years. Since then they have made mistakes, not followed through on their records and been inefficient. The signs were there , I wish I had been better informed and bailed out 7 years ago.
Is this not a sub prime loan from the Bank of England?
I had the misfortune of holding a mortgage with Northern Rock. They were the most unprofessional company I have ever come across. The news made my day.
Jim D -
Unfortunately not. Remember
* NR can foreclose on a mortgage if it wants
* Mortgages can be sold on (potentially at a discount) to other lenders - assuming that they also have the money
Steve
Am v worried. Have fixed rate morgage with NR until Oct 08. Should I be? At present there does not seem to be any advice for consumers, understandably because of the present ambiguity. What might the worst scenario be?
" 20. At 08:33 AM on 14 Sep 2007, Jim D wrote:
Surely if you have a mortgage with Northern Rock you want it to go bust and then you have nobody to pay and your house is your own ?
Is this correct ? "
Not quite; it simply means the valuation of the company becomes virtually worthless. Barings, when they went bust with their debts, sold the company's assets off for £1 with the new owners agreeing to absorb the debts. Essentially the agreement signed, i.e the mortgage, is still a valid contract as it will be enforced by the new owners or the assets will be sold off to a new company in a bulk sale (see the new student loan system for example).
Northern Rock have not provided a "service" to people in the form of subprime loans, they have been greedy and they are paying the price. This has nothing to do with markets, this is to do with management not being content with steady growth.
A flush out of management may do some good but ultimately the business and gluttony of subprime loans should stop immediately.
Northern Rock may have had slighlty losser lending criteria than other UK institutions but it is important to take notice of some distinct differences between lending in the Uk and the US.
Many of the so called NINJA loans in the US were not discounted or fixed rates that one finds in the UK but loans which for the first few years lenders only paid a proportion of the interest to service the debts hence even in the early days these loans were sufferring from compunded interest.
When the initial discounted rate ceased and clients had to pay the full rate of interest then defaults increased exponentially. at a time when property prices stalled.
People are being very quick to link the issue of solvency to the decision of lenders to access the sub-prime sector. This isn't actually the issue; what has bitten the US sector is not that loans were made to the sub-prime market, but that loans were made irresponsibly and without due care being paid to customer ability to repay the loan on a monthly basis. If Northern Rock had relatively robust credit checks in place concerning the ability of their potential customers to service the debt, which it appears they did/do, the risk of "sub-prime" lending is not significantly higher. The real issue is that greed and a reckless rush to lend at any price in the American market, compounded by the packaging of dubious quality loans into bonds, is going to affect most of the UK's lending institutions and Northern Rock will not be the first to call on the Bank of England for assistance.
I have a large unsecured fixed rate personal loan with Northern Rock which I obtained at a very low interest rate, and was overall very pleased with their service.
I then took a look at their mortgages as I thought they might be good value too. On the surface they were great, but the charges and redemption penalites years after the discounted/fixed rates applied were frightening. I wonder how many people didn't read the small print and have a NR mortgage which they obtained themselves online without financial advice? And how many of those people are now looking into the abyss of a mortgage they can't afford when the "cheap" period ends but one they can't afford to clear due to the charges.
It's the borrower's own fault of course, and NR are by no means the worst for this sort of thing, but as traps for the unwary go it's hard to think of a better one.
Several "sub prime specialists" have gone into liquidation or shut up shop over the last few weeks, NR is just the first big name to be affected.
As a non-expert but fairly regular reader of these pages may I make ask a few questions?
Why do so called financial experts make light of potentially serious problems and lo and behold a short time later the bad news finally comes out?
Why do credit rating agencies give good grades for some of these arcane financial products which turn out eventually to be worthless?
Where does the Bank of England acquire its own funds in order to bail out the questionable financial dealings of our own institutions?
As a property investor I am watching the current situation with interest. I haven't bought anything for a couple of years now. I've been selling like crazy for the last 12 months. It's been apparant for ages that things are going to change. Buy-to-letters are still wading in because of the easy credit available. If I have realised the problems on the horizon why haven't lenders like Northern Rock?? Everybody's talking about the sub prime problem in the US....we've got exactly the same here but obviously on a smaller scale. This time next year or even sooner we'll be talking about the sub prime problem on our own shores..
Two things;
1. If the BOE thought this was a long term problem and decided not be lender of last resort, can one suppose it would have sat on its hands whilst the rock sank and savers lost their money?
2. Can someone prevent the inevitable big payouts and bonuses being made to the executives when they 'retire' or are moved on. The executives are probably already doing deals on their bonuses behind the scenes with their banking pals.
here is first formal casualty in debt market. Don't want to press panic button but would suggest concern parties to look into aftermath of potential casualties and how to find remedy for those i.e. job losses , Mortgage repossession, insolvencies etc.
The reputation of the entire financial services industry and the Govt's sycophantic attitude to it is on the line here not just NR.
These events have illustrated clearly the UK's overdependence on this sector and the consequences of giving financial services the equivalent of celebrity status.
The Anglo Saxon economic model is dead. Long may it be so.
It's interesting the number of people who are looking to move their money out of NR and other institutions. I can understand why, but by doing this they'd be adding to the situation that they're hoping to avoid. Realistically, in my opinion there's no possibility that the banking system would let one of its major players go under, because of the effect it would have on the rest. Take a deep breath and ride out the storm, I think...
鶹ҳ - I really wish you would answer the following - as these will be the questions everyone is asking:
* How systemic is the problem - eg. how exposed were other banks compared to NR, and will they need 'bail out' assistance?
* How many banks could the government prop up simultaneously?
* Where is it 'safest' to put one's money. National Savings ? What are the pros and cons of saving with the government?
* How much of my savings does the FSA guarantee should my bank go bust ( I think it's around 90 percent on the first 30-35,000).
These are very important questions. Please let us know, as the general census seems to be that the situation is serious and that the NR bail out is a sign of things to come??
Northern Rock doesn't actually fund Sub Prime lending. It processes applications for another financial who funds the Sub Prime lending.
Should NR go bust you'll have a few more thousand people on the dole queue along with a gut of call centre trained staff available-remember NR call centres are local, on our time zone, speak English and pay taxes into our economy.
If NR goes because of panicking caused by American lies, then I'm sure the rest of the British economy will go along with it.
What I have not heard anyone point out is that Northern Rock has for many years not only given a mortgage but an unsecured loan on top. Thus I have actted for first time buyers, buying at say £150,000.00; borrowing £140,000.00 by way of mortgage and receiving a loan of a further £20,000.00.
The net result is that at the end of the day the solicitor sends them a cheque for the surplus. Is this prudent lending?
No wonder banks won't lend to Northern Roack; they are totally exposed.
What I have not heard anyone point out is that Northern Rock has for many years not only given a mortgage but an unsecured loan on top. Thus I have actted for first time buyers, buying at say £150,000.00; borrowing £140,000.00 by way of mortgage and receiving a loan of a further £20,000.00.
The net result is that at the end of the day the solicitor sends them a cheque for the surplus. Is this prudent lending?
No wonder banks won't lend to Northern Roack; they are totally exposed.
For those banging on about Northern Rock's problems stemming from their sub-prime loans, you are very wrong. The Northern Rock brand does sell Sub-prime loans, however these loans are actually underwritten by Lehman Brothers. Therefore Northern Rock faces NONE of the default risk from these loans. Northern Rock has one of the highest quality mortgage books in the UK
To the poster above who said NRK do not lend on a subprime basis, this is incorrect, they do. See:
Notice the huge banner at the top that says "open for subprime business"?
Now, another interesting point is that the quality of their "prime" loan book is at best questionable. Of their last securitisation offering, a whole 45% (!!!) of the mortgages were self-cert, i.e. loans where no verification of the borrowers income had been made. That is not classed as subprime in the UK, but it IS in the US and it certainly SHOULD be here as well.
Oh and 100% LTV? Interest Only? Mortgage + Secured Loan combinations (their "together" product)? They do all of those. Those are all classed as prime in the UK, but subprime in the US, and in reality they should be viewed as subprime.
Surely this is about the BUSINESS MODEL that NR employs.
This model is well and truly stalled. If they loan this BOE money to customers as 30 year mortgages (or use it to pay back depositors queuing outside their offices) - what will they do next week or next month when it is all gone?
"Please Sir, can I have some more?"
NR are effectively selling Asset-Backed Commercial Paper to the market, and it is EXACTLY that segment that is seized up (awaiting the losses to be realised).
Watch this like a hawk!
As always the first reaction in any 'crisis' is to tell others ... all is OK. The Northern Rock is 'solvent' ... Bla Bla. No its not and that's why it needs special cash cover. If the mortgage book was 'valued at mark-to-market' and sold it would not cover their liabilities.
Secondly, I find it interesting to note that in the US the average mortgage loan to personal gross earnings ratio is approximately 4.5/1. In Spain its above 7/1. Can I suggest that in the UK its even higher at closer to 9/1.
It doesn't take a rocket scientist to see that the UK housing market is horribly overpriced and is a 'bubble looking for somewhere to burst'.
I hope the Bank of England has purchased re-insurance cover in the event that Northern Rock can't buy back its 'junk bonds'.
"Few could have predicted..."
If, as universally acknowledged, the problem was that risk was chronically under-priced, then human nature dictates that there will be a period during which all risk is over-priced, before (hopefully) settling down to a happy medium with (hopefully) more accurate credit ratings from the agencies. It's not hard to predict at all.
But management is management. Most of the time they're fighting fires and doing what they have to do.
Journalists, on the other hand, who have whipped the public perception of this up to the point where News 24 are now reporting a run ono NR's branches, have a choice....
The 鶹ҳ does not report facts. They provide an artistic view of this event.
Everyone in the banking world knew all about the sub-prime bombshell, waiting to explode.
It was not known when it would happen, just that the event was getting closer to happening, all the time.
For the 鶹ҳ to state that the managers of Northern Rock have only had their reputation tarnished is very misleading.
They were complete idiots to be dealing in the products surrounding sub-prime loans.
If I were to go bankrupt because I had dealt in sub-prime loans, I would have been classed as an idiot so when will the 鶹ҳ call Northern Rock management idiots - or do we live in a totally blameless society?
The banking situation is just the start.
Bank of England interest rates will not go up.
However loan rates will go up.
That is inflationery.
Higher rates and inflation will lead to unemployment and then we have the late 80's scenario.
Boom & Bust
Try this analogy - you daughter comes up to u tonight and asks if her friend can stay the night, whilst the friend is standing next to her. It not a great idea because there are so many other things going on, however it could prove detrimental to relationships if you say no - so you agree to maintain the status quo.
Same with the BoE. It has everyone looking on, it has to maintain stability in all relationships. If not the bank goes bust, people lose their savings & investments (or chunks of), businesses can't grow because they can't secure investment or loans, people then lose their jobs, mortgage arrears & repossessions go up & living standards go down. Quite a weight to carry for the BoE.
Yes NR's reputation will be tarnished short term. The immediate effects are the market will tighten, mortgage & loan rates will increase & be more difficult to get for a while.
The now unavoidable downside regardless is we will all be paying more for our mortgages, those that are coming off of fixed rates are probably going to see heavy increases in their payments & defaults will will rocket.
So maybe the BoE intervention is futile, delaying the inevitable?
Thanks to all the greedy banks, investment experts & anyone contributing to the mess - you have just condemned a lot of people to a very difficult time over the next.........?
It is worth pointing out that NR do not lend on a Sub-Prime basis, but rather accept applications on behalf of an actual sub-prime lender. This lender sets their own lending criteria and is responsible for lending the money and administration of the mortgage once completed.
Northern Rock have not provided a "service" to people in the form of subprime loans, they have been greedy and they are paying the price. This has nothing to do with markets, this is to do with management not being content with steady growth.
A flush out of management may do some good but ultimately the business and gluttony of subprime loans should stop immediately.
Thanks to Chris in post number 19 for
locating the information on Northern
Rock's sub-prime lending, in apparent
contradiction to their more public
statements. However, having read
the details, I have to say it is
clear that Northern Rock are basically
acting as agents for a lender called
Southern Pacific which provides the
funds and takes the real risk. This
could actually be considered rather
a smart move by Northern Rock - they
get some fees from facilitating
sub-prime deals, but don't bear
the risks !
Following on from my earlier comment as a very experienced borrower I am available for down to earth advice. I'm not doing much at the moment as I'm soaring the skys like a vulture waiting to take advantage of the troubled times ahead in the property market.If any lending institution would like to benefit from my services let me know. Sorry though boys no sub prime available here though - cash or bullion up front please....
A further thought about how we now have more choice in the mortgage market today and how it is a good thing.
It is not a good thing when so much cheap money has been released to lots of people who struggle to repay it. Paying high multiples to obtain a place to live is disabling peoples lives.
America and the UK governments have enjoyed the benifits of the lending at low interest rates, but now they want to blame others when the reults of such lending come home to roost.
Notice how the Chancelor only warns people and banks about borrowing too much, only after it has happened and they have already got in all the taxes from same.
What about the excessive borrowing the government has done through cheap bonds caused by pension funds having to put there funds into bonds. When will the government listen to its own advise?
People are reading things into this that they shouldn't.
How many businesses buy their inventories on credit - Wholesalers, Car dealerships, Restaurants.
If you were running one of these and went to borrow some money to buy some stock and found out that because of some cowboy in the states you couln't buy some Sparkplugs, bacon, Minis and you were going out of business what would you do?
Well it wouldn't happen, its only because we are talking about Cash that it is, and people struggle with the idea of money as a commodity.
Northern Rock's business model has failed due to extraordinary market conditions and the unique nature of their product - cash, this is why they need assistance.
Many of the statements that Northern Rock is still a viable business seem to be based on the assumption that its balance sheet looks healthy (£130bn of assets etc)
As an accountant and auditor I know that the assets valuations shown on these balance sheets could potentially be wildy over estimated. This is because they were probably valued under models/systems which were sufficiently accurate in a pre-credit crunch market but now do not take into account investors extreme caution about buying such assets.
The public, the markets and all stakeholders need to realise that audited balance sheet figures are not 100% guarantees of value, they only give assurance that the figures should be correct. But in markets where the underlying assumptions have changed fundementally this cannot be taken for granted.
In my opinion, Northern Rock is not as safe as its being made out to be.
Didn't Mervyn King say just two days ago
"The provision of large liquidity facilities penalizes those financial institutions that sat out the dance, encourages herd behavior and increases the intensity of future crises"
He should resign.
As Martin Luther King said four decades ago, capitalism only exists for the poor. For the bankers it's socialism and a never-ending series of bailouts whenever their poor management gets them into trouble.
Ye Gods, the lack of understanding about the bank problems is amazing.
What Northern Rock has is a cashflow problem. Nothing more. It's usual source of funds - the collateral bond market - has dried up completely, so all it has done is gone to the Bank of England for some short term funding at a 'penalty' price because that is the cheapest and quickest way of getting over the hump. That will impact profits, but nothing more.
What it actually makes its money on - the mortgages it lends are rock solid and good quality.
All banks lend long and borrow short. It has been like that for generations. The difference is that the 'borrowing' is no longer via classic deposits, but via a sophisticated bond market that happens to have failed at present.
Northern Rock is a victim of the US sub-prime lending fiasco, not an instigator.
Northern Rock themselves have stated that they are a sub-prime lender.
See the banner at the top of the page on their website:
If I had more than £30,000 in the NR I'd be at a branch this morning withdrawing my money as there is no compensation from the BofE for any savings above £30000.
I think this event must make an October election more likely as the consequences of a decade of credit card, mortgage and Government spending a.k.a 'Gordon Brown's Prudent Boom' comes home to rest. Two million mortgage holders will have their monthly payments doubled ove r the next two years as loans fixes at the last ineterst rate low come to an end.
What no bank or building society will openly tell depositors is that I believe that only £31,700 of your deposits are guaranteed by the Financial Services Compensation Scheme should such an institution go bust. You will still have to pay your mortgage but they will not have to pay back all your savings if you are lucky enough to have more than this on deposit. No wonder people are trying to access the website and its down. If I had money in there at these sorts of levels, I would want it out quick - which of course just exascerbates the problem. The Bank of England and commentators know this which is why they say don't panic. It is runs on banks which they want to avoid. We should be very worried then they start saying don't panic!
BoE = lender of last resort at base rate +1% ?
NR has been heavily promoting 6.9% savings rates this week, LIBOR is around the same level - so how can base rate +1% be defined as 'last resort'; surely this should be at a significantly higher rate than that which others are willing to lend ?
If BoE has to lend then it's because no-one else will irrespective of rate - and isn't that a more telling indication of NR's financial health?
I note with interest the largest investors in NR are Barclays, L&G investments & Aviva insurance with approx 12% of NR. Should Barclays have stepped in sooner & how will this affect Pensions & insurance rates?
I can't believe the poppycock I keep hearing from these economists and commentators.
Robert Peston states that no-one could have predicted this financial mess, when everyone has talked of nothing but for the last 5 years. We all knew it would end in tears.
I sincerely believe that in an effort to maintain confidence in the city, those withinn it have started to believe their own PR or "spin" when it nothing more than hot air.
The government should have given out the type of warnings that Darling sounded yesterday years ago now. But why not ? Because the former chancellor and now prime minister is as vain as his pre-decessor Tony Blair and doesn't want to be disliked. They analyse poll results each week to see how popular they are instead of giving it to us straight.
Sack 'em all. And sack cameron before he's even started !
There is a factual innacuracy here as NR doesn't lend on a sub-prime basis
I don't know if there is a strict definition of sub-prime, but Northern Rock certainly say they lend on a sub-prime basis: even as of this morning at 10:20, there is a large animated banner across the top of their website saying:
"Open for sub-prime business"
Given the large friendly letters, perhaps "Don't Panic" would be more appropriate?
I would be surprised if there wasn't a big arbitrage muddle behind the current problmes of Northern Rock. The securitised mortgages (known by a variety of flavours) are packaged and repackaged to spearte the coupon and the principal to such an extent that the margin is tiny unless the plyers have gazillions at there disposal. The daner is that if rates and sentiment go against the play, a lot of investoprs will begint o call in their paper. Boiling this down to its bones, there is an ongoing and *probably* increasing liquidity crisis. You can be sure that depositors will look for cash and that will exacerbate the situtation over the coming weeks. It is worthwhile noting that NR offered very generous deposit rates to attract the average punter. If the market becomes more illiquid watch their reaction.
As is perhaps inevitable, there is some confusion here. There are NR branded sub-prime mortgages available, however these are underwritten by Southern Pacific Mortgages Ltd, a completely separate lending company. The customer's relationship post-completion is with that company, not NR.
Somewhat ironically though, SPML's parent company, Lehman Brothers, this month announced the winding up of two of its companies as a direct result of the US "shocks".
One thing they could do is cut back on sporting sponsorship. It would be nice to see Newcastle United running round without the Rock's name all over their shirts. Many people in the North East of a red and white striped persuasion lost faith in the bank when it took this sponsorship on. Accounts were closed as the Rock became synomynous with a particularly unpleasant regime at St James
I doubt that NR can foreclose your mortgage just because they chose to, nor can anyone who takes over the debt. Mortgages are normally "payable on demand" in very specific circumstances only (e.g. default), not because the lender needs the cash.
"But if I had money in Northern Rock, I'd be in the queue outside their door this morning, whatever the reassuring words!"
I can tell you that is EXACTLY what is happening this morning in the Rock's home city of Newcastle! They are queueing out of the door at the Gosforth branch, just round the corner from Head Office and the local press are all over!
As a financial adviser, I've been involved in Northern Rock and their mortgage lending for a number of years now.
Only recently Northern Rock launched their 'sub-prime' products which were aimed at those with a less than perfect credit history. One should realise that they will not lend to just 'anybody', they have certain criteria which must be met - proof of earnings is required on many of their products and their decision is also dependent on how 'risky' the client is will determine if they will lend or not and how much. Someone who may have had a blip in the past is not viewed the same as someone who has just emerged from bankruptcy.
As an adviser I have used Northern Rock to place business with, part of our job is to move people towards products with no nasty surprises, for every poor adviser out there there are ten of us who do the job right and give best advice for the client.
In fact there are times when the advice given is to not buy a property yet until their financial circumstances are more suited...that doesn't stop people walking away to another adviser and going ahead, some of us have morals you know !
Carmelanne - IANAFI (I am not a financial advisor, and in particular not yours) but I don't think you should worry. You've made a contract and either NR or (in the worst case) NR's buyer will honour it because they want your mortgage payments.
The only tricky case I can think of is if you are in arrears and NR are doing a deal with you to prevent foreclosure. If NR were bought, the buyer might review such cases as bad risks.
What does "
To obtain the money, the Northern Rock will have to deposit some of its customers' mortgages as collateral," mean?
Does it mean that my fixed rate mortgage can be changed?
Qurious!
Chris (no. 19), it's a shame you didn't actually bother to read the webpage on sub-prime mortgages that you quoted - It quite clearly states "Northern Rock plc process mortgage applications on behalf of Southern Pacific Mortgage Limited. Mortgages are advanced and administered by Southern Pacific Mortgage Limited. The Borrower will enter into a legal agreement with Southern Pacific Mortgage Limited"
What does "
To obtain the money, the Northern Rock will have to deposit some of its customers' mortgages as collateral," mean?
Does it mean that my fixed rate mortgage can be changed?
Qurious!
For some weeks, this column has been building up the magnitude of the sub prime issue. Now something tangible has occurred, and I nedd to untangle the threads of the story, avoiding the politically sanitised news going around elsewhere (other news outlets are just shouting "Don't Panic, Don't Panic")!
So, Robert, which way round is it really? Will there be a run on Northern Rock, and other banks, causing a Domino effect?
Neil Wilson wrote:
"Ye Gods, the lack of understanding about the bank problems is amazing. What Northern Rock has is a cashflow problem. Nothing more."
That's what did for Rover, too, and where was the government bail-out for them? Why should the Rock be shielded from the harsh consequences of mismanagement?
It is worth pointing out that NR do not lend on a Sub-Prime basis, but rather accept applications on behalf of an actual sub-prime lender.
Yes - that just makes the "open to sub-prime business" banner on the NR website a PR misstep. But doesn't it seem a little complacent to leave it up so prominently? Personally I wasn't inspired by the performance of their chief exec on the radio - he also came across as a little too complacent, given the circumstances. I realise there's not much he can say aside from "it'll be fine", but still.
Consumers in the last decade or two have become much more savvy about picking, choosing - and moving - their finances. Many firms - perhaps including NR - have benefited, and I fear they may need to be more careful if they want their customers to hang around. Perception matters. Think of the fuel "crisis" to see how the masses react to calming messages from voices in authority.
I am annoyed that Northern Rocks Spokesman has been on radio 4 saying its business as usual. I have not been able to access my account or any telephone number since 8.00 this morning. I managed to send an email (they keep the emails secret) to technical@ and told them I did not like the way they had removed the helpline number from the website. it now reads 'Null' I dont want to take all my money out just move a few hundred quid to cover a cheque I cashed. Do you remeber the end of Mary Poppins when the lad wants his penny back?
So we are all covered by the Regulations?? Ask the policyholders of Equitable Life about that! Or those who have lost their pensions as their schemes have gone down the drain.
'We have nothing to fear but fear'. (FDR).
'The centre cannot hold' (WDYeats)
And this week Joseph Smith, one of our most successful entrepreneurs, bought a 7% chunk of Bears Stearn for £400 million. Who they? The US lender at the heart of the sub-prime turbulence.
London Rock shares down 20%.
Take over possibility?
Hmm.
Why is the Internet Banking switched off?
Why are the CONTACT US telephone lines playing OUT OF HOURS messages?
'Business as usual'??
Don't think so
I work for these people, and honestly, they roll the dice every day with risk.
It may help in the short term for the Bank of England to assist the Rock, but the brand will be in pieces. Bad enough that current customers are outside stores panicking, but who would really put savings into a company that is in such bad shape, or trust their mortgage with them? Customers and prospective customers will walk 2 mins down the road to another bank rather than take a risk like that.
I have to disagree with the "few could have predicted the troubles in the us housing market" comment. Lots of people have obviously been predicting the demise of northern rock (due to the way their business is run) as their share price has plummeted since about March this year.
Lots of people have been predicting an end to this credit madness, especially when you start lending hundreds of thousands of pounds to high risk borrowers in a climate of stagnating/dropping house prices.
The main Issue here is the way NR has financed it's mortgage book.
Since rules on lending have changed banks(& former building societies), have freed themselves from the constraints that mortgage/debt advances can only be a certain multiple (e.g 1.5) of saving deposits.
As an aggressive player in the consumer debt industry NR has grown hugely in market share while trading on thin margins. The likes of more conservative HBOS have lost out on market share.
Without the savers deposits to back up this debt NR has borrowed heavily in the capital markets, and so has a huge interest rate exposures (LIBOR inter-bank rate). I seem to remember reading in the times NR financed 75% of its mortgage advances from the money market which is much higher than an industry benchmark.
LIBOR has now increased as banks feel a credit crunch and new lines of credit dry up. NR is finding it difficult to raise new cash so has a liquidity problem.
As banker to the banks the BoE must lend to NR to ensure confidence remains in the Banking sector. So this is only a temporary while NR evaluates it position and possible adopts a less aggressive lending position.
Talk of a run on the NR bank is a self fulfilling prophesy!
NR as we know by now finances the majority of its lending through securitised debt issuance. It is the lack of appetite in the markets now for this debt that has effectively halted all NR future lending.
Another problem NR have is that the securitised debt is mostly floating rate debt linked to 3month £ LIBOR.
This means that they are paying 3M LIBOR rates to service the securities, but they are only receiving "Base" rates from mortgage borrowers.
Every day LIBOR is above the Base Rate they lose even more mone, and th BoE will not be raising rates any time soon...
No bail out for Rover because they were involved in heavy industry-this government doesn't like heavy industry.
However, call centres are a different matter, as this goverment wants us all to work in them.
As someone has stated previously - this is a panic created by ignorance. Northern Rock's source of short term funding has temporaily dried up as a result of the sub prime issues in the US. The BOE is merely acting as a temporary funding solution. All Banks borrow on the markets at X% and then lend at a premium to this rate to their customers - surely people are aware of this basic premise?
The Bank of England did not 'rescue' Northern Rock because they believe they are instrinsically sound, but because they could not allow them to fail spectacularly.
Their number one priority now, as (to all intents and purposes) the 'official receiver' is to find a buyer for the bank. Whilst this process runs it's natural course, they will be required to talk things up.
The biggest problem N Rock have is that the media love a story, The "Lender of Last Resort" is simply acting in the role for which it was designed, Banking!
So here's a tip to all the press, don't start a prog/article/blog with headlines which scare the public and then add .." but really there is nothing to worry about".. and to all those bloggers/sages predicting the end of the world and bemoaning modern banking.. want to go back to exchange and lending controls? No didn't thinks so.Credit boom? Don't think so- look at debt versus incomes and the working population!
Badly damaged reputation.... Robert why are you journalists so seduced by the siren voices of the snake oil salesmen of City PR.
Reality is that for most people it will have come as a surprise that a Bank lends more money than it receives and makes up the balance with borrowing. You know, I know that it is a standard business model for banks and most building societies. But the general public don't and most small business owners and managers would see it as a prescription for disaster.
Your damaged repution for Northern Rock is actually another symptom of our general economic ignorance. If Northern Rock's reputation is damaged it is because it took action early. Good public relations will identify the prudence of Northern Rock's board, the contribution that their action made to stabilising the system and longer term do some serious public education on how business, banking and finance really works.
You Journo's could help there ...
PLw
All the comments from the financial industry and associated bodies giving assurances that Northern Rock will not go under are identical to the comments given at the time of the Equitable Life fiasco and that affair cost me dearly.
I am unable to speak with Northern Rock diectly, even after 35 mins of paid telephone waiting time so I must write to withdraw the Tessa's that my wife and I have with them.
But where do I now place our money? How can our government allow this industry to provide house loans to borrowers who are allowed to assess their own earnings?
I also wonder why the government backed NSI do not allow ISA transfers into their schemes from other providers?
Can anyone help?
If you really want to increase the possibility of major problems at Northern Rock, why don't all the news channels and reports show queues of people lining up outside to get their cash back and cause a real run on the Bank ? Oh you have...........come on please ? Can we have some sensible responsible journalism please? Rather than hoping the greedy banks fail, can somebody point out the misery this will cause to a lot of people. Many may feel that it will be justice if a 'Fat Cat' banker loses his job and the banks go bust but will he be as badly impacted as the many other people that will join the dole queues if nothing is done. Probably not.....
I have a 30 day notice account with NR Channel Islands. On line access is 'temporarily' unavailable. Telephone is engaged? does anyone know how to give notice under these circumstances? registered mail??
I guess this is how they felt in Argnetina a few years ago.
Management is generally ignorant when it comes to the three "stress" variables, also known as financial risk. 1) credit risk ie. how safe are deposits from defaulters etc. 2) market risk ie. how safe are the markets we operate in, and 3) operational risk ie. how safe are we as a bank or FI. Given that NR's management appears no more enlightened in these three areas than your common all garden bank management, the lot of them, by that I mean all bank and FI management everywhere, are hereby required to ship themselves off to their nearest central bank for three weeks full immersion in financial decision making!
I think that the Bank of England is propping up "Northern Rock's" distarous and irresponsible financial dealings out of a desperate fear of causing investors to panic and start withdrawing their savings and switching their mortgages. With assets of 24 billion and loans totalling 134 billion Northern Rock was courting disaster. My Grandmother used to always tell me "if you earn 19s and 6d and spend £1.00, you will get yourself in debt," could not be more true. This bank (and I wonder how many others have done the same) have been greedy in the extreme, and now they are suffering the price for their greed. (Unfortunately, a lot of innocent people are going to suffer with them). It is strange how the bank of England can give millions to try and save a financial monster like Northern Rock, yet cannot help in the slightest those thousands who have got themselves into extreme debt through being encouraged (by irresponsible banks) to take on more and more credit card and other loans.
Two points I haven't seen discussed yet.
1) Maybe shareholders 'deserve' what's coming to them if a financial institution fails, but it's hard to see that ordinary savers should be expected to research the exposure of a major bank or building society.
2) The Financial Services Compensation Scheme offers only partial protection and hence does little to prevent a run on a bank in this situation. Compensation on deposits is limited to 100% of the first £2,000 and 90% of the next £33,000. Anyone (like me) with a lot of savings in Northern Rock could lose thousands. I'll probably tough it out, but I can't help but feel nervous.
If depositors' savings in NR are safe due to Bank of England support then why cause panic by revealing what could have remained behind the scenes? This only makes the situation worse.
If a plane develops a non-critical fault during a flight, is there any point in worrying the passenegs by making an announcement?
The worrying aspect of this crisis is that the retail banks are irresponsibly playing with the money of the hardworking individuals who save a bit of their hard earned cash for rainy days. Now when things go bad, the savers would loose their money. The bank would not loose anything as it was not their money in the first place. This is a dangerous situation.
Who mentioned a run on the Northern Rock?
Unless I'm mistaken it is happening right now.
Impossible to contact by telephone and a mysterious problem with their on-line banking service means that on-line customers have no access to accounts.
Last attemt to contact by either means was just 20 minutes ago at 12.55
And what are the £113bn of assets that we are supposed to believe makes Northern Rock and all the other banks so solid ?
Debt. That’s what. They put the 'debt', the money that they lend, that isn’t theirs in the first place, on their balance sheets and then call it and asset.
It is madness, and time for the whole edifice or mirrors to come tumbling down, that's what I say !
What on earth does everyone think has been driving house price inflation. Not wealth, but debt. The so called equity that everyone has been drawing on isn’t money, it is just more debt.
And what’s really behind this all ? Well, debt was fine when there was an expectation that future growth would be greater than today’s growth. But that’s not the case anymore.
And why ?
Because the people that really know, know that demand for oil is now exceeding supply.
Welcome, there era of “Peak Oil” !
Northern Rock isn't being bailed out.
It is having to pay the Bank of England a punitive rate of interest for liquidity that it cannot get in the open market.
It is a viable company with £100 billion in assets.
The taxpayer is going to make a profit out of the interest charged to Northern Rock.
Sooner or later this turmoil will subside; meanwhile Northern Rock's shareholders will be punished by lack of profit and, perhaps, dividends. And Northern Rock's top brass will receive their P45s for failing to spot the effects of the sub-prime crisis on their business plan.
I am a member of the legal profession dealing with residential conveyancing. I feel that Northern Rock have been unrealistic in their lending by lending 100% of the purchase price plus a further amount over and above the value of the property and the costs and disbursements of a buyer. If a buyer is unable to produce sufficient savings to at least pay their legal fees and disbursements, should a lender be seriously thinking of placing them in such debt?
When NR took over the North of England Building Society about 10 years ago it was clear to me (as I had business dealings with NoE and several other regional B Socs at the time)that Northern Rock were closer to cowboys than one would like. Their attitude to business partners was dreadful.
Those who live by the sword...
I can't get onto my online account at NR to withdraw everything, otherwise I would, been trying all day.
Why take it out? Because the Government can't be trusted to protect our interests. The opposite, this mornings announcement might just as well have been "get your savings out now, they're about to go bust".
Remember Equitable Life?
Remember how the government messed up over SERPS.
Remember the FSAVCs scandal, Personal Pension Scandal, Maxwell?
Gordon Brown hit the pension funds for £5bn a year, the equitable thing to do would be to use that to help the victims of all these scandals, the money is there, it's ours, but he'd rather use it on illegal wars.
Even where the government wasn't directly responsible, the underlying responsibility is the goverment's for not regulating the market properly and not fulfilling its duty to look after the interests of the most vulnerable social group: pensioners.
Part of my pension reserve is in NR £50k. I can't afford to lose that.
If, sorry, WHEN NR goes legs up (later today) I feel quite confident that we'll be the losers.
If Government wouldn't accept responsibility for their own mistakes over SERPS what chance of them baling out NR?
Northern Rock is a one-trick pony company that deserves to go bust, pure and simple
If banks can lend Northan Rock money at such good rates why cant they cut out the middleman (Northern Rock) and take all their mortgage business by offerring better rates to ordinary customers.
For Northern Rock to say it will lead to dearer mortgages in the future, due to their incompantance is laughable.
Bring back proper building societies
I suspect one of the problems coming up for Northern Rock will be the one year savings bonds they have aggressively marketed and which must represent a substantial chunk of the money deposited with them. Over the next few months a lot of these will mature and I doubt very much that many people will want to leave their money with NR, even if the present crisis has passed.
I think criticising the bank is uncalled for. If the sub-prime did not happen in the US we would not think about the debacle that's playing out here in the UK.
What I want people to understand is this: the Chancellor has been giving the authority to increase the money supply since 97 at double digit figures i.e, approx 13% with growth languishing at about 4%. What this means is that UK banks have been flooded with cheap debt organised by Gordon Brown. Banks then need to find ways of spending the cheap debt, like the hedge funds who have borrowed Jap yen and spent it.
The reason why this has been left to happen is because GB believed that physical assets would continue to rise in price which would get people to borrow against the asset to fuel the growth in this country, hence, we have a trillion debt in this country.
This government has lied and lied and all those people who thought they were a sound party, shame on you.
It is only because of strict conservative policies under Kenneth Clarke did we have a stable economy, so do not even think of shaming them.
The reason why the conservatives went into the EU is because we had no choice........
Don't let me even start on inflation. If people tell you that they can't afford even the basic things, they are not lying, the governmetn is.
A run on the bank's resources by withdrawals ?
There are in excess of 100 people in a queue outside the Cambridge branch of the Northern Rock at this moment.
NR are effectively a sub-prime lender, because they do not require proof of income for loans below 85%.
This is self-cert by any other name.
I am somewhat of a novice to all this. I am however a Northern Rock Mortgage customer.
If they were to go bust what would that mean for their customers?!
Alex Thomas
So the Old Lady of Threadneedle Street has acted on our behalf and chosen to lend money to a bank that other banks judge as too risky a debtor. Is this a risk free operation? Is this an open-ended commitment by the BOE that could last for months or longer? If property is the main asset underwriting the BOE's largesse what happens if house prices start to go South? Is the BOE merely propping up a lame duck business model through a stormy patch? In the days to come we shall no doubt find out how many mortgage applications to Northern Rock were self certified. If this is just a temporary blip in the fortunes of a great company why is the share price imploding? Northern Rocks problems have been brewing for months and we are now entering the interesting phase of the drama. I can only thank Robert Peston for his brilliant commentary on the current financial malaise.
When I put my hard-earned savings into an NR On-line savings account it was on the promise of being able to access my account and my money 24 hours a day, seven days a week.
Surely NR are now in breach of contract by withdrawing access via their website. I have been trying unsuccessfully to log in since last night. This is no way for a responsible bank to behave.
Many of the above comments appear to be valid. However they are based on one, rather large, misapprehension..
Northern Rock has very little exposure to Sub-Prime Mortgages. In fact, they don’t offer Sub-Prime Lending. What they do, is act as a Processing centre for Sub-Prime lenders such as Lehman’s Bros. NR’s own Mortgage book is comprised of mostly UK based mortgage debts and they have a delinquency rate below 0.5% - lower than many competitors.
The trouble NR faces is due to banks and financial institutions not wanting to lend to other banks given the current situation with the money markets.
The majority of NR’s mortgages are backed by Securitising the debt – essentially selling on the proceeds of the mortgage (this does not mean passing on the mortgage). Essentially they use the projected earnings of the mortgages as collateral to lend the money to cover the cost of the mortgage. A simple way of thinking of it is to see it as NR taking out a mortgage to cover a mortgage.
The 鶹ҳ are perhaps being a bit over confident, but many other news organisations are being reckless in their reporting of major issues.
NR's share price down 30% by close of today's play... all confidence in that bank lost. It wont be the last....watch Barclays.... watch the Abbey!
I'm very concerned. If the liquidity crisis continues indefinitely, will the BoE continue to support NR?
At what point is the funding refused - 2 weeks, 2 months, 6 months?
Is there a repayment plan - when will tax payers money be returned to BoE?
This situation poses a lot of questions that need to be addressed.
If we pause for a moment to think the unthinkable - what would happen if Northern Rock went bust?
Since it doesn't have depositors, its only major "assets" presumably, are its offices and the properties of its borrowers. So presumably its creditors would move in on the unfortunate borrowers. It would be useful to envisage how such a meldown might play out; and what impact it would have on the rest of the housing market.
David SmallmortgagenotwithNR
I find it odd that most people blame the sub-prime borrowers, while some clearly are to blame much of the problem rests with shady practices. For the most part these people borrowed at rates of interest they could afford. Then when the nice terms came to an end, often the terms were similar to what the "normal" people paid the rates then doubled. I saw one programme where a American lady was paying about 5% before (a normal rate) then this shot up to about 9%+, when the actual interest rates paid by the lender was the same - they were simply taking her for a ride. In reality it is often the money men who are playing with the lives of innocent people, rather than the people themselves who are to blame.
The lady in question had not as yet defaulted on her mortgage, which suggests to me that she was not that sub-prime after all. However the almost doubling of her mortgage would lead to this situation.
All this means we need tighter regulation of how much the banks can lend. We cannot do away with the complex instruments which are currently in use as if used sensibly the probably do keep the cost of mortgages lower for most people. However like alcohol it is addiction and excess which causes problems and the financial markets have got addicted to these instruments and have made excess profits from selling them. Meanwhile the group of health advisors such as the Bank of England or the ratings agencies have either not done enough or have been complicit in the chaos. The ratings agencies are still giving such bonds A+++ ratings, then when you explore the issue in more detail you find it is the issuers of the bonds who pay for such ratings to be made...
I would urge the BoE to conduct a full scale review of such practices and bring charges against those involved in this pyramid scam.
Having read through the previous posts i think the blog as a whole illustates that most of the UK population is financially illiterate. Northern Rock act as an intermediary on sub prime business for Lehman Borthers, they carry non of the risk themselves. They have very low levels of arrears on their morgages and personal loans - so if they have been acting as cowboys in their lending, the other banks are all worse. They are guilty of providing good value loans and mortgages to the British Public financed in the main by commercial borrowing. That's why Northern Rock has grown so quickly. When the wholesale commercial market seizes up due to problems in the US, Northern Rock are caught up in the problem. This is primarily a matter of confidence and at the moment the banks don't trust each other - because they don't know who is sitting on huge losses from investments in devalued sub prime paper from the US. And until that situation is sorted out, we can expect more institutions to suffer the same fate. Its the arcane nature of repackaged poor quality US mortgages that lie at the root of this problem - not Northern Rock's lending which has been by comparison most responsible.
The issue is not as some people remarked that there is no cash available for NR, the problem is that the conveyer belt:
subprime->securization->distribution->greater fool
is failing. The problem is subprime products are priced wrong and do not make sense (didn't do it for a while). They only made sense if you ignored the ultimate bagholders. But those folks have evaporated. All con artists that sold those nonsense financial products have also been put out of business since nobody believes they can pull off the trick in the near future again. The business model has been kaput for a while, it took just a lot longer for enough bag holder to wake up than most suspected. So long even Grenspan bothered to make up a theory called savings glut.
A run on the bank's resources by withdrawals ?
There are in excess of 100 people in a queue outside the Cambridge branch of the Northern Rock at this moment.
Oh no the collapse of an institution thats funding the creatio of a new landlord class?
END BUY TO LET NOW.
This bail out will only work to the benefit of the UK if in due course the Northern Rock is dissolved, either run off as in previous banking crisis or subsumed into another bank. Northern Rock's management need to suffer publicly for ignoring the developing crisis and significantly increasing their exposures in the last year. Yes the last month the liquidity crunch has been public news, but insiders have been concerned for some time, but have been unable to change the habits of not just Northern Rock but managers of other financial institutions as well. Lets hope that whatever bonus is due to staff and senior management for meeting lending targets is stopped.
Basic:-
All loades for houses are secure as long as the house prices continue to go up, that has helped sub-prime lending.... As soon as house prices start to fall, that's when the whole ting goes pop, just as it has in the US, its all down to house price, this is the banks security.... and probably why BoE will lend NR money..
Problem is, house prices are way too high, and the Gordon Browns will not build more homes to ensure the price stays high, and demand continues to fuel house price inflation at the dizzy rate it is currently moving. The BoE could just drop interest rates to keep the process going, but at some point something will have to happen to make homes affordable and help first time buyers....
News today from the Bank of England about a massive cash bailout to help the UK’s fifth largest mortgage lender made me laugh. You see it is our old best frenemies, Northern Rock.
For those in the IVA world we know them as the bank that won’t take payments from debtors and wants to rush to get charging orders instead.
So Northern Rock has a policy of telling people that want to repay via an Individual Voluntary Arrangement to go to hell and at the same time is chauffer driven to the Bank of England to pick up spare cash to help them out.
The Bank of England should have told NR to cut the IVA BS first as a condition of the bailout but then I guess that’s water under the bridge now.
The 鶹ҳ Reports, "The fact that the Bank of England has been prepared to act as the lender of last resort is an indication that it thinks the problems at Northern Rock are temporary ones," Mr Peston added.
Treasury Select Committee chairman John McFall urged Northern Rock customers not to panic.
"I don't think they should be worried about their current accounts or mortgages," he said.
"The fact that the Bank is willing to act should be reassuring."
The loan would be provided at a penal interest rate, he said, as a recognition that management at the firm were not without blame.”
And Bank of England, if Northern Rock claims they can’t repay the penal interest rate loan as scheduled, refuse payments and go for a charging order. Now that would be poetic justice and you know that Northern Rock would be bitching that was unfair.
More news yesterday about Northern Rock, seems that legal eagles have found some very interesting prior court cases where the judge tossed out charging orders from creditors that were acting unfairly or unreasonably. It seems the judges felt that the rush for the charging order not only placed the debtor in a disadvantageous position but also screwed over the other creditors. More news on these developments to come soon.
When I cycled through Cambridge this morning, I passed a crowd in an orderly queue. It looked like they were waiting for a celebrity to arrive, except the queue ended at the Northern Rock.
This reminded me of the discussion of the bank by the excited Robert Peston on News 24 last night. Although he was at pains to stress that we won't be getting Depression-era bank failures and he thought Northern Rock was solvent and repeated that customers shouldn't do a run on the bank, the comparison was too vivid and that's exactly what's happened.
I know the 鶹ҳ is under pressure to report more hard-core financial news, but I fear that a lot of financial news is bewildering to the average man-on-the-street as cricket scores are to me.
The media isn't blameless for this bank run we've seen today and the 鶹ҳ must exercise more care on how to get across sensitive financial news without causing a panic.
To all who say "don't panic, there's nothing to worry about, just a temporary liquidity problem". Someone once said, the recipe for success in markets is correctly anticipating what everyone thinks everone else is going to do. The same applies to liquidity crises. The assertion that NR (or any bank) is solid is based on the assumption that it continues to have the trust of its depositors. If it seems likely that a significant number of people feel that their deposits are not secure, basically that means they are not, because a run on a bank is a self-reinforcing process. As people start withdrawing money, the banks problems only get worse. The logical thing to do is therefore to get yours out before everyone else.
Whether Mervin thinks it currently has a good balance balance sheet is neither here nor there. Whether he puts up the money when depositors suddenly want it back is critical.
Anybody with a brain take note. Take your money (even better if it's in an account with Northern Rock!), watch the share price over the next few days then buy as many shares in Northern Rock as you possible can. As one thing is guaranteed - they will not be allowed to go bust. More likely they will get over the hiccup or someone will buy them then it's "show me the money!" - at least 50% growth on you investment over the next 12 months. Every cloud and all that........
ps this may not necessarily be sound financial advice!
Corerect me if I am wrong but the BOE are lending money to NR (at arate above base) so are making money out of it. They have not stepped in to bail them out (as yet) just acting as the lender of last resort. So NR is paying for this service and possibly over the odss.
Thing is NRs rates will have to rise or have their profits squeezed probably both to get out of it.
Bank base rate is 5.75%. Bank of England is charging NR a % over base rate.
3 month LIBOR is running at 6.88%
and NR need that source for its
funding.
NR has mortgages available today -
2 year tracker 7.04% no arrangement fee.
Flexitracker 7.24% no arrangement fee.
On this basis, there is little profit
margin in writing these mortgages ?
It seems that the business model of
borrowing short term and lending long term is not working.
"A.Eden wrote:...I took out a 'promise' mortgage 9 years ago as it was a VERY low rate. Then , just before it reverted back to Base Rate I changed my product , was not warned about Early Redemtion charges nor the small print ,and was tied in for another 7 years."
Mr Eden, If you are stupid enough not to have read the small print, and have borne the adage 'caveat emptor' in mind, then you have foregone my sympathy and you deserve everything, and I do mean EVERYTHING, you get. There is little point blaming banks for irresponsible lending when there are suckers like you willing to sign on the dotted line..
To all of those claiming that the doubters are financially illiterate and that Northern Rock isn't carrying any risk:
Why won't other banks lend to Northern Rock?
If Northern Rock is under the financial microscope there must be other institutions using similar methods of raising funds.
All this secrecy and hints of rumours must have a de-stabilising effect. There seems to be a general lack of transparency until it all blows up.
The Northern Rock is in crisis, not because its customers in the UK are defaulting to loans but because an unemployed person in detroit is defaulting to Loans taken from countrywide,USA. Sad but true, this is an ugly face of globalisation.The complexities and risk associated with a globalised business model is large. As far as NR is concerned, they are a victim of "US exports of subprime poison". Clearly, the NR bosses were lured by the CDOs and are now paying the price. The question is "will they learn any lesson, as they have put so many customers at risk"
1. Borrowing short and lending long is an inherently a risky business.
2. Is there not an accounting standard that requires losses to be quantified and disclosed immediately upon recognition, and if not, ought not there be one?
3. Indeed, ought not the disclosure requirements for banks be more onerous, that is, open, than for other entities?
4. Is there not a case to index-link ‘protected’ saving from the date that the present limits were set?
Let’s have critical analysis, not a peddling of official placatory statements! What is Robert's view of the regulatory system and the banks' ususal approach to rewarding savers?
I am sure Northern Rock wont be the only bank to experience problems. They have all been lending recklessly, especialy to the buy-to-let speculators, creating the current housing problems for first time buyers. It's ironic that the current Chancellor now warns the banks about irresponsible lending but his predicesor, Gordon Brown, saw no problems when many economists were warning of an impending debt problem. We were told that banking was the 'bedrock of the economy'so were does the current crises leave us now?
Number 138....
"Bank base rate is 5.75%. Bank of England is charging NR a % over base rate.
3 month LIBOR is running at 6.88%
and NR need that source for its
funding.
NR has mortgages available today -
2 year tracker 7.04% no arrangement fee.
Flexitracker 7.24% no arrangement fee.
On this basis, there is little profit
margin in writing these mortgages ?
It seems that the business model of
borrowing short term and lending long term is not working"
I say, while house prices still increase then there is little risk to the BoE or NR, NR just need cash to continue to offer there deals. They do not care if people can not repay, they will get the house and sell it on, thus no loss... but in the US house prices have fallen, buy to let are bailing, lots of property on the market, that's when the NR's of the UK will get hurt
As ever, the DOW does its own thing, and the plight of Northern Rock is a non-issue as far as US investors are concerned. It doesn't even register on their radar. And as usual, the brits invested in the FTSE play catch up when we see that Uncle Sam really doesn't care at all. So nothing much has changed.
All the same, I think I'll spread my cash among a few banks on Monday, just to make sure. And if I were in Northern Rock right now, I'd move it all out of that. And if the general public amplifies that into a panic, then it's best to be out first than last, as we all know. This is a capitalist society, after all, where timing is everything.
Are you primarily a journalist or a financier? I would give greater weighting to your blog if you were the latter. Or are you the archetypal 鶹ҳ "I'll make the news in my blog" sort of journalist?
As the weekend approaches Northern Rock looks to be on the ropes. Senior management took a gamble on a business model which required regular external funding from the interbank market. This gamble worked for a while but a gamble it was. As the stock price collapses let us hope that blame is apportioned where it is deserved. Senior management have failed their shareholders and that is where the buck stops. Blaming other banks or the market for not lending them new funds is riseable. This whole episode is starting to assume a political dimension which adds further intrigue to the drama. The Chancellor, Alistair Darling has his fingerprints over the decision to bail out the lame duck and no wonder. At this stage of his prime ministerial career the last thing Gordon Brown needed was a spectacular bust of the 5th largest UK mortgage lender. Could this be the trigger for the reality check on new Labour?
Am I the only one who thinks that some UK bankers might just be rubbing their hands with glee at the sight of all this?
By refusing to lend money to NR (one of their competitors in the mortgage market), they have effectively triggered a run on the bank. If it does transpire that NR goes into administration, then there will be £113bn of assets up for sale at knock-down prices.
As long as the administrator(s) can get at least £24bn (about 22p in the £) to cover the depositors' funds...
Is this an example of commercial schadenfreude?
Or am I just being too simplistic, or cynical, or both?
As editor of Searchline Publishing's "Bank League Tables" it will come as no surprise to learn that in the Capital/Assets league table, that is to say the proportion of assets covered by capital, Northern Rock comes in the bottom 10% of the 158 UK banks. Advances to customers have increased by nearly 250% over the past 4 years as their return on assets continues to decrease. So who's next? Take a look at www.searchlinepublishing.co.uk and click on "bank league tables" for a complete list.
I don't know who it was that put the squeeze on Big Merv so he'd make the mistake of bailing out Northern Rock, but the BoE are now the Dukes of Moral Hazzard. Our only hope is that NR subsequently goes down in flames.
The people telling the N/R investors not to panic or overreact are the same ones responsible recent dramatic falls in the stock market. The big players there moved to secure their cash immediately leaving many small investors out of pocket.
This is now a trust issue and clearly people don't trust what the Banks are saying
As I had not been able to access the Online account by day I thought I'd try by night. At 00:30 and 05:00 the website was saying it was busy and please try later. Apparantly you can go to a branch to withdraw from you online accounts as a special measure but remember NRK have less than 100 branches, so its not an option for everyone.
I'm glad, to a certain extent, that this has happened. It's about time the mortgage lenders here and around the world were called to account, also governments. For years our government has ignored the fact that house prices have been rising way beyond wages and yet mortgages have been lent by this company and many others to people who are a bad risk. I think the goverments response was we'll let the market decide. Well we'll see how the market decides when there are few more queues at places other Northern Rock.
I personally have saved over the last several years and for various reasons haven't entered the mortgage market. During this time I've not had great interest rates, so why should I and other savings be at risk because banks and building societies think they can make endless money from bad risks and ever increasing house price rises.
Oh and I forget these wheels (or at least one) were put in motion years ago when the conservatives decided that council housing was a bad thing.
Michael #149 - I think it is highly unlikely that other banks will deliberately push NR over the edge - first of all they don't make decisions by committee - secondly it's a strategy that could soon backfire very badly, in terms of trust in banks in general. Imagine Barclays one week down the line saying "don't worry, we're solid as a rock". Depositors have heard it all before. The fact that NR *was* solid as a rock is neither here nor there.
Bank runs are all psychology, little to do with balance sheets at the outset. Politicians and business leaders lie through their teeth every day, they've practically made it their job. As for Mervyn, his message could be pre-recorded, it's so predictable. He believes "bank X is not in danger" (because the more he can make you believe that, the more it is true, and the easier his job is).
There is therefore very little they can say to quell the fears of the person in the street with his/her life savings at stake. The preceived risk is big: not because they think the bank will fall over, but if there's a there's a tiny chance it will, the consequences are disastrous. So they get their cash out "just in case", and quickly, before everyone else does.
The other banks are not lending to NR (or each other) because they feel it is too risky, and they themselves are short of cash. Effectively it's as if the banks themselves are withdrawing money from each other. In NR's case, this spilled over into the high street, but because retail deposits are only a small part of their financing, it's not enough to cause a big problem (or so they say). Unless of course, other banks on Monday take a look at the queues, and decide to pull out more, "just in case".
I think it would be really cool if those who were paid huge bonuses for their performance, were now sent an invoice for that money back !!
Good! I tried to invest £78,000 in Northern Rock and I spent an hour in Cambridge filling in forms interviewed and what have you to open an account preceeding the lump sum arrival. Then I received an arrogant letter stating that because I did not have a UK address the Northern Rock did not want "that kind of business". I went to recover my opening investment and Cambridge branch did not want to give it back because I did not have a UK address thus wasting more of my time whilst I blew my top until they coughed up with extreme ill grace.
Now Northern Rock are in trouble. Good! I hope it hurts.
The Government encourages saving. But
if a bank goes belly up we lose everything over £31K. Is this fair? Is this just ? The Government should guarantee every saver's deposit 100% in every high street bank or building society.If the Chancellor had done this on Thursady the crisis would have now blown over instead of developing into a financial hurricane.
In reply Tom - "Northern Rock Does Lend To Sub-Prime" - As i always advise "read the small print" - on the link you provided - it clearly states that NR process applications for sub/near prime on behalf of SPML (Southern Pacific. NR does not lend to the sub prime and as previous posts state has a quality lon book.
Ill informed speculation such as this and other other tabloid statements will only fuel the NR problem. Their problem is not there lending criteria or default situation it is their financial structure or to put it how they borrow their cash to loan to you.
Chris
Carmelanne - IANAFI (I am not a financial advisor, and in particular not yours) but I don't think you should worry. You've made a contract and either NR or (in the worst case) NR's buyer will honour it because they want your mortgage payments.
The only tricky case I can think of is if you are in arrears and NR are doing a deal with you to prevent foreclosure. If NR were bought, the buyer might review such cases as bad risks.
Many thanks for your advice.
If NR is so keen to borrow from B of E at 6.75% why not reduce the hemorrhage of individual depositors by upping our rates?
While they're at it, why not hike rates payable for the, by definition, "wealthy" - multiple "buy to let" property owners?
What is the impact going to be on overall saver's confidence and hence mortgage availability? If neither the other Banks nor the individual saver have confidence in NR, where does the money come from to lend to housebuyers?
Will this be what finally pops the house price bubble?
For what it's worth (a bit off topic?), when the housing price bubble bursts it will be interesting to see the likes of Ocean Finance become the biggest landlords in the country as their entire customer base defaults!
as a "small saver", i have for a number of years felt like a pariah.
endless advertising has been aimed at borrowers with special deals abounding. savers have been neglected even abused by almost every deposit taker resulting in a much misplaced loyalty thro poor savings rates. so much so i considered setting up an organised withdrawal of funds from each bank/building society in turn to cause liquidity discomfort to these rogues who continue to earn plaudits not to mention huge bonuses at the expense of all small savers. they are to be reviled not praised for their "enterprise".the boards of these companies should be disqualified for malfeasance.they deserve to be villified not lauded.
What is happening seems to me to be the just desserts of an exceptionally heartless and greedy company. I know a fair few employees of the crock, employees who do not qualify for yearly increases in their pay, employees who are told when they are allowed to go to the toilet, employees who (unlike the executive directors) do not benefit from "buy one, get one free" share schemes.
It would appear that whilst the fat cats have done everyting in their power to line their own pockets they have forgotten how to run a bank.
I wonder if Applegarth (he doesn't deserve to be called Mr) will still be in place to see the completion of the crocks latest £85million head office development?
I agree with those who say the government could defuse the banking crisis by the simple act of raising the level of protection for money on deposit.
The level of payment at £31,700 on a deposit of £35,000 and zero above is derisory. That amount, was set quite some time ago and has not been increased in line with inflation, which is a minimum we should expect.
But I forgot, as experience teaches, the present prime minister has a love affair with "fiscal drag" so I don't hold out much hope.
To add a European perspective, readers of this string may like to know that NR launched operations in Denmark in February this year, offering online savings accounts at attractive rates.
Their press advertising campaign was well designed, impactful, and got noticed - not only by consumers but also by the main Danish high street banks who suddenly found themselves in an unexpected competitive situation and forced into offering savers better rates than the meagre offerings that had been the norm before NR came in and rattled cages.
Sadly the positive effect may be short-lived, as Danish TV is now awash with the same images as seen on UK TV of lines of people outside NR branches desperate to pull their money out. It will be no surprise if folk over here follow suit, despite NR's attempts to sooth savers with reassuring statements which have now appeared on its Danish website.
But whatever the questionability of NR's unorthodox business model, it's still worth recognising that what NR did over here kicked Denmark's own banks into giving savers a significantly better deal.
Niels, Denmark
By Saturday, the situation for online customers has worsened dramatically. I tried to access my online account on Friday morning but was unable to log on after inputting my ID. I tried to reassure myself rationally with the publicised arguments about Northern Rock's liquidity. By Saturday evening, I had become concerned about the effects on the bank of the high level of savings withdrawals and tried to log on to my account, which contains over 1/3 of the cash I will need for my retirement (I am 59, with effectively no pension, so this accounts contains what will be my pension funds). There is now no access at all, with a routine screen stating that the system is currently very busy regardless of the time of day or night and asking me to try again later. As an online customer I now have no access to my savings and no ability to protect them.
Please don't take this as me being smug. More than twenty years ago the Midland Bank charged me for going £2 overdrawn. This was after never having ever been in debt to them. No arguments could make them budge.
Thanks to their pig-headedness I decided to move my accounts to the Nationwide Anglia Building Society. Over the years, as I have watched the mainstream banks become greedier and greedier, the fact that Nationwide has only Members and not shareholders has given me a warm feeling inside.
I always advise anyone that asks me to move to the Nationwide, and maybe NR customers should do the same.
Re Don Porter's comment No 166
Don't worry Mr Porter. As we stood in the queue yesterday outside the Northern Rock, one of the subjects of major debate was, if we were fortunate to get our money out, where on earth where we supposed to put it.
I predict a resurgence of the mutuals and the notion that in order to borrow first you have to save.
But can we also see much more attention being given to the specific needs of pensioners - who need to know that their money is in a place where nobody will take unnecssary risks with it - as has happened at Northern Rock.
Pensioners are in it for the long haul - it's about time that financial institutions wake up to the fact that they are lucky to get our money because we have to hang on to it if we are to have a pension.
Maybe we could start with a fund which has a membership scheme - with an age threshold - and maybe a complete ban on the involvement of big business interests and people who like 'winning' and 'making a fast buck'?
I lost all confidence in Northern Rock after their chief commercial executive claimed on 鶹ҳ Radio 4 Moneybox on Saturday 15 September that their online service is working but only slowly. This was and remains blatantly untrue as online customers have not been able to access their accounts at least since Friday morning 14 September. This state of affairs has been confirmed by many online savers, myself included. I am convinced that Northern Rock deliberately disabled access to online accounts so as to prevent people withdrawing money via that route. For online customers there is no other way to access their money.
Re Post #169 from Pensioner saver.
There is probably nothing wrong with the NR's on-line banking site. It is probably only collapsing under the strain of so many people trying to access it at the same time.
No doubt the company had it built specifications that allow n number of connections at any given time.
Now that there are n x 1000 (or whatever) people trying to access the system, it's no wonder it's not coping too well.
Re. Carl Waring's comment No. 170.
You are giving Northern Rock the benefit of the doubt. I don't. Especially not in light of their chief commercial executive's blatantly untrue statement on Radio 4 that the website is working but slowly. It isn't working at all and I suspect he was one of the executives who decided to disable the website so that online customers couldn't withdraw their money. I am yet to hear of a single saver who managed to withdraw money online since Friday morning.
I dont have a deposit with Northern Rock but would advise people to take their money now if they can. Does anyone remember RailTrack, Equitable Life etc, This is typical of the state of the Country, no individual responsility just rely on the Government and their slack bureaucratic monitoring systems.I guess the next thing is for taxes to go up again to pay for Public Servants Pensions that were invested in NR shares
We are savers with Northern Rock and whilst we may not wish to draw down all our savings we do need some of them for planned events (Ruby wedding holiday etc). Having finally logged on to their site and made a transfer we were told that due to a technical hitch it was not possible to say whether the transfer would go through. Now we are in an even worse situation and unable to talk to anyone. Is there any wonder that confidence is erroding.
D Simpson
Further to my comment yesterday, asking if ANYONE had got through to Norther Rock online, I am pleased to say that after spending most of the weekend trying, I have finally got through. I am now wondering if the whole scaremongering episode was caused purely by the media reporting the funding request to the BoE?
I have several thoughts.
Lots of people blaming NR management for the problems. Some blame merited but what would all the individuals say if they were on the receiving end of what happened in the financial markets.
A parallel would be if all credit card lenders refused to allow people to roll over debt on their card each month and made them pay it back at the end of the month.
How many people with no access to other lending would sudenly be in exactly the same position as NR are now?
I wonder how many would blame themselves???
Also feel sorry for the NR employees - specially those who have money in SAYE or similar - many will have lost a lot.
Seems a shame that Merv King thinks that the shareholders should shoulder all the pain. Seems to me like the hedge funds shorting the shares stand to gain the most - not what the govt. really wants I'd imagine!!
I guess I am not as lucky as "Eggsinonebasket and your contributors who seem to be able to logon to their NR internet accounts. After a couple of dozen failed attempts over the past 3 days, I am still offered the plaintive message:
"You may find logon times for your online accounts are longer than usual. We apologise for this but please be patient, we can assure you that we will be able to deal with your transaction."
Oh no they won't! Optimism is short lived, as the next message tells me to try again later, then "Thank you for your patience in this matter."
I have also phoned, actually got through twice and was promised on both occasions a call back from one of the managers to confirm a proposed transaction. Call back. Did they heck?
Patience after all is only a virtue! I'll set my alarm of 03.00 and see if its any less busy then.
There seems to be an extraordinary air of optimism over the Northern Rock debacle. This suits the bank, not the investors and savers who need straight talk. Why has Alistair Darling stepped in (having been in his office both Saturday and Sunday?) crying, 'don't panic'. Truly, The Bank of England maybe the lender of 'last resort', but I imagine Mervyn King has only stepped in because of pressure from Mr. Darling's office, with a £30bn 'overdraft' from government coffers. I don't understand why the markets cannot be allowed to function in a normal and healthy way without this sort of intervention which inevitably prolongs and worsens the eventual outcome. I wish Darling would brush up on his Keynes.
this was going to happen sooner or later and the banks have only themsleves to blame for this mess. for far too long all they have cared about is how much money they could make and leanding people too much money too easily. but of course instead of saying sorry and it was our fault they try to blame everyone else and again the poor consumer has to suffer.they should take to cut in profit and learn from their mistakes.
but will they?.....
this was going to happen sooner or later and the banks have only themsleves to blame for this mess. for far too long all they have cared about is how much money they could make and leanding people too much money too easily. but of course instead of saying sorry and it was our fault they try to blame everyone else and again the poor consumer has to suffer.they should take to cut in profit and learn from their mistakes.
but will they?.....
greedy bankers with fat salaries, taking stupid greedy risks...what a suprise
Reply to 108.
Just to clarify, the debt is called an "asset" because it is deemed that a future economic benefit that can be reliably estimated will flow from that debt within a defined time period. The terms "assets" and "liabilities" are accounting terms and should not be mixed up with their more colloquial meanings.
If Britain is, as David Cameron and other Cassandras suggest, a nation of credit-greedy spendthrifts, why are all these feverish people struggling to get their SAVINGS out of Northern Rock?
Is it not nauseating to hear the millionaire Cameron tell everyone else to spend responsibly? If a crunch does come, DC can always borrow on the strengh of Normanby Hall, the 300 acre estate to which his wife is heir.
Nice to see the government using taxpayers' money to buy votes in the North East...
Live by the sword..... Die by it
I doubt NR saw the customers who they reposessed as having a temporary liquidity issue.
Neither should anyone else now NR have one and will soon be "posting the keys back".
Your Bank may be repossessed if it cannot afford to pay its debts.
Northern Rock managed to spark the explosion - but not one word of apology from the CEO - not one shred of admission that maybe he had got it wrong - no - the liquidity problem could not have been foreseen was the lame excuse. What brazen hogwash - the crunch has been building for a while - yet NR continued to pile into mortgage debt. NR are not alone in this mess - the sale of directors shareholdings in a near competitor in the spring and early summer - tell their own story.
But lets not forget the US real estate brokers and their UK equivalent for furiously stoking up the need for borrowing in the first place. So far this group of parasites have got away with it - no risk - they rake in fat fees on the market rise and in the crash when they auction off homes. Surely it's time to put a stop to this win - win gravy train and introduce meaningful penalties linked to losses due to property overvaluations.
Surely it's time that the financial services operatives that have ravaging peoples lives through greed or ignorance need to feel the heat of the legal process. No more 'dignified' resignations and massive golden handshakes.
banks may be sickened to see the queueing british public having such an negative influence on share prices. One factor nobody has mentioned in all of this is how distrustful the british public have become of british financial insitutions. We've had to put up with lost pensions, huge endowment mortgage losses, extraordinarily high credit card interest rates, unlawful bank charges - and a toothless FSA. So even when it's obvious to > 99% of us that it makes no sense to take money out of Northern Rock - it doesn't surprise me that
Can anyone actually say what the conditions are that have been placed on this guarantee of deposits at Northern Rock? I can't seem to find anything about it on the internet! For example how long is the BOE going to guarantee Northern Rock? For a week, a month? Indefinitely? I just want to know the exact criteria for the guarantee. Any help with this would be gratefully received.
After his words on Friday morning in support of Northern Rock, the Chancellor was bound -- by political expediency -- to underwrite the whole of its debt : can you imagine what would have happened to New Labour, had it allowed a bank its own Chancellor had endorsed to go to the wall ? (Remember : it's the marginal, swing vote upon which a party depends for electoral success.)
When, on Monday, the investing public declined to follow the recommendations of a broad spectrum of politicians not to panic, the Chancellor had no choice : he had to step in with the express and comprehensive underwriting of Northern Rock's debt.
Somewhat amusingly, even after this 'nuclear' intervention, many in the residual queues, interviewed on Tuesday for television, were saying they were still not prepared to take the risk of leaving their funds in what had overnight become the safest bank in the country.
Politicians -- of all parties -- and the executives of corporations must ask themselves why and, having worked out the -- in my view obvious -- answer, address the problem within themselves.
This has been coming for a long time. Financial institutions ave been increasing the amount they would give to homeowners without too much thought given to how they would pay it back. Add to this, how easy it is to get ready credit in any High Street or shopping outlet and the ridiculous credit limits that are allowed on credit cards, and it is no wonder that people are stretched to the limit.
As a start to sorting out this mess, there should be a limit to how much you can borrow to purchase a home. This would reduce the upper pressure on house prices and make homes more affordable.
Minimum monthly repayments should be increased to, say, 20% of any outstanding amount. This would focus people on just how much they really can afford to spend each month.
A limit on the number of credit cards one is allowed would also help.
These are all deflationary actions but would be for the good of the country in the long term.
It is all very well telling people not to panic and withdraw their money, but the financial institutions in this country have not got a very good track record of honesty. Remember the mis sold endowments and the pension funds. How can they expect people to trust them. I say get your money out while you still can.
The only crisis with Northern rock is that most people in this country have little understanding of finance and particually where banks get there money from to lend out to us lovely customers. So the customers created the crisis.
The real worry is that the bank of England was willing to provide cash to northern to keep providing mortgages so we can keep selling houses.
Remember money in a house is dead money and no use to your kin until your dead, oh yeah then they going to get taxed onit. Only an investment if you can afford to lose or don't need to livr in it.
Robert Peston should remember the banking maxim "Never borrow short to lend long". Northern Rock should never have been allowed to call itself a bank -it is just a jumped-up building society which sought funds from completely the wrong sources.
Suppose it would not be possible for the directors and others to be required to pay back their bonuses for this year? Might well meet the withdrawals over the last few days, and, let's face it, they can scarcely claim they were really doing a good job?
p.s. As a retired old style bank manager I would add that it is perhaps timely for some of the old Stock Exchange adages to be considered such as
"Leave something for the other guy", "Invest one third for growth, one third for income and one third in cash". The latter might have stopped people putting all their money into a single investment. You might ask other old buffers for their memories of Stock Exchange sayings. Pity this government does't like history - it has a habit of repeating itself!
Robert Preston was one of the media journalists who positively delighted in stoking-up the public hysteria over Northern Rock that saw days of queues of people drawing out their savings causing the bank to falter. Now he has Mervyn King in his sights.
This isn't the sort of journalism that I have ever associated with the 鶹ҳ and it is absolutely disgraceful. It is tabloid in nature and beneath the 鶹ҳ.
Mervyn King has done a brilliant job at the Bank of England over the years since Eddie George retired. He makes one decision like this and the hounds sniff blood and want to bring him down. Shame on you.
I hope the 鶹ҳ gets back in touch with it's journalistic integrity very soon.
The surprise policy declaration by Darling the other day would seem to be very significant: it seems that he has just abolished the risk premium on higher interest rate savings and bonds investments and that you can now put your money into any risky high-returns account in the UK with the same cast-iron guarantee that you'll get your investment back as you would from a National Savings bond or, indeed, a gilt. Sounds too good to be true? Read what Darling said again and make up your own mind. For my part I'd like him to provide a list of institutions to which this new guarantee applies and whether it also applies to unit trusts, mutual funds and pension schemes and, if it doesn't, why not? Does it cover foreign investors and can we look forward to Japanese banks dumping their Treasury Bonds and piling into the Birmingham Midshires Internet Fixed Rate Bond at 6.91%? Because unless I've misunderstood Darling it would seem that both now carry the same risk. You never know- maybe he'll go the whole hog and put up public money to underwrite a punt on the 4.40 at Doncaster?
There are other questions as well: having made such a direct and significant investment in Northern Rock is the taxpayer going to get representation on the board and receive a shareholding? And if not why not? Will the dividends paid on these shares and any proceeds from their sale be ring-fenced for some specific purpose, perhaps to refund investors in Farepak or Rover? What other businesses can rely on nationalisation in the event that they fail and how does one apply for Brown's- sorry, I mean Darling's- "free money guarantee"?
This is the sort of poorly thought out panic measure that would befit a banana republic and it will do immense and lasting damage to the regulatory authorities' credibility, as well as setting a simply appalling precedent in terms of moral hazard. But the fact remains that you can't buck the markets and, as always, history will teach us to regret this 1970s-style intervention. The first lesson will be delivered in the currency markets, where the pound is about be given a lengthy and very public caning.
The next step will be that the Bank loses control of inflation, doubtless hidden from the "official" statistics by some new sleight of hand. Sterling will plummet, savers will be punished yet again but Britain, bloated and sclerotic with yet more debt, will stagger on towards the inevitable, but now far worse, reckoning a year or two further on- but only after Brown has secured another term in Number 10. Because make no mistake, Brown's re-election is the only priority dictating UK Government policy at the moment.
Only this could explain why the government has taken such drastic action to save a relatively small-time cowboy lender on the edges of the credit frontier: the decade long housing boom that has underpinned Labour's economic "miracle" is as intimately associated with the record of our Prime Minister as it is with cavalier lenders like Northern Rock. His very reputation and career are at stake here and, as we ought to know by now, nothing whatsoever will be allowed to stand in the way of this grand project.
He has done all he can to encourage and sustain the housing boom and the rampant credit expansion that has underpinned it, from starving the market of new homes to turning a blind eye to reckless lending and hiding inflation under the carpet of the official figures. Now, when finally the markets are sending out a crystal clear signal that it's all over, he's reached for the only thing he has left to keep it going: to literally underwrite the bubble with public money. It is unbelievable.
In the short term Mervin King, one of the few trustworthy officials who actually knows what is going on and who battled admirably to try and ensure that the market be allowed to sort this mess out, will be made the fall guy to hide the fact that the markets have been fixed by Brown using our money. The next governor will know who really runs the "independent" Bank.
This is more than just another story of the ants bailing out the grasshoppers and moral hazard, it is nothing less than the story of Britain's long-term economic prosperity being sacrificed at the alter of one man's massive, suffocating ego. This bail-out might save Brown but it sows the seeds of certain economic disaster for Britain; mark King's very words on that.
I wish you wouldn't perpetuate the oft-quoted notion that "No depositor has lost a penny". The proceeds of my house sale went into my a/c at the Northern Rock at around 4pm on Thursday. Since then I've paid out around £150 in CHAPS fees withdrawing it in stages as the panic deepened, into the (current) a/c I'd designated to receive interest from my NR a/c in normal times, from where I had to CHAPS it to another a/c for which I did have a cheque book, in order to deposit it around a variety of building societies (so as to spread the risk around). My money has been whirling dizzyingly around in cyberspace and clearing for the last 7 days, and I've lost around £300 in interest that I would have had, had I left it where it was (unthinkable). And now, if I return it to the NR, as invited to do by Mr. Applegarth, I'll get 2 CHAPS payments refunded, £70 in total, but no interest. I've lost around £400, which should have funded around 10 days rent, and who's had my money all this time? Not I. In the week since I sold my house I probably haven't received a penny of interest, and I can't believe I'm the only one in that boat. I can't think how you wouldn't have the insight to realise that this would be the case for everyone who withdrew money.
Piffy on a rock cake
Has Robert Peston, ace 鶹ҳ business editor and ex-Sunday Telegraph man, done a Gilligan? I fear so.
Mr Peston reported on the Today Programme [September 13] that the Bank of England agreed to give emergency financial support to mortgage lender Northern Rock. Emergency? What emergency? Northern Rock had merely secured a bridging facility at a cheaper rate than the inter-bank rate.
But, in a slip of Mr Peston's elegant prose, he called it an “EMERGENCY LOAN” [my caps] which was solemnly repeated for days on every 鶹ҳ news broadcast.
What were people to think? Result: an unprecedented run on a British bank in decades.
Irony of ironies, Robert Peston speaking to Ray Snoddy in “Getting business news right” talked about recent criticisms of the corporation's business news coverage especially “sloppy language” in reporting. [/go/rss/-/mediaselector/check/player/nol/
newsid_6980000/newsid_6989700?redirect=6989704.stm&news=1&nbram=
1&nbwm=1&bbram=1&bbwm=1&asb=1]
Yes, Pesto has done a Gilligan.
1.No-one was forced to take their money out using lots of CHAPS transactions.
2.It's daft to call Northern Rock a "cowboy lender".
Savers have had a shock but will lose nothing. Shareholders are bearing the brunt of this.
NR's Chief Executive has said the problems became apparent on 9th August, yet the share price continued to hover around £7 until the end of the month. Problems were clearly not apparent to most shareholders until September.
Do we know if directors bailed out in time?
This is pure rubbish. i have never been so insulted to read such coDswollopp by the bbc, clearly this is written by a specialist in the 'secuarty of Englands finacail idendity society', or some other unimportantant part of the British government.
written purley to regain confidence in a dieing population of uneducated morons that still think they have the spallest bit of control with there silly little vote.
Oliver Lambie
Its a pity that the Bank of England don't step in when Northern Rock vote NO to an IVA (Individual Voluntary Arrangement)and do not give a reason. They have also recently started taking Charging Orders out on the property thereby reducing the amount avaliable to other creditors. I understand there may be legal challange to this. So where does that leave Northern Rock. I am unsure how Northern Rock calculate and report their bad debt but I hope this has been taken into account when the FSA and Bank of Englang where shouting that the Northern Rock was a solvent business.
The ironic thing is they have been given a chance to put their house in order but are not as helpful with their clients.
Its a strange world we find ourselves living in, or is it.