Bank on the Rocks?
I had to chuckle when I heard Will Hutton on Today this morning (you can listen to the interview here). Here was the leftish head of the making the same arguments about the need for the Bank to pump money into the financial system that I have been hearing from the uber-capitalists of the investment banks and the commercial banks for weeks.
The bankers want the cash from the Bank to ease the pain they are feeling from the injudicious way they invested their capital over the past few years. And, funnily enough, Hutton feels their pain too and thinks the Bank should have provided an analgesic weeks ago.
It’s is wrong of me to be flippant. There is an important debate to be had about the response of the Bank, the Financial Services Authority and the Treasury to the crisis in financial markets.
Simplifying slightly, the bankers and Hutton believe that some weeks ago all banks should have been allowed to borrow from the Bank of England more-or-less in the way that Northern Rock has been allowed to – and via a generalised special lending facility, rather than as an emergency loan to ward off imminent collapse.
What they argue is that if banks had been allowed to pledge all manner of assets of questionable value as collateral for Bank borrowing – Hutton mentioned the asset-backed commercial paper that no one wants to hold any longer – then there would have been enough liquidity or cash in the financial system to reverse the rise in market interest rates and also to encourage banks to lend to each other in the normal way.
Just possibly, Northern Rock would not then have faced a strike by the institutions that normally lend to it and would not have had to go cap-in-hand to the Bank.
That might be right. There is, for example, some evidence that conditions in the eurozone and US money-markets, where the central banks have been a bit freer with their injections of liquidity, have not been quite as tight as here.
Another possible argument against the way that the Bank used its lender-of-last resort powers to bail out Northern Rock is that the very act of saving it in this way also damaged it, possibly beyond repair. There is a huge stigma attached to requesting emergency funds in this way: Northern Rock was identified very publicly as a victim which therefore created the very anxiety among depositors that has led to the mass withdrawal of funds we’ve seen since Friday.
So the Bank may end up giving more financial help to replace the Rock’s lost deposits than it would have had to do if it had been less uptight up pumping cash into the banking system more widely and generously.
That’s the case against the Bank of England.
And I can understand why Hutton and the bankers are quite emotional about it: the pictures of those queues outside Northern Rock branches are quite shocking; they’re not really the sort of thing that ought to happen in one of the world’s largest and strongest economies.
There is however a powerful argument in the Bank of England’s favour.
The first is that the Northern Rock was an accident waiting to happen. It was far too dependent on the money markets to finance the growth in its lending. And if the Bank had pumped a ton of money into the system to allow Northern Rock to weather this particular storm unscathed, there is a significant risk that Northern Rock would have faced bigger, uglier and scarier problems in the months and years ahead.
The second is that if the Bank had allowed all the banks to dump asset-backed commercial paper and mortgage assets on it in return for loans priced at the base rate plus a bit, a mountain of dodgy assets might have ended up on its books – and with no certainty that normal service in the money markets would have resumed.
In the process, the investment banks and commercial banks would have learned a dangerous lesson, which is that so long as their foolish lending and trading is on a big enough scale, the Bank will rush in to prevent them suffering undue losses.
At least in the case of the Northern Rock bailout, the Bank knows there is an upper limit of how much cash it would have to pump in – which is probably around £20bn in the highly unlikely case that every retail depositor were to take out his or her last penny.
To be clear, I am not yet arguing that the Bank and FSA handled this crisis in an optimum way.
Much will depend on what happens to Northern Rock over the coming days – and also whether there is contagion in the form of a loss of depositors’ confidence in other lending banks.
Northern Rock’s woes are a bit worse than just a little local difficulty. But it is premature to say that the Bank of England’s conduct has turned a crisis into something a good deal worse.
UPDATE 17:15 According to well placed banking sources, this afternoon’s massive Alliance & Leicester share price fall does not reflect any run on the bank’s deposits, either by ordinary customers or by other banks and financial institutions.
Like all banks, A&L is suffering from the illiquidity of the inter-bank market, but is much less dependent on other banks and institutions for funding than Northern Rock.
A&L itself believes simply that it has been targeted by hedge funds looking to profit from identifying the next banking victim, which have been short-selling the stock.
It and other small banks – like Bradford & Bingley, whose shares are also down sharply, though not as much – will remain vulnerable to this kind of negative speculation unless and until the Bank of England succeeds in restoring confidence to wholesale money markets.
I'm 
°ä´Ç³¾³¾±ð²Ô³Ù²õÌýÌý Post your comment
its just not the northern rocks, i am afraid property boom had already forced loads of financial institution to compromise on loan policy to remain on top of the business i.e there could be few more NR on the cards.. It is surely worrying time and crisis could really loom large on all of us.
The first REAL test for King, Brown and co in ten years,result,total catastrophe.
It is morally essential that the banks suffer for their recklessness. It is a pity that it isn't possible to concentrate the loses on the pockets of bankers making over £1 million a year.
You cannot blame savers who refuse to heed Alistair Darling's assurances that their money is safe.
After all, if banks around the globe no longer trust Northern Rock with their money, why should individuals?
Paraphrase "...central bank bailouts giving wrong message..."
Before you can fix a problem you must firstly correctly define and diagnose it. The problem in this case is NOT that this rinky-dink little bank is being bailed out, it is that this Northern Crock is slugging the entire market.
Hence- RESTORE MARKET CONFIDENCE, bail 'em out, but do it in such a way that the central bank gets control of the offending institutions, and can then divest the lemmings that bought America's valueless debts.
Could it be that the major banks, peeved at the Bank of England for not bailing them out, have got their own back, so to speak, by refusing to lend to Northern Rock, thus precipitating a crisis and forcing the B of E to intervene?? Or am I just cynical?
I think most people fail to recognise the seriousness of the weekends developments (including the Government and Central bank). The whole financial system is underpinned by a single concept - confidence in money. A large number of Brits (many of them old enough to remember the Great Depression), have just decided that one sort of money - the electronic NR variety - is too risky to hold, despite "assurances" from all officials involved. Newspapers on Saturday were wallpapered, not by Mervyn explaining how he would not allow a general bank run to develop, but by queues of those who don't believe him.
The government, citing their Regulatory "experts", don't understand that their credibility was shot to pieces by their obsession with spin and lies about Iraq. And the manager of the bank (bless) comes out and talks about customer relationships. And everyone has just learnt that Mervyn is more worried about "moral hazard" in the future, than to provide fail-safe guarantees about peoples savings today. The media seems to be mostly concerned about whether a sale of NR is likely (ie. will the employees and shareholders manage to recover something)
The people queuing up understand one thing that many commentators don't. It doesn't matter how much you wave a piece of paper saying everything "should be" ok. Runs on banks are in the mind, not on the balance sheet. If they are allowed to start, the piece of paper is worthless, it describes yesterday. The pieces of logic that are missing from the "assurances":
Your money is safe [..provided you all agree to leave it were it is]
Even if you want to get your money out, we can pay you [..provided that the markets don't also want all their money at the same time]
In any case, you shouldn't worry about other banks, this is an NR problem [..although the whole credit market has been doing what you are doing for weeks now, too all banks. And we won't tell you about any other wobblies we might know about].
In any case, we guarantee deposits [..but only up to 35k]
I challenge everyone to ask yourself one question: did you ever, over the weekend, even for a fleeting moment, question whether YOUR money is *really* safe? If you did, so probably did everyone else. That is a confidence problem for banks right there. Which is enough to start another queue the next time something wobbles, and a much bigger one. And this time it may be a real bank, that actually really needs its deposits.
The sad thing is that the whole thing is preventable. The Bank of England *can* guarantee deposits, it is not possible for it to run out of cash, because they print it. There is no moral hazard issue about lending a bank enough cash to pay out all its deposits, if the bank is solvent. If the bank is insolvent, it is too late to "teach it a lesson" anyway, and financial stability hugely overrides any such secondary aims. But the greatest beauty of it all: If they just provide the deposit guarantee, they will never need to honour it, as trust will be restored.
Unless Mervyn lines up for a photo shoot next to his money printing presses, and explains that he will print all the cash that everyone wants to withdraw, people will continue to worry. Which is very very very dangerous.
Bank run 1 - Mervyn 0.
It might be best if we all followed Corporal Jones sensible advice and didn't panic.
The panic is/is going to cause more problems than any issues facing the banks
You cannot blame savers who refuse to heed Alistair Darling's assurances that their money is safe.
After all, if banks around the globe no longer trust Northern Rock with their money, why should individuals?
How about we see The CEO and all his Directors lining up to put some of their cash into an NR account?
And how about, if all is so well, NR offers an interest rate increase for all existing customers to placet them?
Action do speak much louder than words!!
Why are customers withdrawing deposits?
To paraphrase what was stated on Ceefax over the weekend: If administration happens the FSA will 100% guarantee deposits up to 2000. For the next 33,000 it will guarantee 90%. Anything over would be lost to the customer and made available to creditors.
Given the volume of withdrawals one assumes its those customers with deposits over 33,000 who are shifting billions?
> It’s is wrong of me to be flippant.
No. It's not _you_ who is being flippant. It is those asking for bailouts who are lacking respect and seriousness. We must be resolute in our convictions that those who cause the problem must pay the full price. It will be far better in the medium and long term if we maintain a serious position through our dealings. Only then will miscreants think twice before engaging in anti-social activity.
Some muddle about compensation for savers. The 'book' solution is that for FSA regulated companies presumably inlcuding NR the fund tapers off at about £30K for any one investor in a company which goees broke. The pundits are saying don't panic but were not the Cheltenham couple who had £1M in NR right to worry? Could they not have ended up £970K short. Can you please clear this up?
JP
Re Northern Rock,unfortunately some bloggers comments as well as media reports have exposed a rather distasteful trait of the character of some of the British public, that of envy and hyprocrisy. So many are jumping on the bandwagon to vilify shareholders as if they deserve to be punished for "greed" whilst the bank depositor is the good guy, Surely, most people realise that a vast majority of the public own shares directly or indirectly through their pension funds, ISAs etc and that all shareholders are not fat cats so let's stop this sanctimonius hypocrisy, Without those willing to invest in companies, there would be no economy and the benefits of this which everyone enjoys. If we have a pensioner who deposits his savings in a bank but uses part of these savings to make prudent share investments, is be both a good guy and at the same time to be vilified as "greedy" ? A touch of envy here, I think.
What I don't understand is why Northern Rock and/or the Bank of England felt they had to go public about the application for a Bank loan facility and it being granted. Had it been kept confidential there wouldn't be the current run on NR's reserves, and hence the amount that the Bank will need to make available will now have to be higher. And in addition it has set a precedent - so not only will the Bank rightly be checking on the financial condition of other UK banks, but it has set the conditions for further panic in the event that there is even small cause for concern which otherwise could easily be rectified behind the scenes.
Post 5. I think that the FSA scheme is undewritten like an insurance - by industry contributions (not the Govt)... so has fixed (and finite) funds - there is therefore no absolute underwritten guarantee that those who lose ...in a wholesale meltdown... will actually even get the c30K limit.
Correct me if I am wrong - but I think this is wht the BoE / Govt cannot temporarily increase the amount to cover all potential depositor losses.
Deag.
Maybe.. But I now look forward with interest to seeing if they will step in to save the next MGRover that goes bust because the "City" won't invest in that either.... Or... is there simply one rule for the banks that overstretch themselves and another for the rest of industry?
I heard the interview, it made a lot of sense. and a broad, deep understanding of the situation, and yes a little passionate!
basically, as long as house prices hold up and keep moving, loan security is high, if people default on payments, the bank just sells the house clears the debt and makes a profit!!!
So what happens as in the US, where house prices fall...
US lenders had to go to europe to secure it's lending policy.... since house prices were falling and there 'investment' was at risk yes invesment, a house who's value was rising is a good investment and one against which you can loan cash..
Where will the UK go to secure its self if hous prices start falling.
And that is the time people should pull their cash from the sub prime lenders, NR are in a tough position and are by no means alone.
What happened in the US in the at the turn of the century.....depression hopefully not!
Mervin King has been concerned about the under-pricing of risk for some while now, so the reversion to norm should not be a surprise: it was only a matter of time and trigger.
My concerns are the Northern Rock matching long term liabilities with short term funding - a basic business error, as is growing too big too fast without sufficient working capital. Further, this institution was unique in the degree it practiced this, yet the Bank of England felt compelled to step in to prevent systemic failure. What is the systemic risk if this organisation was unique and is solvent & well run? So far I understand it has not had to call upon the funds anyway, despite a run of withdrawals.
It would appear that when the going gets tough, the Bank of England yeilds to pressure - cutting the interest rate in August 2005 and now assisting the Northern Rock not 2 days after a public statement warning of 'moral hazard'. How reckless does a bank have to be NOT to be bailed out?
One has to accept that the depositors of NR who are withdrawing their money are acting entirely rationally. Even those with under £35000 saved, who are covered by deposit insurance, will have to wait to receive their money if the bank fails (as seems increasingly likely).
Bad lending has become endemic in the system - Britain not only has its own sub-prime (self-certify mortgages), but valueless unsecured and credit card loans. We've all heard of the people who have lived by moving their debt around for years.
If the B of E does what Will Hutton wants then not only will it encourage bad lending and build-up greater problems for the future, it may well be inflationary and the B of E might have to undo all its 'good' work the very next month(s) with a rate rise!
What if the B of E has its credibility endangered? Its perceived trustworthiness will be a bulwark in any crisis. If it starts bailing-out too readily then we'll have an inflation problem and concomitant problems - we won't be able to duck the crisis.
I guess people withdraw all cash even if they have
After all ask yourself where will THEY (the FSA) get the cash to compensate all the savers, it will be an insurance policy underwritten by a number of banks, who in turn have probably also sold that risk to many other banks etc.....
Show me the real money, that's what people want.. just hope they get to cash there cheques in time and find some where safe for there cash.
It is Important that an example be made & Northern Rock is it !! The Shareholders have taken a real bashing on this due to total mismanagement from its directors, That has contributed to the vastley inflated property prices !! Many have been warning that the money for nothing gains would come to an abrupt end at some point...Now it is simply a question of how long & deep the property bear will be !!
Blah blah blah - wish I could Blah blah like Chris S - the sky is falling!
The other half of the story is what's happening to the surplus dosh that's not going into CP - if someone isn't buying that, he's using it on summat else, it's simply that one channel for matching lenders and borrowers has died. The net market liquidity remains the same, it just needs another route to balance itself out: in this case, through the Bank draining surplus liquidity to offset the NR extraordinary credit line.
However, if the cash is going elsewhere, the net increase in liquidity arising from that line is effectively printing money, and stoking inflation.
The classic argument that increasing interest rates keeps inflation down only works at low levels below 5%: the extra pain caused by a 1/4% increase above that level is imperceptible. Higher levels of inflation require a credit corset, not just a squeeze, and may also require public works to offset the resulting unemployment: we're going to need more Old Peoples homes, for instance.
Robert, please can you comment on the legality of the bank of england. Unlike the federal reserve, is it a legal entity?
Pat wrote that we should follow Cpl Jones' advice not to panic. The trouble is that the Dad's Army approach to crisis management is happening in this country yet again: Some run around shouting "Don't Panic! Don't Panic!". Others just keep saying "We're all doomed." In the end, there'll be an enquiry and its conclusion could all too easily be paraphrased as "You stupid boy."
Yes, the sensible course would be not to panic but, if the result of so-called fools is to bring about the undesirable and undesired outcome, then the so-called sensible course of action turns out to be the more foolish in the long run. I am sure that game theoreticians could explain this one better than I can but it strikes me that this is Prisoners' Dilemma played for 11 figure stakes.
Equitable Life was a case in point: those who got out first got most out; those who heeded the reassurances suffered savage cuts in their pensions. Could it be that the cries of "No wolf" are still ringing in the public's ears?
PS A cynical thought has occurred to me that the same government that refused to bail out Farepak's customers is effectively bailing out Northern Rock's. Heaven forfend, but could there be electoral considerations here? At the risk of stereotyping, I am assuming that NR's customers are more likely to be swing voters (or even just voters full stop) than Farepak's.
The comment by Chris S recommending that the BoE simply prints additional money as required to meet the current (and possible future?)crisis of confidence appears to ignore the detrimental effect this would have on the value/purchasing power of the Pound, leaving us all worse off. Is he advocating a deliberate policy of inflation to destroy the wealth of all?
The herd mentality may be irrational, but once it has set in, it is entirely rational for individual depositors in Northern Rock to want to move their savings - after all, in that particular merry-go-round, nobody wants to be left holding the baby.
wow, the share is so cheap now, I might consider buying some.
chance of a life time, it seems to me.
As ever you/they will deny it, but clearly the media could have covered this in a infinitely less sensionalist manner. To quote from the latest story on the ´óÏó´«Ã½ website: "... It's impossible not to feel a bit panicked after the coverage we've seen over the last few days."
Be very clear that this run on Northern Rock is as much a result of the tax and spend policies of Gordon Brown as anything else. His policies of encouraging ludicrously low interest rates to support private spending whilst he taxed the same peoples capital and spent it (as sort of DIY Keynsianism) and spent it very badly has created an overall economic situation that mirrors that for the banks and their customers. Gordon Brown inherited a strong economy set fair for good recovery and has enjoyed 10 years of plenty. But rather than reserve for the future he has created huge current costs and future obligations that we do not and will not have the resources to meet.
While the BOE can print an infinite amount of money to bail out any number of banks, they have a duty to remember that the laws of supply and demand apply just as much to money as any other commodity.
When they print the stuff, they are literally transferring wealth from one section of society, to another.
My wages don't increase with the money supply. They rarely even increase with RPI inflation. When you print money, the value of your money in the bank goes down. The value of your wage packet goes down. That value is transferred to other commodities, they become worth relatively more. Those who have money in those commodities are basically given your cash.
The irony of Will Hutton's comments are that printing money, makes poor people poorer and rich people richer. It's expedient, but not the solution to the problem.
You are absolutely correct in saying that the scenes of people beseiging the Northern Rock offices should not have taken place.They appear to stem from the fact that British people no longer believe what they are told by officials or politians. In the end financial systems depend on the trust shown on our bank notes"I promise to pay the bearer on demand".When that trust is perceived to have been compromised in any way then the future is uncertain.
One more thing I refuse to believe that we have one of the world's strongest economies,we are too reliant on foreign capital for that to be the case.
confidence - only my guess but wouldn't NR have had to go public about the loan as it is a plc and thus would be required to make some kind of statement to the Stock Exchange?
BoE money is taxpayers money and shoudn't be used to bailout reckless banks and investors. If NR commercial papers are not trusted by other banks as they are based on bad debt and may be worthless, why BoE should accept it as a collateral for our money?
The silly, unfair game of the last decade has to end. Good old fashioned banking has to come back and this country's dependence on financial services has also to end. Richness should not accummulate in the hands of speculators but be earned by hard honest work.
I am with protecting ordinary people who deposited money in NR but not with bailing it out as an aggressive financial institution which conducted its business with no thought of consequences.
A banker replies, to address some of the issues raised.
1. As the BoE and the Thresaury were committing public money, the public has a statutory right to know
2. there were no bankers earning £1m+ per year at the NR except the CEO and he might well lose his job - possibly without his contractual compensation. However bringing other bankers into it smacks of jealousy not rational thought
3. the couple having all £1m of its saving in one place could lose the excess over £35k - but one might question why they have so many eggs in one basket
4. the likelihood is that the investors (not savers) in the bank will lose their money - the question for the BoE and FSA is what they do about regulation in future
Banks willfully lie to customers to suit themselves and maximise profit. Politicians apprear to wilfully mislead the public to suit their own agenda.
Is it any wonder that when the PM and the head of Northern rock say "Don't Worry its all fine" that those with half a brain cell interpret that as Get the money out quick!
Isn't it time the FSCS was increased from £31700? This is a relatively small sum and growing smaller compared to inflation in the value of the banks' property assets. If they were compelled to keep safe say 50% of the average house price (£100k) they might not be so quick to look at these dodgy money market deals.
Andrew
The BofE had to go public:
a) their support is a material fact for shareholders. To have kept it secret would have created a misleading market in the shares - especially as
b) the fact would almost certainly have leaked out from changed behaviour by NR in the money markets. News coming out in that way would have created much greater uncertainty.
c) The BofE was probably more worried about institutional behaviour than whether retail depositers waste their time queueing or waiting on line to take money away from a now very secure place to put it in one slightly less secure.
I agree with you about guaranteeing deposits in all banks: first, the existing scheme is funded by banks and financial services companies, not tax payers. Do we really want tax payers to stand behind all financial services companies? Secondly, providing guarantees without question would encourage risky behaviour (I mean very risky behaviour, more than we have seen). Thirdly, they were right to try to ensure losses fall on the owners (shareholders) of NR, not depositors.
The BofE probably could have done a bit more sooner in some technical areas in the money markets, and I am sure they could have tried to explain what they have done a bit better, but so far most other things they could have done would probably have had a worse long term outcome.
Robert Peston says:-
"There is an important debate to be had about the response of Bank, the Financial Services Authority and the Treasury to the crisis in financial markets"
The first objective of The Financial Services & Markets Act is for the FSA to maintain "Market Confidence".
Market confidence has been blown to pieces and replaced with high anxiety.
How has the Government, the BoE and the FSA allowed Northern Rock (and maybe others) to trade without any proper strategy in case of disaster ?
Who is next to join Northern Rock - Alliance & Leicester ? Bradford & Bingley ? etc.
Please note:- It not the Government, the Bank of England or the FSA which covers the first £35,000 of savers deposits. This is covered by The Financial Services Compensation Scheme (FSCS) which is wholly funded by the financial services industry. Any claims to the FSCS will ultimately be paid for by every customer with higher fees and charges.
I noted Northern Rock were sponsors to quite a number of teams/events. They are now ready made to sponsor "The Great North RUN" !!!!!
Perhaps the Chancellor could learn a lesson from the Tory's handling of the BSE crises and force his daughter to publicly open a Northern Rock savings account and put all her pocket money in, to prove how safe they are...;-)
I think it is important to differentiate between the quality of loans on NRs books (which is effectively what is being used as collateral for the Bank of England loan) and the quality of loans in the US sub prime market that has caused money markets to stop lending to all mortgage providers.
It is important to us that the Bank of England emergency loans should not be made against collateral on the US mortgage marketed because then the British tax payer would effectively be buying junk bonds, which is what the ECB and Fed seem to be doing.
I cannot agree more with Chris S(11.15)
This has been very badly handled. An absolute guarantee by the Government should have been issued, not the wishy washy statements so far.At first I decided not to panic but have now requested nearly all my deposits be returned. One, my deposits were in excess of the safety net and secondly, because some of my saving was in the form of a bond which it has been suggested here would not be covered by the guarantee.
There also seems to be a background of opinion that silly old pensioners like me should not invest with "dodgey " banks and if it all goes wrong "serves you right"
I did not know that in this country there was any thing like a dodgy bank,
and if there is what are all those regulators doing. Are we supposed to turn to the mattress like my Granny did?
Andy (comment 23) raises an interesting point - if the whole premise of shareholder capitalism is that the shareholders are able to exercise proper scrutiny over the activities of the management of the company, but in real life shareholders aren't equipped to do that, is shareholder capitalism a viable way to run our economies going forward?
The fact that NR have little exposure to US subprime makes it clear what is happening. If other banks have declined to lend to it, it is not because of a foolish, IKB-style punt into mortgage paper markets thousands of miles from Newcastle. It is because they have lost confidence in the value of NR's real assets - UK properties. If those banks think UK house prices are tanking, and if they are right, no amount of soothing words from the BoE will help NR and its fellow mortgage banks. It reminds one of the words of the Titanic's Chief Engineer, soon after it hit the iceberg but before anyone had an inkling of what would happen, "It is a mathematical certainty this ship will sink". Nobody should blame NR's depositors for scrambling for the lifeboats.
Robert Peston's breathless reports on the daily news are doing little to restore calm. Get a grip ´óÏó´«Ã½!
Despite the internet being awash with people who think, with the benefit of hindsight, that they know all the answers, and who is to blame, and what should have been done, I’m afraid we have to step back a little for the true culprit.
Yes, my friends, it is the eternal struggle between fear and greed. The changing equilibrium between these primitive forces dominated the loans to sub-prime borrowers, the motivation of the borrowers, the burgeoning market for credit derivative instruments, the collapse in value and liquidity of those instruments, the collapse of the interbank credit market, the actions of the BoE, and the behaviour of NR depositors.
All of us are to blame, because we are all greedy and fearful humans. Anyone who says they are not to blame is not only greedy and fearful, but lacks insight as well.
In my opinion the initial reporting of this has led to a massive exacerbation of the problem. Mr Peston, your own initial TV report on the loan from the BofE just kept repeating to the effect that the BofE wouldn't have loaned the money if they thought the Rock was a bad risk. What you should have been telling the country was that the loan was a loan to allow Rock to continue LENDING (not trading as was the inference a lot of people took). In other words the prognosis was a drop in profits from the Rock, but no risk to existing savings or lending.
From that mistake the rest follows. People took the loan to be one to keep the company afloat.
It's no use blaming the regulators since their message has to come through the media which messed it up on day one, but then "company borrows from more expensive source to continue business as usual" is not as sexy as which is so much more tabloid.
A business I am close to customises diesel engines for power generation, boats etc.
Four weeks ago the business could get working capital without problem, now there is a problem.
This is not mortgage banks tightening up but front line Scottish Banks and established businesses. It is difficult to get capital at present.
If this problem is allowed to continue it will cause serious economic damage. The Europeans and the Americans have injected liquidity, this is the reason for it.
The UK has not injected enough into the system to ease the problem.
I dont think the system can sort itself in the short term.
Withdrawing cash from your bank is not immoral or anti social behaviour. It might speed up a drop in confidence with Northern Rock and cause panic. Therefore might even increase the risk that you will not see all or some of that cash again. So could be described as rather stupid. Especially considering the Bank of England are prepared to bail out NR. But like large corporations and financial institutions, individuals are selfish are only care about the cash they have and how to get their hands on it again and to me thats fair enough. I'm not saying cash will run out like fuel. But during the fuel crisis I would have filled up so I could get to work, wouldn't care if I was causing part of a panic (as long as fireman and ambulance people had reserves!) but thats not really my problem. If the people do not know any better and want to queue now it is unlikely they ever will so let them get on with it. It's not up to us individuals to use our own common sense or morals to help reckless and moraless coporations,institutions or banks who's reckless mismanagement of other peoples money has caused them problems. The people running this have power and ridiculous salaries, but as usual, as with policitians there is no accountability. I might change my mind if the bank of england will pay off my own mortgage if I ever get into trouble?....
My concern is why banks are not lending. Could it be that they are having a second look at their current loan portfolios?
My guess is that Northern Rock is an unlucky recipient of wider issues lending banks have stored up.
PS this is not a bailout with public money. The BoE is creating liquidity/money supply by creating a loan with NR which has to be paid back. No taxpayers money is used.
My concern is why banks are not lending. Could it be that they are having a second look at their current loan portfolios?
My guess is that Northern Rock is an unlucky recipient of wider issues lending banks have stored up.
PS this is not a bailout with public money. The BoE is creating liquidity/money supply by creating a loan with NR which has to be paid back. No taxpayers money is used.
Point is, you can't actually trust what the politicians and the bankers say.
Darling - Remember him with the railways thing? Bearing that in mind would you trust what he says over this? You would be foolish to do so.
The Banks - They are not likely to tell the full truth. they will minimise evrything they say and try to put a gloss on things.
Every body knows this, so the more Darling and the banks open their mouths, the less likely they are to be believed. Conversly, if they don't say anything, people will assume the worst. Bit of a lose-lose situation.
Reality is that NR's situation is probably worse than we have been led to believe, but not a total meltdown.
A great opportunity missed?
NR say they are not sub-prime lenders, but all indications are they have been very irresponsible with there lending (ie sub-prime).
I see this whole episode as a great opportunity missed. If NR had been allowed to collapse naturally without the BoE help, it may well have signalled to the other lenders that irresponsible lending was no longer tenable. If this had then caused mortgage lenders to be more responsible and say maximise borrowing at 3x earnings it may well have had a knock on effect in the housing market by making borrowing harder and possibly reducing house price inflation.
I'm no financial expert - so please let me know where I have gone wrong in my thought process.
With the Governor of the Bank of England blaming the rating agencies, and the banks blaming the B of E, and the Government blaming the banks, isn't it time that responibility was placed accurately?
Government is charged with providing a secure environment for both people and banks. If we had rules that ANY credit required a 20% cash deposit; house, car, household, whatever, then people would consider their wants and needs, and the banks would be safe. Stability is much better than boom & bust!
Am I missing something? I understood that Barclays had to apply for emergency funding twice in the last month and yet no one is withdrawing their cash. Allied to that is the fact that they are in a very public takeover bid of ABN, presumably financed by borrowing .... what am I missing?
The FSA deposit insurance is some type of insurance scam. The first £2000, then 90% of the next £35000, then you nothing because you drop behind the other creditors. Excuse me, that is my money that I put in the bank to look after for me. They play with at their risk not mine!! The value of shares may drop is a known risk. I don't see the warning - you may lose a wedge of your money if you deposit it here and we play silly devils because we are a bunch of incompetents - when you open a bank account. Or is this a new warning that should be displayed on all adverts for bank accounts?
Presumably there's only so much cash you can keep under your mattress, so where is all the cash going that NR depositors are withdrawing? If they've lost confidence in the banking system what do they do? Where is a safe haven? Any advice from all you experts out there.
Bill
Post 15: More subterfuge, smoke and mirrors, while seeming to fix a short term problem, will only ever lead to larger problems later. (There's a common theme here...) Openness, transparency and honesty will keep medium and long term problems at bay, as will responsible financial behaviour. It is a lack of these things across the board (financial institutions and governments in particular) that has led to the problems we are now facing. It’s time to come clean and face the music now. Finding ingenious ways of putting it off will only make it worse later.
northern rock.
like too many companies, the independent board did not work.
i worked for such a company which allowed "men of vision" too much unsupervised laxity. my company no longer exists.
one man's vision is another's nightmare.
directors of these companies should be disqualified from holding directorships. i do realise the "old boys network will ensure that wont happen.
The solution here is blindingly simple - take all your money out and use it as a deposit to buy another house!!!! Houses will always go up in value (at least 10% year on year) so you will actually end up richer - and your mortgage application will help revive the lending industry..... who needs the B of E.
In responce to posts about why the Chancellor went public about NR having this credit facility.
It's taken foot and mouth of the news agenda where if they found a link between the new outbreak and the original it would show Labour's quarentene and protection measures didn't work.
me, cynical, never.
Mr Peston, I wonder if you are embarrassed or even a bit worried for your sensationalist coverage which has in large part been responsible for the current crisis?
At a seminar at the EBS in London 3 months ago I pointed out to the FSA and the EU representative present that the current events were likely to occur. My views were dismissed, especially by the EU, as alarmist nonsense.Mr Peston is quite correct, not only should NR be allowed to fail as a quoted company, serious questions need to be asked of the FSA as to why they were not aware of the looming problems. Did they know anything at all of the abysmal quality of the assets hiding behind ABCP. Also why and how do senior managers at investment banks allow their staff to sell SIV lite structures 70x leveraged? If they were not aware of this why not?
I am afraid that the demographics of current market participants also frighten me. Most of the senior managers in both trading and more worryingly in Credit Committees have no insitutional memory of a bear market-the outcome of which will be a knee jerk reaction of cutting credit lines to SMEs to hoard capital to take these valueless assets onto their balance sheets. Senior bankers need to reflect very carefully on the conswquences of actions that have, to my certain knowledge, already begun.
There seems to be a tone in many of the comments that the Bank of England shouldn't bail out NR and the shareholders but it's OK to protect the savers.
Surely you cannot have one without the other. If the B of E doesn't offer borrowing facilities the panic could spread to other institutions - Alliance and Leicester? Bradford and Bingley? etc.
NR is dead as a future business because of the loss of confidence and the risky business model. But it's current balance sheet makes it viable as a takeover target. Let the market decide it's share price and hopefully maintain the confidence in the savings market as a whole.
Hi,
I would just like to take this opportunity to thank you and all of the other tabloid sensationalist journalists for turning a non-event in to the worlds greatest ever catastrophe.
Thanks to all of this panic I have been able to buy hundreds of thousands of options for the price of a glass of water. I would therefore like to say thank you for funding my retirement - and I'm only 25!
Like the old adage goes:
"Be fearful when others are greedy and greedy when others are fearful"
Is this not the obvious outcome for an industry that has had it's own way for far too long at the expense of Joe Punter? NR is at the risky end because all it's profit derived from the difference it purchases money at and what it lends at. What all bankers call margin. Totally different to what we in the maunfacturing sector call margin when we add value to an object or process. Surely more banks who have low rate ,fixed rate mortgages will follow NR if interest rates rise and find that their cost of borrowing increases.
There may be an argument that NR should be allowed to collapse,the billions being taken out will probably not used be for stuffing mattresses ,but will help other banks liquidity!
At so many levels this situation is insane.
Does anyone really think the banking system would allow NR to run out of cash to pay customers? What would be next? I would be asking to be paid in cash, weekly, in my hand for a start - and so would everyone else I imagine. Next time HSBC closed a branch or Barclay's made someone redundant there would be rumour that they were cost cutting because they were having financial difficulties and there would be queues in every city in the country.
These are global businesses, so a crisis in Britain would taint them world-wide.
Their only option is to stand together and then pick over the bones of the fallen in private.
There were reports over the weekend that NR was being approached by another bank with a view to a takeover but that the B of E had rejected this on the grounds that it would destabilise the banking sector - if this is true then how much more destabilising can the current predictament faced by NR be to the wider financial markets and their clients?
At so many levels this situation is insane.
Does anyone really think the banking system would allow NR to run out of cash to pay customers? What would be next? I would be asking to be paid in cash, weekly, in my hand for a start - and so would everyone else I imagine. Next time HSBC closed a branch or Barclay's made someone redundant there would be rumour that they were cost cutting because they were having financial difficulties and there would be queues in every city in the country.
These are global businesses, so a crisis in Britain would taint them world-wide.
Their only option is to stand together and then pick over the bones of the fallen in private.
I think it's wrong to say that Northern Rock is a victim of a temporary credit crunch only.
We were thinking of opening a Northern Rock account earlier this year, and looked at their website, and decided against it. They seemed to be lending any sums to any Tom, Dick or Harry with bad credit ratings.
When Northern Rock says now in its statement on current market conditions that, "Northern Rock remains a prime-only (high quality) UK residential mortgage lender."
That seems to be to be untrue. On another section of their website, they say, "We can now offer you and your clients a full range of sub-prime mortgage products from Niche Prime to Unlimited – a wide choice designed specifically to meet all of your needs."
Those two statements are in flat contradiction.
Northern Rock seems to be a chancy business, and we decided not to put our money in it.
The BoE has made an investment in NR. a risky one but an investment all the same.
The BoE has full control over the security of that investment through base rate % control measures, which in turn determine how well the housing market is doing and whether the home owners are able to continue making loan repayments, but balancing that with house price inflation to ensure there is a get out, ie sell home of payment de-faulter...
If house prices continue to rise or hold, there is no problem with NR or any other lender (locally i.e. UK) unless that lender is already feeling the pinch from US sub-prime.
ever wondered why there is a reluctance to build more homes....supply demand, inflate house prices to keep all the sub-prime lenders in business....
Around 11.15 this morning Northern Rock's Director of Operations took questions on 5 Live. Well if her performance was a yardstick for judging this bank the future is looking bleak. The narrative went along the lines that the bank has been a victim of turbulence in the money markets and that the Old Lady had provided an overdraft facility. I am sure Mr Hutton would love the choice of word; victim. No mention of the cavilier dash for growth by the senior management during the earlier part of the year using a business model which was based on lending from the very markets which have now picked upon the poor old Northern. No mention of self validated mortgage applications, were there any? If yes how many. With politicians starting to get restless and the share price in meltdown it can only be a matter of time before the inevitable takeover occurs. Even at this early stage I think that there is a strong case for a public review of what has been happenning at this bank during the last six months. I repeat my call for a thorough investigation of trading in the shares of the company. This might help to calm investors if they see that the directors and senior executives have taken a big hit. But we need transparency and fast. This bank has nobody else to blame except its own business model.
Is it the authorities' fault that people are panicking and causing the very problem they fear? No. It is the fault of the people queuing up.
Stop indulging people and start giving them some home truths. Tell them that if you panic and destroy Northern Rock then it's your fault if anyone else loses out.
Stop always telling people that it's actually "the authorities" or "the politicians" who are really to blame.
Northern Rocks own sub-prime lending will also sink it.. Dont believe this "good quality" loan book stuff.
5/6/7 x salary lending - thats sub-prime
125% lending on the notional "value" of a house - thats sub-prime
self certification of earnings - thats sub-prime
and how many other banks have done the same?
I too believe that Robert Peston is partly to blame for this difficult situation. True, Mr Peston did not cause the issue itself, but his reporting and subsequent comments I felt sensationalised the whole situation.
The recent article about Barclays on the ´óÏó´«Ã½ news website was also sensationalist and I complained at the time saying that it would cause a run..
Now my prediction is right, though in this case it was NR.
I think the Media should be more responsible in their reporting - and in this case being too Open doesn't help anyone.
Mr Peston I hope you think about the employees/customers at NR & other banks before you create any future storms!
Re Northern Rock.
Surely the Government and / or FSA are at fault as their regulatory financial ratio requirements that they apply to banks cannot have been appropriately prudent. I think the Government and / or FSA should now publicly commit to refnd money to all Northern Rock customers who apply to them direct for reimbursement, if and when this may be required. This would permit Northern Rock to pay the penalty of its own imprudence.
Geoff.
Where in this very predictable (from a banking point of view) situation is the Central Banks supervisory department?
wootton
It is absolutely essential to the health of the UK's financial system and economy that financial recklessness, especially by banks with other people's money, should cause real losses to the managements responsible and the Investors who back them. Otherwise risks are seriously mispriced and capital mis-allocated. The Bank and the FSA have thus been quite right to protect the depoisitors but not the management and investors. As for Hutton's ideas - does he really think the Bank of England should take on "commercial paper" that other banks won't touch?!?
Isn't it interesting that the three institutions that you would expect to know what is going on and take preventative action (Government, FSA and BoE) once again show how completely inept and out of touch they are. Endowments, Pensions, Tax etc. they are a total waste of time. The only people who seem to know what to do are the British people.
The media in general should have a lot of blood on their hands for the situation that NR now finds itself in.
Having read and winced at the self congratulatory nature of the author of this article both on ´óÏó´«Ã½ News and online, no balace given to the fact that NR asking the Bank of England was actually sound business sense.
No. What the press did instead was stir up a hornets nest of panic and hype. In one Saturday paper I laughed out loud as one desperately tried to compare Northern Rock with Barings crash. Please!!
The only winners here will be canny investors holding out for NR shares at rock bottom, or another financial institution who will get NR's mortgage book for bottom dollar.
Good work, the media. Thanks in advance for my higher mortgage payments.
If the Bank of England is supposedly independent how can Alistair Darling claim to be authorising it's loans to Northern Rock?
It makes me laugh to see the vitriol aimed at bankers and those thinking that NR should go to the wall to serve as a warning to those in the industry. If NR goes to the wall, the likelyhood is a couple of others will too. They will go because of lack of cashflow, not lack of long term profitability. In the meantime in order to get anything back for the stakeholders(savers and investors) the assets (including future cashflows against mortgages) in the immediate term, there will be a firesale. Now the beneficiaries of this firesale will not be the mortgagees. The purchaser isn't going to turn around and say - hey, we bought your mortgage for half of the amount NR lent you - take a 50% reduction in your repayments no they are going to make twice as much as NR would have done anyway. So who are the winners - thats right - Bankers - a small number of individuals will make a company billions and trouser millions personally.
Hmmmm... call me an old cynic but I am sure this is manipulaton by Media to ensure a quick and easy takeover by a larger Institution at a much reduced rate - just look at the share price wont have to fork out millions to Investors for the priviledge now and Investors not likley to oppose one now still the share price is now so tempting to have a little dabble
As usual the press have talked up a small problem which has now evolved into a crisis.
NR was not insolvent and was not in trouble. It had a liquidity issue which needed funding by the BoE as banks do all the time in the markets and so it was arranged. Until Friday, NR hadn't even drawn down on the funds.
Talks of runs came from the press along with 'going bust', 'crisis' and their other favourite 'recession'.
You, yourself talked on Thursday evening of an emergency loan (which it isn't), of the bank being in trouble (which it wasn't) and the markets being scared (which they weren't).
The press has a lot to answer for and if NR goes bust - I hope the regulator comes looking for you.
John (85) I think you have partially hit the nail on the head, the media and the usual British inability to think for ones self has brought this problem on. While there were perhaps flaws in the NR business model, they were only doing what the city wanted... Also until the recent problems, which many are experiencing they were successful.
There were a few warnings about NR a couple of months ago, and it seems they did start reducing their new lending. However it is with some irony that NR is now the victim of reckless lending by other institutions (who are no longer willing to lend) while at the same time having among the lowest mortgage default rates in the UK - about 1/2 the average. As ever though the city fat cats and short sellers will continue to milk what cash they can out of the situation.
One amusing this is that a few months ago many analysts were saying "buy shares in banks" they are the safest bet - now across the board they are falling. So much for the advice of the so-called experts!
The EC Basle Accord and Sarbanes Oxley in the US govern capital allocation banks need to make according to risk weighting of their lending book. Northern Rock has been allowed to lend (and hence grow) at an irresponsible pace - buying money in, lending it out and selling the debt on. They've been caught out because there is no source for new funds (except BOE) and no market to sell debt on to. Its a flawed business model and its quite obvious when you look at it - the availability of money is a commodity and their business model took no account of constrictions in the money markets due to lack of confidence in general. This will only end when we know the extent of what appears may be fraudulent risk weighting by banks in the US and a "plug" of regulation prevents a recurrence. The UK government is also to blame for allowing this and supporting a negligently operated bank. There is no clear exit or end and that is why depositors are queueing down the high streets. The BOE and government would have done better to nationalise it and reign in lending policy and and give confidence to public in one swoop. Only way out now is private sale, NR will be sold for c10% of its market capitalised value earlier in 2007. Every 20 years or so we get a complacent chancellor who has had an easy ride and doesn't understand banking economics - last time was BCCI, this will be bigger. Watch A&L and B&B.
62 Gary E wrote:
"Houses will always go up in value (at least 10% year on year) so you will actually end up richer - and your mortgage application will help revive the lending industry..... who needs the B of E."
At least 10% year on year !!! - sounds like another get rich scheme to lead the herd in to ! This is the best joke / laugh I have had to day from a 'pint of beer expert' - another one who knows the price of everything and the value of nothing !!!!
#46 peter f. _is only partly right. NR's problems stem from the fact that everyone else in the moneymarkets won't touch the US sub prime bonds etc with a barge pole and as a result wont lend money sort term to fund ant morgage market, but look at Alliance and Leciester and Bradfod and Bingley. They don't lend to that market. They are catching NR fallout because their assets are UK morgages on UK properties which are atleast 30% over valued. The UK housing market is slowing down now big time (I speak an estate agent in suffolk with little to do other than watch the current crisis on my computer screen) Where NR has gone, these two , A&L and B&B, would be my bet to soon follow.
All the reporting that I have read or watched has been biased.
For example I only see people on the television who cannot get online. I don't want to be on the television but I'd like people to know that I got online four times on Saturday 15th August and made four transactions involving two separate accounts.
Futhermore if its correct that the Chancellor says our money is safe why do we need to worry. He cannot be more unequivocal than that.
I would like to know the relationship between Northern Rock and IVA's
Tracking back through documents of the relationship might give a clue to the date things went towards Queer Street.
COE must have issued change of orders on IVA's weeks ago.
Maybe my thinking is wrong?
I quess these Watchdogs I keep hearing about have checked that angle.
A kingsom to be in Mr Kings Office at BOE.
Robson.
My brother says he can hear the footsteps of the SFO heading towards their Laptops.
I believe their not too good these days.
Robson.
Robson.
alliance and leicester and bradford and bingley have kept buying back their own shares up to last friday. so presumably their directors are confident they aren't in the same boat as northern rock. but A&L down 15% today ??
If NR does get sold off I don’t think that the computer system will be worth much!
A&L and B&B have both been buying back their own shares up to last friday. presumably their directors are confident they're not in the same boat as northern rock. but A&L down 15% today ??
Here here, John Doyle
No one has a crystal ball, but it is arguable that the BOE should not have pumped money into NR unless it had a takeover bidder in the wings. The current run on funds is much more serious than official spokesmen from NR on the BOE are admitting. To bail out the bank so publicly without an angel on the side is was bound to unnerve the average depositor. "The money is perfectly safe, it's just that we don't know what direction the bank will take in the future..." was the subtext detected by depositors. There is a risk that other lenders will be hit by runs (smaller) as their share prices plummet. Moreover quite a number of investors, personal and fund-based, have taken big hits in the contract-of-difference (CFD) market which is putting added pressure on liquidity (as many are finding it hard to cover their positions). And of course many of the CFDs took positions on the very financial stocks that are slumping at present. I am gloomy abot credit policies in the aftermath of NR. Both the Eurozone and the UK have become relaint of cheap ready credit to fund consumer spending, and investment. Rates will remain relatively stable but the restrictions on credit will multiply enormously. Necessary in the short to medium term, but it will push up unemployment. By the way, my prediction for the Fed tomorrow is 50 basis points. If it goes to 75 basis points, the markets will sense a ferocious looming crisis and we can expect huge trading volumes to occur as more 'securitised' pare is dumped.
What about the moral hazard issue? If you bail out one bank that made poor decisions, then other banks won't be as cautious in the future because they know that if it all goes wrong, they can just run to the Bank of England. Bailing out one bank just sows the seeds of more bailouts in the future.
Small depositors should have their money guaranteed, but the bank itself should be allowed to go bust, if it comes to that.
Northern Rock savers have shown the power of savers and its impact upon Banks if they all choose to take their money out, could we try Barclays, HSBC, Bank of Scotland etc and give them a wake up call. Why stop there, if nobody shops at Tesco for a week, does not buy a new car for 3 months and buys no petrol, by- pass the Congestion Charge etc we could do some damage.
Business cannot survive without our money yet we allow ourselves to get ripped off - a revolution may be around the corner.
It's not surpising people are getting their money out asap - it is all about trust - would you trust any government minister or the head of a central bank about anything these days - either side of the pond - given the lies about the Iraq War.
Simon @ 55 above: Northern Rock has a very solid mortgage balance sheet. It has quite a low proportion of subprime loans and a low amount of arrears. It is quite a responsible lender.
However, the problem is that it has overexpanded the number of those responsible loans it made. Thus, it has been *borrowing* like crazy from the money markets to fund those loans. It has a much higher ratio of loan to deposits than the other High Street banks, so to fund the loans it needed to borrow by issuing securities. With the market for debt securities in meltdown, NR couldn't do that at all. It's not just a temporary liquidity problem of not being able to cover the day's liabilities (as the other banks have - who would have paid back the BoE within a day or two), it's a liquidity crunch that has lasted several weeks that it could not unwind until it was able to borrow again. So it had to go to the BoE, and ask for unlimited credit at "penal" interest rates - this will mean at least one percentage point above base, leaving barely any margin on its standard mortgage rates.
In addition, its brand is now toast. It's a complete Ratners. Would you trust your money in such an institution?
Northern Rock was a fairly responsible lender. Its problem is that it has been a reckless borrower.
As for those who suggest that the reporting has somehow caused this run: what do you propose? That the BoE and NR sat on this news for several days in the hope it would go away? That is highly illegal under insider trading laws. That the ´óÏó´«Ã½ stuck it in a ten second item at the end of the bulletin? "...and the cat was reunited with its owners. In other news, Britain's 5th biggest mortgage lender is being bailed out by the Bank of England, but there's no cause for alarm. Good night."
Linda Brewer - no matter how cynical you are, markets are far more cynical. Market traders are in it for only one thing - to make money. If any of the traders thought there was a chance of making money by buying the shares, they would do - and if enough thought the same, the price would recover. However, as people keep withdrawing their deposits, the price will keep falling.
I'm very sorry to say that Northern Rock will be brought down not by its actions in the market but by those of its own customers. What will save it is the uncertainty which is around with regards credit and this will mean that potiential buyers, seeing an absolute bargain, will not be able to raise the capital.
Who is to blame for this panic? Step forward Mr Robert Preston with your alarmist reporting of a very dull and unimportant story.
If the Chancellor and the Governor genuinely thought that the grant of the line of credit and the statements they made would reassure investors, their judgement has been proved to be embarrassingly faulty, as they have in fact created such panic that Northern Rock is no longer a viable name for a bank. At first glance, it has to be seen as incompetence when such senior figures take action and it turns out to have an outcome the opposite of that intended, but in fact it now looks so obvious that the demise of the bank would be the consequence that one wonders whether incompetence is a plausible explanation. Could they have actually been prompting this deliberately out of concern about Northern Rock’s strategy?
This is not rocket science.
When you go into banks they are always trying to sell you something
so they are tempted to sell/give mortgages to people who really cant aford them, all about a wee bit of greed from the Banks and people of that ilk, the old Building society system you had to be a member and prove you were a good risk before they would lend you money
It's not surpising people are getting their money out asap - it is all about trust - would you trust any government minister or the head of a central bank about anything these days - either side of the pond - given the lies about the Iraq War.
The real shame in all of this is that a great many people are closing ISAs (and losing their tax-free status for the future) instead of transferring them, and people are closing long-term bonds and paying early-closure penalties... due to fears stoked by a media hungry for a dramatic story.
The fact is that most people do not read Robert Peston's column or much financial news of any sort - when they read the words 'cash crisis' or 'emergency loan', the words 'crisis' and 'emergency' have far more extreme connotations in their minds than is intended (or *should* be intended).
I've just read three articles from different newspapers and I've lost count of the number of times I've read the words 'collapse' 'freefall' 'emergency' 'crisis' etc.
Unnecessary pictures of people queueing outside branches caused people to rush out and join the queues. Endless quotes in articles from people standing in those queues echo unfounded fears... journalists may think they're 'capturing the mood' but they're failing to put it into any context.
Anybody else remember the old story of Orson Welles beginning a breadcast of War of the Worlds on American radio by saying the martians had invaded, not realising that his unsophisticated audience took his use of language more literally than he did (everybody left their radio sets to ran about in panic, expecting to see the little green men arrive)?
The debate is raging as to whether the Governor of the Bank of England should or should not have lent to the sinking Northern Rock. That is indeed a relevant matter, but no one seems to be asking why the BoE permitted and approved Northern Rock's banking model.
It is the task of central banks to supervise their national banks, and one of their functions is to check on whether a bank is not doing something unwise, such as borrowing short and lending long.
If I understand it correctly, Northern Rock has been employing this very strategy for some years now. We all now agree this was not very clever, exposing its shareholders and depositors to excessive risk. So, what was Mr King and his merry men doing all that time?
IMHO the reason the credit crunch has happened now is that worldwide light sweet crude production peaked in May 2005 (EIA figures) and consequently from here on in and forever the 'extra' energy available every year will decline.
Not a problem for life on this planet, not even for people, but definitely a problem for any economic systems predicated on growth and currency creation through debt (which requires growth to repay)
This is not rocket science.
When you go into banks they are always trying to sell you something
so they are tempted to sell/give mortgages to people who really cant aford them, all about a wee bit of greed from the Banks and people of that ilk, the old Building society system you had to be a member and prove you were a good risk before they would lend you money
The real shame in all of this is that a great many people are closing ISAs (and losing their tax-free status for the future) instead of transferring them, and people are closing long-term bonds and paying early-closure penalties... due to fears stoked by a media hungry for a dramatic story.
The fact is that most people do not read Robert Peston's column or much financial news of any sort - when they read the words 'cash crisis' or 'emergency loan', the words 'crisis' and 'emergency' have far more extreme connotations in their minds than is intended (or *should* be intended).
I've just read three articles from different newspapers and I've lost count of the number of times I've read the words 'collapse' 'freefall' 'emergency' 'crisis' etc.
Unnecessary pictures of people queueing outside branches caused people to rush out and join the queues. Endless quotes in articles from people standing in those queues echo unfounded fears... journalists may think they're 'capturing the mood' but they're failing to put it into any context.
Anybody else remember the old story of Orson Welles beginning a breadcast of War of the Worlds on American radio by saying the martians had invaded, not realising that his unsophisticated audience took his use of language more literally than he did (everybody left their radio sets to ran about in panic, expecting to see the little green men arrive)?
Hmm 50 pence per share rise in price for northern rock since lunchtime. Looks like a few city boys feel like a punt now they've had a good lunch :o)
The real shame in all of this is that a great many people are closing ISAs (and losing their tax-free status for the future) instead of transferring them, and people are closing long-term bonds and paying early-closure penalties... due to fears stoked by a media hungry for a dramatic story.
The fact is that most people do not read Robert Peston's column or much financial news of any sort - when they read the words 'cash crisis' or 'emergency loan', the words 'crisis' and 'emergency' have far more extreme connotations in their minds than is intended (or *should* be intended).
I've just read three articles from different newspapers and I've lost count of the number of times I've read the words 'collapse' 'freefall' 'emergency' 'crisis' etc.
Unnecessary pictures of people queueing outside branches caused people to rush out and join the queues. Endless quotes in articles from people standing in those queues echo unfounded fears... journalists may think they're 'capturing the mood' but they're failing to put it into any context.
Anybody else remember the old story of Orson Welles beginning a breadcast of War of the Worlds on American radio by saying the martians had invaded, not realising that his unsophisticated audience took his use of language more literally than he did (everybody left their radio sets to ran about in panic, expecting to see the little green men arrive)?
The BofE, or the Government, whichever is responsible, should raise the 'insured deposit' to, say 100,000 pounds, for all banks and similar institutions.
That would take a lot of the people out of the queues.
Where is the risk if that insurance was raised to 250,000 pounds ? Very slight I would think.
Mervyn King is wrong on two points. His concern for moral hazard should be a secondary issue, and his refusal to state when the guarantee to NR expires, or under what circumstances, leaves depositors with a guarantee that is not a guarantee.
I agree with 14 well said. Greed by all to make money that should be the UKs new motto.
113 has it spot on and is one reason I do not buy a newspaper but what really disappoints me is the way the ´óÏó´«Ã½, ITV and Sky news have reported it, they should be accountable for the way they have acted on the subject. People want facts not glamorised reporting just facts.
The savers at NR are rushing to the bank because of the way the news was reported by them shame on them all.
The BofE, or the Government, whichever is responsible, should raise the 'insured deposit' to, say 100,000 pounds, for all banks and similar institutions.
That would take a lot of the people out of the queues.
Where is the risk if that insurance was raised to 250,000 pounds ? Very slight I would think.
Mervyn King is wrong on two points. His concern for moral hazard should be a secondary issue, and his refusal to state when the guarantee to NR expires, or under what circumstances, leaves depositors with a guarantee that is not a guarantee.
It seems that support from the Bank of England is a mixed blessing.
Perhaps BoE support should automatically come with a 100% guarantee to cover existing deposits.
That would prevent a self-fulfilling run on the bank.
I am interested in the government's response to a minor bank's difficulties and their commitment to safeguarding the investments of depositors, I assume with public money. Where was the same commitment when the investors in Equitable Life found that despite government regulation and scrutiny the actions of the Equitable Life directors left them stripped of the savings and pensions for which they had been 'prudently' saving?
The problem with the credit squeeze on and by the banks, is said to be the sub prime mortgage borrowing in the USA. I do not see how this can have created such chaos. If the houses were re-possessed and re-sold at a loss there would be a certain amount of pain for the banks but surely not the billions we are told. To be that large scale the property market in the US must be on its knees.
Barry O'Dwyer has hit the nail on the head. Borrowing short and lending long is surely one of the basic economic No Nos.Also NR is entirely dependant on its competitors for its prime raw material - money. Combined with a stupid dash for growth during this year to become market leader in the mortgage market this flawed business model has led to predictable disaster.
The company now needs to be sold to a reputable institution and the Directors sacked as soon as possible.
The latest statement by the BOE that all deposits are safe is all very well but for how long does that stand.
I have just read the NR took a loan BoE 1.6bn from the BoE, this represents about 1.6% of their assets, so is small change really. It should be noted that Barclays did the same thing recently when they had "computer problems", was there a run on Barclay? No I think not, however the Barclays CEO has been saying the Govt should bailout banks when needed.
I suspect this panic is being fueled by the real money men, i.e. the brokers and larger banks in London and elsewhere who think they can make a fast buck by getting new savers, borrowers and even buying up NR's assets on the cheap. If the latter does happen then a large part of the losses they made from reckless lending will be covered by the fast buck made by snapping up NR's mortgage book.
I pity the NR staff, who must be aware that their days are perhaps numbered.
A&L has had a substantial built-in takeover premium for some time, which took the shares to £12 last year. They have lost the 10% suffered by similar banks plus the takeover premium (about anothyer 20%), while falling victim to short selling by those, who have probably lost heavily already on NR and CDOs.
What always amazes me is that, were you to talk to the senior people in these banks when times were good, they would tell you that their bank's good health was all down to their "experience". Now, they seek to blame "market conditions". Yet the truth is that, like Barings, the dot.bombs and the like, they never asked simple questions like "why is the return so high" and "what happens if the market turns down/rates go up"? Simple really.
The three highly paid non execs of NR that are members of the Risk Committee, Sir Ian Gibson, Sir Derek Wanless and Miss R A Radcliffe, should hang their head in shame. They have been totally inadequate in their roles as non execs in allowing NR to take the wholesale funding model to it's extreme. The regulatory bodies should take measures to prevent them from being a board member of any other company.
The Trinity Mirror and Morrison's shareholders should take care.
Even despite my losses on my small NR shareholding as an understood risk at the time, my much larger savings deposits were made on the understanding that there was minimal risk.
I would be quite happy to re-invest as a speculative punt at least some of the savings that I have deposited with NR and largely withdrew this weekend, but not at the savings rates on offer. And probably not even then without greater comfort from independent commentators.
Does Northern Rock not think the extra risk (as obviously now widely perceived by its savers) justifies a better interest rate for its savers? And if not, why do the independent commentators not widely reinforce the Chancellor's words of comfort that the risk is fully covered by the BoE?
I fear the thick plottens - and that this can only end unhappily for all, without some leadership.
Perhaps it is time for all the major UK banks and BSs to move away from any understandable private glee and schadenfreud of the problems of a competitor - and close ranks to help protect their sector's much wider interests, that seem now to be under so much threat? And ours too.
Northern Rock got 75% of its funding from other banks. Nationwide Building society gets 70% of its funding from retail savers. Both brorrow short term to lend long term - its always been that way in morgage lending. And its always been the case that if all the savers wanted their money back fairly quickly, any bank would be in trouble. In a strange way Northern Rock should have been less at risk of the panic we've seen recently because only 25% of its funding was at risk from a run on the bank. For Nationwide (and other Building Societies) it would be even worse. Norther Rock grew by offering mortgages at very competetive rates, something its funding practices allowed. Without them in the market, morgages will be dearer than otherwise would be the case, so I'm not sure how it was in the interest of savers or borrowers to let this solvent and profitable company go under. And why is it liable to under? Because of market conditions resulting from poor lending practices in the US, and the selling of junk mortgages as prime financial assets - something Northern Rock is not guity of. The authorities have done us all a big disservice in the way they have handled this. Not only is public confidence in the banking sector at lows not seen since the 1930's, something that will take years to recover, but the increases in the pricing of mortgages are liable to trigger a significant fall in the housing market, rising reposessions, real banking losses and more bank failures. Well done Prudence Brown you've really handled this one well!!
What do I tell my 3 year old grandson :
The banks have run out of money ! They gave it to people who were not able to pay it back. Were they a bit silly then ? No the men who run them got big bonuses.
Won't their friends help them ? No,they got frightened and ran away.
Will that nice Mr.Brown help them ? Yes,it was all his fault in the first place because he can't add up properly.
Will my grandson believe this stoty
Lets get down to basics. Whatever the reason for NR's current liquidity difficulties, following on from the facility offered by the BoE, this could have been managed internally with no significant damage.
Robert Peston decided to sensationalise this story and as a result has caused untold additional damage to a large financial institution and put at least 6,500 jobs on the line (not to mention assoc firms). The coverage of the ´óÏó´«Ã½ has been extremely biased concentrating on the negative while ignoring the positive, for example in summarising the blog entries on PM (Radio 4)all of those quoted were highly negative which you'll all know simply isn't an accurate picture. Where was it publicised that a number of branches have never had a queue at all, NOWHERE, where was it publicised that Sir Bobby Robson arrived at NR's head office today to open two savings accounts with £1 million deposit and urged everybody in the region to support the company as the company has supported them over the years (see NR Foundation).
I would say this to Peston, while this situation was not of your making, you have consistently poured petrol on to the flames and you are now playing with 6,500 careers (all of which are shareholders).
Would you like to do an article on the effect to the North east economy of such a massive redundancy programme ?
I sincerely hope NR survives. If it does I'm sure it will annoy you intensely.
Well done Chancellor Darling! By guaranteeing 100% all deposits in NR, Mr Darling has stemmed the flight of capital from the institution and restored trust in the banking system. Now he should go further. He should initiate a policy review to see how ALL bank deposits could be furnished with the same warranty.Large savings deposits are the foundation of the banking system and should be regarded as sacrosanct. Furthermore, if such a gold-plated guarantee could be installed within a short timespan, it would attract vast sums from outside the UK for obvious reasons.
To be fair, Hutton did also suggest that the government guarantee 100% of depositers money.
This is now what the government is doing.
It is ridiculous that the government only guarantees 90% of the first £33k.
There really needs to be much better depositer guarantees for all banks.
Why, if the BofE had planned for a 'run on the rock', and £2bn is less than they thought would go out, the chancellor now needs to give a 100% guarantee ?
The two don't add up. The chancellor et al must know more than we know. There must be more bad news to come.
Maybe the truth is the run on the bank and potential contagion is far worse than they had planned for, hence they are worried and feel they need to do something.
Otherwise it is a reactionary after the horse has bolted move.
All of this stems from the Governments willingness to support Equitable Life in their swindling of ordinary people out of their pensions. You will never convince anybody now that the word "Guarantee" has any validity, even if it comes signed by God, Jesus & St.Peter.I'm afraid that the "Bank of Under the Mattress" will be taking on many deposits in the coming weeks and this could radically change our perception and use of the financial sector forever. All because one lousy company wasn't forced to keep its promises.
A&L has had a substantial built-in takeover premium for some time, which took the shares to £12 last year. They have lost the 10% suffered by similar banks plus the takeover premium (about anothyer 20%), while falling victim to short selling by those, who have probably lost heavily already on NR and CDOs.
What always amazes me is that, were you to talk to the senior people in these banks when times were good, they would tell you that their bank's good health was all down to their "experience". Now, they seek to blame "market conditions". Yet the truth is that, like Barings, the dot.bombs and the like, they never asked simple questions like "why is the return so high" and "what happens if the market turns down/rates go up"? Simple really.
The ´óÏó´«Ã½ headline at 23h20 tonight said : "The government has said that it will guarantee all deposits held by the embattled Northern Rock bank."
Are we sure that this means all deposits will be guaranteed to 100% of their value, or rather does it just re-hash the existing guarantee to the value of 90% but perhaps now for "all deposits"?
Please can the ´óÏó´«Ã½ journalists raise the question and get Mr. Darling to be clear about this?
I have had a mortgage with Northern Rock for some years. A few months ago I visited the Bournemouth branch to enquire about a remortage as I was wanting to add an extension to my house.
I was in the branch for all of 2 minutes when the manager showed me the door with the comment 'we dont lend to people like you'.
My sin? I am a director of my own private limited company and take the usual minimum in salary and the remainder in dividends. My business is solvent, I am a higher rate taxpayer and still their lending criteria meant that I was not a sound bet... by the way... my mortgage was £40,000 with house value £250,000 - I have one credit card which I always pay off at the end of the month and do not have any other loans...and still they did not want to lend to me.
I went to the Abbey instead.
Can Northern Rock really survive? It cannot raise money in the wholesale markets. It cannot attract new investment, either from savers or shareholders and no one wants to take it over in the present climate. Persuading existing savers to remain is not enough in itself. How will it fund new business?
Northern Rock got 75% of its funding from other banks. Nationwide Building society gets 70% of its funding from retail savers. Both brorrow short term to lend long term - its always been that way in morgage lending. And its always been the case that if all the savers wanted their money back fairly quickly, any bank would be in trouble. In a strange way Northern Rock should have been less at risk of the panic we've seen recently because only 25% of its funding was at risk from a run on the bank. For Nationwide (and other Building Societies) it would be even worse. Norther Rock grew by offering mortgages at very competetive rates, something its funding practices allowed. Without them in the market, morgages will be dearer than otherwise would be the case, so I'm not sure how it was in the interest of savers or borrowers to let this solvent and profitable company go under. And why is it liable to under? Because of market conditions resulting from poor lending practices in the US, and the selling of junk mortgages as prime financial assets - something Northern Rock is not guity of. The authorities have done us all a big disservice in the way they have handled this. Not only is public confidence in the banking sector at lows not seen since the 1930's, something that will take years to recover, but the increases in the pricing of mortgages are liable to trigger a significant fall in the housing market, rising reposessions, real banking losses and more bank failures. Well done Prudence Brown you've really handled this one well!!
Spot on Mr Ackern (No 128) I couldn't agree more. What I find really disturbing is the power of Mr Peston the ´óÏó´«Ã½ and the rest of the media who through sensationalist journalism can cause such immense damage to a perfectly sound Financial Institution with the loss of jobs that will inevitably follow when / if there is a takeover.
OK, so Alistair is my Darling has now guaranteed all depositors in Northern Rock and today share prices of other banks are rising. In effect, the taxpayer has now been committed to a £20 billion insurance policy. This equates to cover of £1,000 per household. Think of it as a compulsory premium on an insurance policy where the risks are currently very severe.
If this national (read taxpayer) cover does indeed extend to ALL bank deposits, then the cover taxpayers are purchasing would be 50 times this (my estimate, it may be hundreds of times more), resulting in,
say, a compulsory £50,000 policy per household.
The Government may just about get away with it in the short term, but it has now introduced enormous 'moral hazard'. Now every individual rationally can simply go for the highest rate on offer in the least
credit worthy bank, introducing a ridiculously mismatched high return with a low or zero depositor risk. Risk does not disappear from the system; the additional burden simply shifts to the tax payer again.
This means that commercial risk has now been transferred to sovereign or national risk. The likelihood, if this policy dupes everyone over
the next few weeks and financial markets settle, is that the Government will get away with it, but at the expense of inflating current problems away and heading towards a still greater credit bubble. Let the printing presses roll! That bubble's ultimate collapse is more likely to be the bankruptcy of the Government and the nation as a whole, with attendant increased risk of the wholesale devaluation of our national currency, the pound, and attendant hyperinflation in the British economy.
Unintentionally, this looks like a cracking plan to allow the standards of living of Britain and the third world to converge - considerably better than any charity pop concert could achieve. A Live Aid Concert in China for starving Brits by the start of the next decade, anyone? "Press the red button now for Gordon karaoke singing, 'Je ne regrette rien'."
Darling has written a blank cheque with taxpayers money. I disagree with that entirely, but clearly having pensioners worried about losing life savings was a political issue.
But what´s the quid pro quo? Surely NR should be cancelling its interim dividend due at the end of next month.
Please could you all lighten up a bit. You are beginning to worry my teddy bear.
Mike re post 57,
What the government is trying to keep you from knowing (and I am also trying to keep it from teddy), by focusing your attention on Northern Rock, is that the world banking system is falling apart(this is in addition to the problems we have with the oil running out and the over-population killing the planet).
Best to try not to make any long term plans I think.
Re Post 91,
I am speaking from Planet Earth.
Where have you been for the last 10 years ? I do not understand how you believe or take anything the govenment says at face value , given their record.
Could we please have a reality check ?
1)
The problems at Northern Rock have not been caused by Robert Peston or the ´óÏó´«Ã½ (although I am not a fan of ´óÏó´«Ã½ television, on this occassion they should be congratulated for informing people about what is actually going on - I accept it was a 'good story' - but it is a lot more than that).
2)
Northern Rock is not a sound finanancial institution and it was not - even before the ´óÏó´«Ã½ started reporting the situation. As has often been posted and some people can't seem to accept - If it had been a sound financial institution, they would have been able to commercially borrow some money from somewhere 'in the whole wide world'
before approaching the BOE to ease their cash flow situation but they could not.
Why would anybody leave their own money in a bank which could not borrow money from 'bankers' spending 'other people's' money ?
Also the share price has been falling for some time.
3)
Northern Rock are certainly not alone - this is why the government ,in particular, is panicking - watch this space.
This is the tip of the proverbial iceberg and the beginning of the correction of houses prices which are over-valued to the tune of 300%.
The housing crash and recession are now upon us and long overdue.
Dave is right, NR is a 'commercial business'...just like thousands of others, banks, bakeries, banana importers and like. NR is run by Managers employed by shareholders, they are not state employees working for the NHS or other Govt. body.
Why should tax payers money be used to prop up a reckless management of NR? All private business is a risk. I can't see the BoE coming to save all the other private companies that have problems, let alone any individual.
The overheated economy always has some victims, small and big ones...NR is in the latter category so what - big deal, this is nothing new. To see a run of the banks who took excessive risks for higher returns is bound to happen, it happens in other businesses everyday. And if your business happens to lose one-dark-cloudy day then that's life. It happens to thousands all over the world everyday.
The Govt should not have stepped in to protect a private business, unless they are ready to do it for everyone. The economy needs a shock to stop the rampant speculaiton in the financial markets every few years, especially in the past 10 years. This type of shock would be good for the long run.
As for the NR savers, we all take risks ourselves with all banks, it's our decision to place the funds in the first place and we must understand the risks. If they have no confidence then they have every right to take their money out...but where will they put it now? Perhaps the mattress will be the ultimate safety!
Why should the public be lectured on the benefits of the 'free market' and deregulation, and then be asked to bail out ruthless institutions when they over speculate..?
Why is this generosity only extended to the corporate sector? Meanwhile, child poverty increases and the rich get richer.
Time for a new English revolution, perhaps?
Let's hope that everyone is aware that under the rules of fractional reserve banking that neither the Northern Rock, nor any other bank, has the money to pay back 1 in 1000 of it's depositors. All banks loan money they do not have on the basis of promises to pay. This is a rather well kept secret.
But reserve ratios are now through the roof, with banks lending hundreds of times their deposits. All thanks to the miracle of deregulation.
In addition, any deposits banks do have are essentially credit from other banks who have created fiat money in precisely the same way. The house of cards is beginning to fall. The game is up.
I was away in America when all this happened and only found out today, having returned at the weekend
My question is very simple. I have a mortgage with Northern Rock which I have had for 10 years and only 8 to go to the end
a) Is it safe
b) Is there anything I should be doing to safeguard my interests
IF ANYBODY OUT THERE CAN HELP ME, I WOULD BE VERY GRATEFUL, AS I AM NOT A FINANCIAL GENIUS LIKE YOU GUYS - JUST MRS ORINARY LOOKING FORWARD TO A RETIREMENT IN A FEW YEARS