大象传媒

Yeah and don't forget that this is all your fault Peston. If it wasn't for you, Northern Rock wouldn't be in any difficulties at all. I have a source in the city who says that not only did you cause the consumer run with your blog post on the BoE dealings, you also caused the wholesale run we're now seeing. It will no doubt shock your fans to learn that you have been appearing in the dreams of dealers of wholesale credit, ordering them in no uncertain terms to call in their Northern Rock loans.

I've said it before but I'll say it again...

BoE should have transferred the savers, by nationalisation if needs be, to protect them and avoid a bank run whilst letting the rest of the pack of cards fall. That way the banking sector feels the risk part of the "risk-reward" equation on which the financial community is based and taxpayers are not left carrying the can for nothing.

Taxpayers paying 拢730 each, for nothing, with management still in place and shareholders still in the game, is an absolute disgrace.

It is a pity that British Bank like Rock was not supported by the Government in the early days when the rumours of its problems came to light.
It would have probabily saved both the Bank and the Govenment like.

Robin Bruce

You can not be serious. One guy can not create the problems that the Rock is now facing. It is the fact that they gain their funding from the wholesale markets. Also Robert Preston is not the only perosn in the whole world who is reporting on the Rock's problems.

You can't blame Robert Preston. That is known as shooting the messenger.
Northern Rock caused this problem by using a highly risky business model.

It is commendable that the moderation process does not censor the repeated accusations that Robert Peston is responsible for this situation.

He did not make the news: he reported it, which is his job and one he did well.

The blame attaches to the management of NR, the regulators and the former Chancellor who instituted the system in which regulatory responsibility was fragmented.

Robin - Sorry, but to blame Preston for the Northern Rock position is absurd. Without wishing to denigrate journalists, he was doing his job communicating, rather than creating, a situation and doing his job well.

To say otherwise is like blaming journo's for reporting crimes whenever there is a copycat crime. So presumably Maxwell's pension scam should not have been mentioned, or BCCI? And when would have been a good time to speak up...what if your assumption of a rose-tinted dawn had been wrong and savers had lost all their money? Would you then have stood up and carried the can?

I for one have no wish for journalists to value-judge on my behalf. The bottom line is that banks have been lending recklessly and those empowered with regulation failed. People can spin it how they like but that is the bottom line.

Expanding on that, most companies have risk/audit committees. "Inability to raise debt to meet liabilities" should have been top of that list and acted upon. No business should assume the sun will always shine. I certainly don't and if I get caught out doing so then I expect to be the one carrying the can, not the chap who does his job (very well) by reporting it.

Preston - keep up the great blog!

Robin Bruce, for christ's sake, Mr Peston is a journalist. It's his job to report and comment on this kind of thing. To attribute the fall of the Western financial system on on Mr Peston is just childish stupidity. Why not address your anger to the thousands of "clever bankers" who have been living a lie for the last few years intent on screwing anyone and everything for a quick buck using nothing more than a series of worthless IOU's

What tosh, #1 !

Do you seriously think that if RP hadn't picked up on NR's situation that someone else wouldn't have?

And the wholesale run was entirely predictable from the start of this.

Haha, I'm loving these posts! Why are all these people so passionate about NR? Are you Applegarth in disguise?
To say that Peston CAUSED the NR TROUBLES and even worse, NR would be in no difficulty at all is the most ridiculous thing I've heard. Who is your deluded, mystery source? Tightening WORLDWIDE credit conditions caused the NR difficulty and there wouLd have been no problem if they hadn't been so greedy and kept a more risk averse portfolio. Obviously in good times it's hard to know where the top of the market is, but it's always lurking. I take it Peston is also to blame for Countrywide Financial?, Bear Stearns books? Stan o' Neals decisions? Grow up Bruce!

Yes, you naughty man, Mr. Peston; fancy reporting on things as trivial as a major UK bank being insolvent.

Let's face it, the Rock is a dead brand with a broken business model too dependent on the wholesale markets.

Will someone PLEASE put it out of it's misery and stop using MY TAXES to keep it propped up?

why has the stock not been suspended?surely there is (and has been for some time!!)a false market in Northern Rock shares? How can analysts value the bank without clarity about its business prospects or even ownership?

I wish I could run a flawed business plan to the point where the fault gets found, effectively become insolvent (and certainly not trusted by any of my peers) and then still tap up the BoE for 拢23billion!

Nice work if you can get it!

Mr Bruce, you must be the world's biggest wind up merchant, or the world's biggest idiot. Please own up, either way.

The Rock would have been required to disclose the BofE funding at some point on the basis that it was seriously market sensitive information. The current predicament is undeniable proof of that. The question is not if but when that information would have got into the public domain. It has caused no more damage by manner in which it has been disclosed. Indeed there is a case to answer that if management had been more upfront and honest about the short term cash flow difficulties, the Rock may not be in this position. To compare, how much less damaging is a ministerial scandal when the minister himself breaks the news and spins it there way, than when the opposition break the story?

To those at 4 and 5 - I think that Robin Bruce's comments are very much tongue in cheek. In what way would Robert Peston actually appear in people's dreams?

I do hope Robin Bruce's tongue is firmly in cheek but I fear he is serious. Still his comments amused the office for a while.

It's worth noting that NR is paying the BOE a considerable amount of interest on those loans so the taxpayer is actually making a profit on this compared to just having the money siting with BOE.
As calculations showed when the crisis first emerged, NR was/is solvent it just doesn't have the cashflow to pay its creditors. Should it go under, there is sufficient securitised debt available to pay off the creditors including BOE but at the moment BOE is keeping the company going and making a tidy profit

Why is it we mostly only see you talking about Northern Rock. Except one story about supermarkets, before talking about the Northern Rock again for no apparent reason. You hyped up this problem which is why the bank is having the problem. Your a one hit wonder, please go away.

I hope your "Source in the city" has another, more useful trade..he will need it very shortly, Mr. Bruce.

Economically and politically we are in for some very interesting times. I wouldn't relish telling the prison warders or the other public sector workers "the money isn't here" after this shambles. Pensions will be fun after this inflationary money creation as well.

Good luck to us all, we will need it!

how can Gordon Brown preside over his so-called brilliant separation of banking regulation into 3 parts? so far this work of genius is costing the tax payer 拢23bn!!

A lot of damage to come to Northern Rock yet. The mortgage book value will drop substantially.
A 200k flat in Glasgow bought in 2005 new sold for 150k this week.
A well known estate agent said when I look at my computer screen all I see is houses, no punters.
I think that may be Robert Peston's fault as well. He has a secret position in the government, he manages the economy. ps dont tell anybody. Especially Robin Bruce.

regards
jimmy

So it's 730 quid with more to follow, maybe going to 1300, 1400 who knows. So where is this money now? Let me guess. Do you think it's in the pocket of some speculative bankers someplace. Where else can it be? Must be somewhere. Only it's not speculation if it's a dead cert you get paid out by a govt is it. Its a one way bet, bankers like those. Remember Mr Soros & his one way bet, boy did we make him wealthy, each and every one of us. Sweet being a banker - backed by a whole bunch of taxpayers who get no choice on the use of their money.

Dump the bank, burn the manic, profligate lenders, some one MUST learn a lesson from this. If we have a banking crisis it's a so what? So who let it happen? Loans from the public purse does nothing to fix the systemic issues, merely funds a nice corporate jet or two.
Burn 'em.

What a contrast eh.... A bank gets into trouble and the Govt rushes in to help..

Rolls Royce announced today they're closing their plant in Liverpool and moving production to the USA because of $/拢 rates..

Reaction from the Govt? Nothing..

In response to #20.
anthony camomille wrote:
"how can Gordon Brown preside over his so-called brilliant separation of banking regulation into 3 parts? so far this work of genius is costing the tax payer 拢23bn!!"

Actually 'so far this work of genius' hasn't cost the tax payer a bean. In fact it is currently benefitting the tax payer since the Bank of England is lending to NR at a punitive rate. I do hope you're not in charge of the family's finances.

RP is completely missing the point - there is nothing at all wrong with Northern Rock. Its mortgage assets are as robust as those owned by Halifax et al and as for its liabilities, it has resorted to the BoE due to the bizzare actions of the city institutions in closing down the inter bank market. The BoE was merely doing its job as lender of last resort, but it would not have done so if those mortgage assets were not good collateral.

All this nonsense about "拢730 per taxpayer" is simply stirring up emotion where none is due. The taxpayer is in no danger at all, and when the interbank market gets going again, I wager that Norther Rock will tap into it and repay the BoE.

I readily admit that over reliance on the inter bank market as opposed to deposits is risky, but that risk is surely limited to the extra interest payable on those BoE loans. After all, all City institutions know of the BoE facility,and if anything has been proven in all this, it is the fact that the system works!

The only lasting damage is the dent in the profits of Northern Rock, and that is a private matter for its shareholders. As for a take over - totally unnecessary. A management change - possibly.

Hahaha... Well done #1, it would seem that the people that comment on this blog have no humour receptors... probably all bankers!!

Seriously, I think even Robert Peston would agree (in his more private moments) that some of his (and others) journalism at the start of the crisis wasn't the best.

But he certainly wasn't to blame. Which is the point that #1 was making, via the medium of humour.

Spot on Ewen Pitcairn.

This only becomes an ACTUAL loss to the taxpayer if the NR mortgage holders don't, or can't, make their payments. Since, ironically, Northern Rock has an execellent loan book, the only risk to our money is if interest rates shoot up and the mortgageholders default.

In the meantime, NR is paying the BoE (and therefore every one of us) punitive interest.

The only cloud on the horizon is that the Government isn't going to wait 25 years to get all its money back, nor are they going to transfer their lending to whoever might buy NR. That's their dilemma. But whatever happens the government isn't going to allow a big hit on the public purse - there'd be a huge outcry and it would probably cost the Chancellor his job.

Actually I thought this was a much better post on the subject - measured, thoughtful, balanced. Shame Robert's initial report on the subject wasn't up to this standard. He may not have caused the run on the bank but the breathless nature of his report and its placement as the headline on the news certainly contributed to it.

It might be flattering to Mr Peston but I think you are exaggerating the influence of journalists by stating that he caused the run on the bank: "The fly sat on the axle tree of the chariot wheel and said, 'What dust do I raise!'" (Francis Bacon).

The NR directors, in their evidence to the Treasury select committee, said that the news would have leaked out anyway because too many people knew about it. And news travels fast.

Jonathan Freedland's "Long View", on Radio 4, was comparing the NR crisis with the collapse of Overend, Gurney & Co in the 1860s. Even in those days, pre-telephone, the news had reached the north of England via word of mouth and mail by the end of the same day, and the US by telegraph the next day.

Combine modern communications with our (necessary) financial transparency regulations and you cannot keep something that big quiet. But why would you want to? If it had been kept secret but NR collapsed three months later because of its weak business model, everyone would have been crying foul about banking secrecy and conspiracies.

You can imagine a very rare situation in which a doctor would not disclose a condition to a patient or their relatives because the condition was harmless and transient, on the grounds that it would cause them unnecessary worry. But if the condition was dangerous, and possibly caused by the patient's own behaviour, it would be gross negligence not to inform them.

Well I've complained about Robin Bruce's post - it's a ridiculous and probably libelous claim to write that a journalist brought about the Northern Rock crisis.

Interestingly, the deflationary spiral in Japan created "zombie banks" that the Japanese government continued to prop up for fear of a loss of confidence in the banking sector, at the taxpayers' expense.

As has always happened in history, credit led expansion leads to deflationary spirals. Textbook economics which the MPC, BofE and Darling should bone up on.

The necessary course of action is now clear: nationalise the Northern Rock, sell off what can be sold either as one lump or several (no clever stuff, mind), sack the management without compensation and we can all walk away secure in the knowledge that every greedy banker will now be looking over his shoulder. Do it fast, hard and brutal.

The BoE caused the problem at NR by failing to avert the liquidity problems in the market.It is as culpable as NR and the FSA. It is entirely appropriate it should now face the consequences. Taxpayers money is not being spent to prop up NR; the loans from the tax payer are getting better than market rate of returns. The BoE can make a nice profit in borrowing from the market and lending to NR. Besides, the BoE/gov cannot see the UK's financial service industry damaged further by NR going under. It is now too important to the economy.

It is entirely in the interest of the BoE to preserve the value of NRs mortgage book otherwise it really will say goodbuy to a lot of taxpayers money. In fact it is the only way of ensuring its loans are repaid. So whatever Robert Peston wants you to believe the BoE is locked in and going to stay locked in. The current position is tantamount to NR being in public ownership and the gov will need to preserve its value so that it can be 'privatised' ie sold on and the loans repaid over a period of time. Commentators don't seem to be able to see the wood for the trees, including Mr Peston. The BoE will know from NR exactly what commercial loans are scheduled to turn over during the next six months and will continue to replace them while a real competition for NR proceeds.

Robert Peston's comparision of the size of the loans with GDP is wholly inappropriate and a further attempt to scare and dramatise. Vast sums of money are loaned commercially to UK companies without attracting such comparisons. Banks borrow and lend money - thats what they do. How would HSBC's borrowings look compared to UK GDP Robert - 50%? It is a meaningless comparison.

People have been discussing whether there would have been a bank run in the absence of Preston's reporting. I have a different, equally hypothetical question: What if Northern Rock mortgagors (those owing money) stopped making their monthly payments on their mortgages. Of course, the bank would normally pursue them and eventually re-possess their properties, but what under the current circumstances?

So let鈥檚 see.

NR has replaced commercial loans with BOE loans.

So it costs the taxpayer nothing.

It simply squeezes NR鈥檚 profits unless the costs are passed on by increasing the interest rate charged on Alasdair Darlings NR mortgage and those of other mortgage borrowers.

So in reality NR shareholders are paying; not then tax payer. And the BOE is doing what it should do; acting as lender of last resort. Some would say this is an essential duty, due to poor central regulation.

Calling Mother Brown what are you going to do now? Well yes the senior management of the Rock are entirely resposible for the problems but how bad can it get? Obviously you are keen to avoid any political fallout but where were your pointmen at the FSA as the Rock pursued its high risk borrowing model? Don't blame Merv at the Old Lady because you took away his banking oversight reposibility and gave it to the FSA. Let us also not forget it is the Treasury which has sanctioned the loans to the Rock so the political football stops with you. So when it is time gentleman please? Clearly the sums involved are now rising way beyond the comfort zone. The impact of expensive borrowing from the Old Lady must be squeezing the Rocks bottom line to the pont where it will be operating at a loss. So Mother B the choice is yours and yours alone on where we go from here? Does the public really want to spend their money nationalising a bank? I doubt it. Can the Rock be saved by the private sector? Watch this space because this one is starting to get very interesting. Oh and by the way thank you Robert you are continuing to provide an intelligent assessment of what ultimately could be a situation which ruins Mother B's so called reputation for prudence. Keep doing you job.

Well if Mr Darling is taking a loan off my taxes at about 拢730 and getting a good return in interest shouldn't I and the person loaning the money get the interest? Looks like the government is using my money for its own profit. That's a nice scam.

Quite right Mr Pitcairn (#17): the Government is getting paid a good rate of interest on "my" 拢730 and "yours". It's just possible this will turn out to be a really good taxpayer investment.

And don't forget that NR can raise its standard variable interest rate any time it wants to encourage existing borrowers to take their loans elsewhere (once any initial fixed rates etc have reached an end). That would cut the size of its in-force mortgage book so that it can repay the wholesale loans (and ultimately the BoE) sooner rather than later.

That would be the "self-destruct" option for a business with no credible brand or future - but it should provide a floor against which to judge the share price that any prospective bidder might offer.

And if NR doesn't have the resources to follow that option, then how on earth can FSA assert that it remains solvent?

Seeing the abuse you are getting from some quarters Mr Peston, you must be touching some rather tender nerves.

Or perhaps the Bishopsgate Job Centre was just full again today.

You must really hate Northern Rock.

For everyone else, of course post 1 was a wind up. I have a suspicion I know who wrote it too.

I blame Preston to! Its a blame '24 hr news' culture so its what he would of wanted!

Nationalise the damn thing, it's ours anyway now.

NR's borrowing from the Bank of England, and from all its other savers and depositors, is backed by high quality mortgage assets, which are probably better placed than most to withstand a downturn in property prices.

As a result, the British taxpayer is currently making money out of NR through charging them higher interest rates and will continue to do so until they sort out their future. You can be sure that the Bank of England is not going to lose any money out of this, otherwise they would never have provided a guarantee!

If you think this will stop at 23 billion, think again !
Effectively what we have now is a public-owned/run bank, supported till the end by tax payers money, run by incompetent directors and fully supported by the Darling of the BoE.
When you think that this is the same bank that fully participated in inflating house prices and causing misery for millions (even those who think their house has gone up in value), you're torn between seeing this as either Comedy or tragedy.

Robert, once again with your little personal vendetta against Northern Rock.

I wonder if you would take such glee in reporting that a Southern bank was in trouble?

I also notice that your reporting is still missing large bits of information, for example the fact that NR's mortgage book is worth over 拢110 billion? Nearly 3 times as much as your supposed "40 billion exposure" and nearly 6 times the current loan. Therefore if push came to shove the government would get their money back, and plenty more with the penalty interest rate.

Would you therefore either please shut up and move onto a topic that you don't have a personal vendetta against, or do me a favour and just resign.

The misery that you have caused countless investors in NR, not to mention the staff, should surely merit your resignation, don't you agree?

But wait I forgot - you work for the 大象传媒, so you routinely rip people off and spread lies...

> Or he can nationalise the bank.

Yes, that's the way to do it. The
Labour party would back it, the public
would have a bargain at 100p a share,
and it would give them the chance to
re-privatise it later, so we can all
make a bit of dough, like we did with BT
etc.

Or even this - join it onto the post
office, so those guys can make some
dough as well!

what if NR goes bust, does it mean the BOE would loose money?

OH MY GOD!

Go learn about Fractional Reserve Banking.

The money comes from nothing. It's created at the point of the loan. Whether it's the BoE or some other bank is damned near irrelevant. The only consequence is inflation. More boom before a bigger bust.

Northern Rock should have been allowed to fail. Perhaps individuals would be more inclined to look at how banking actually works, who owns the money you deposit with them.

Great to see that Robin Bruce is 'shooting the messenger' again...

Wake up and smell the coffee, folks, this problem has been brewing a long time, and the drift in the share price from August indicated that the market had cottoned on to what was happening a long time before Mr Peston's article.

And are you also trying to blame him for the fact that Northern Rock had an unsustainable business model ? If he hadn't blown the whistle when he did, NR would have carried on escalating their borrowings, securitising their debt, and continuing to fund it all from the Wholesale money markets, leading to an even bigger crash in the long term.

Anyone trying to blame this all on Peston would also have blamed that little boy for the Emperor's little embarrassment..

Tom Taylor - "Dump the bank, burn the manic, profligate lenders, some one MUST learn a lesson from this."

By doing this, could create the taxpayer another 拢20 Billion and even create alot of homeless people.

Oh dear, what a pickle the government finds itself in. It's promised to prop up a minnow of a bank to the tune of quite literally unlimited billions, using taxpayers money.

It did this to retain market confidence in our banking system.

Unfortunately, this self-deception is termed "tying a concrete block around ones neck and jumping into a river" in my language.

It's a farce, and a well written one at that. What happens when the next bank (and who's to say it won't be a big bank with bigger losses) decries that it needs 拢100bn, 拢500bn or 拢1000bn to stay afloat? Where is the government going to 'magic up' that money from?

Oh, I know - the same place it already 'magics up' money from in our fiat monetary system.

Except the bottomless well is finally running dry. Hide your precious metals well, people, it won't be long before your friendly neighbourhood copper will be knocking on your door with a swag bag to collect the mrs's gold chains and earings.

A few points seem worth making:

1. It seems unfair to blame a journalist reporting a story for being the cause of the story in the first place. Whatever you think of NR's business model, and whether it should have planned for the current market conditions, it must be right that RP hasn't actually caused the present situation himself. As somone else put it, blaming him feels like shooting the messenger.

2. The loans from the BoE and Government guarantees haven't actually cost each taxpayer GBP730 each. The loans etc to NR might amount to us having loaned it that much each, but that is a completely different proposition. That would only cost the Government (ie us) money if NR defaulted on its payment obligations. As no one has (yet) suggested that NR is insolvent, that currently seems unlikely.

3. As the BoE support to NR takes the form of a loan to NR and not simply a cash payment, the BoE is actually earning quite a lot of money from NR's current position. It's also worth noting that although the rate under these loans is designed to be penal, to stop banks using the facility except as a last resort, with market conditions what they are NR might have found it difficult to refinance their short-term paper at a better rate than that demanded by the BoE. Purely in terms of the interest it is paying, therefore, NR might not actually be worse off than it would otherwise have been. Of course, it's worse off in lots of other important ways instead.

via Deep Throat (cue gravelly type voice).

Banks can go on taking irresponsible risks and will be baled out with taxpayers' cash when things go wrong thus encouraging moral hazard by bailing out dysfunctional lenders.

23 Billion to date - but at this rate will be 68 Billion by Feb 1st.

As you say Robert a colossal sum.

Keep up the good work!!!

You guess of 40bn is too high as it implies that there are still 17bn of retail funds - Last week I was told they only had 7.9bn left so that makes it no more than 30bn, or 拢550 for each of us!

Are there mortgages still performing? I think so, by all accounts, so what are you worried about? Will we who have so far paid 拢550 each not get then benefit of the mortgage repayments? The big thing is for us not to get left with just the liabilities of NR without the assets.

I also see noway anybody can or will buy the bank. Perhaps you could suggest a scenario?

I agree with Robin Bruce!!!

And I DO dream of Peston Grrrrrrrr

Initial estimates were that the Rock would require 30bn to cover costs for a year. Now it's 23bn in 6-7 weeks.

It is assumed (important word that) that everything reported in the "other assets" category in the Bank of England's weekly accounts is going to Northern.

Is it possible that someone else is also borrowing from the BOE?

Comment 44 is as correct as Commnent 1 is wrong. Mr Peston did his job and did it well by reporting the facts. It is as foolish as it is libellous to suggest that RP was the "cause" of the balloon going up.It was not a state secret that NR was bust.
Mr Cartier's suggestion that the Government should "Railtrack" NR and merge it with the Post office makes sense - it would simply be the re-creation of Girobank, which worked well before it was privatised by the Conservatives.
When the Stock Market goes belly up there will be other NR's and nationalisation will again be on the agenda. Ministers should reflect that if Ted Heath hadn't nationalised Rolls-Royce the company would have gone under.
What is required is some good old-fashioned patriotism and retention of ownership within the national domain - far two many blue-chip companies are now controlled overseas. It would be outrageous if the billions of taxpayers levies poured into NR paved the way for overseas vultures yet again!

I can not imagine the bosses of NR are blaming Robert Peston. what would a journalist do? Reporting. And this is precisely what Mr Peston is doing. Mr Peston is doing a great public service. The NR bosses should be ashamed of themselves.

Peston is only a messenger and as such should not be shot. The Bruce post is pure troll.

This whole thing scares the hell out of me. These are collossal amounts of money and the financial markets are almost inevitably going to test all the various mechanisms - and for some the test will be to destruction.

What if the UK housing market goes down by 15 to 20%? What if a really big player like Citibank falls over.
What if another big UK bank shows weakness and a run starts?

Of course, it will all be Peston's fault!!

What worries me about all this is that if Northern Rock are borrowing 拢23 billion, at, what would be presumed to be higher interest rate than their average lending rate, the questions beckons, are they able to make up this obvious shortfall in profit on this difference with their current t cash flow, or even their retrievable assets? I think we should be informed of this. If the figures do not add up, then the government has merely spent our money on a no-win scenario, i.e. a prolongation of the inevitable!

I have yet to see a single post that demonstrates that NR is without considerable value.

It has replaced commercial loans with loans from the BoE. And the BoE will continue to lend against NR's mortgage book.

The mortgage book of 拢100bn is good quality and generated profits of 拢500m a year - so worth a conservative 拢4bn.

There are three significant bidders for the business.

The buyers will need to be encouraged, so BoE will ensure the value of the mortgage book is maintained. It will further ensure a reasonable discount on the value of the mortgage book (25%) and phased replacement of BoE loans are available to prospective buyers. I guess the purchaser will need to pay 拢3bn and have three to five years to get the business fulled funded by the commercial money markets. Far from being worthless the shares look to be worth about 拢7 on this scenario.

The tax payers' money is only safe if NR mortgage holders are able to keep up their payments.

Looking at the way the housing market is going many will be heading into negative equity soon, and the 'collateral' provided by NR may become devalued.

If the BOE gets landed with a lot of non-performing loans it will be taxpayer picking up the tab.

I believe the savers should have been reimbursed but the bank allowed to fail.

The estimate of a peak of 拢30bn is probably a littly shy, but there are too many variables, but 拢35bn is possible

Depositors are protected which is sane and fair and its to be hoped that a protection scheme is more widely introduced

This is because the depositors were not receiving a premium on their money in return for taking higher risk, unlike the shareholders

They employed a management who pursued, publicly, the strategy that has gone so wrong and they and the management (look at the rise in salaries and the value of options etc pre crash) got the higher return that came from that risk

Now they have the dowside. Rock is in fact bust in that without the BoE support it would close. Shareholders' equity is gone.

If the Bank maintain the funding for a new owner in return for less than 100 BP more than normal funding cost htey are very silly - their funding in effect carries the entire value of the business and it should therefore be the taxpayer who benefits from any value recovery, not another company's shareolders - at the very least the Bank should have a great big chunk of new equity or a warrant kciker to give it value if someone else takes over Rock

Best solution ? Simple - separate Rock into two different businesses. New Rock carries on with a much smaller book of debt cut to whatever size it can manage, either by way of a rights funding from existing shareholders or with equity from anew owner. Ex Rock (Pebble?) is a closed business that will make no more new loans and simply run off the business over time backed by the BoE debt - which means the taxpayer gets the benefit. Or just 'sell' a package of the 'in force mortgages' to someone, they have a net present value, and drastically reduce the size of Rock that way and therefore its funding requirement

Oh and the management should go - not because they are crooks or particularly foolish. They just took a great big bet and it went wrong - so they lose as do their shareholders - no reason to wring hands just move on.

Seems to me that the only thing the B of E can do is to continue to pour money in. Not to do so would be to cause a massive fire sale of mortgage backed bonds - which would be exposed as being just about worthless. This would, in turn, expose the "record house prices = wealth" myth for what is really is - and shatter this whole phoney wealth illusion that people have been riding on for the last 6 - 7 years. Why did people not see the hole in the ladder?? my guess is that they were too busy watching their 46" plasma TV - bought with equity release money ......

Some very interesting observations by previous bloggers. I have a slightly different stance.

The world views the UK as a relatively stable economy and with a still (hard to believe at present here at home) lightly regulated financial system. That is why London is the global business hub (sorry NY and Tokyo).

When HMG effectively uses 3% of GDP to "guarantee" NR funding and depositors, yes, surprise, surprise, we all have to pay.

HMG is also running the biggest overdraft in UK history, with a contingent liability pensions funding risk for the public sector, and for the retired through State Pensions. Some 拢600bn plus and rising at the latest count.

What does HMG do in times like this. It issues Gilts. Gilts are both an income play for its holders (they like our high interest rates - compared to Eurozone and the Fed) and a capital protection play (for those confident in the UK remaining stable and solid for the forseeable future. Equities should be shorted NOW into Gilts. Gold or other defensive commodites might also be good, but long term, Gilts are the best defensive play (other than cash - funds or mattress held cash!!!).

Ewan Pitcairn has the right idea. The BoE is making short term gains for the taxpayer charging NR. NR is still a going concern and is not insolvent. It has mortgage backed assets which currently still have a surplus on a loan to value basis. Issuing Gilts to cover this exposure will be at rates lower than they are charging NR, so they make a profit.

Yes, NR is paying punitive interest rates, but this is on the same business model as the commercial banks backed - NR has lent long and borrowed short. NR is now paying more for this privilege, and we are guaranteeing the play. Changing the management of NR is not going to alter the metrics of NR as a business. This is all about liquidity and supply and demand of cash for NR right now. NR has Hobson's choice and has accepted the choice.

More worringly for me, is if HMG and the BoE had done NOTHING about NR. HMG would then have undermined the UK economy and the financial and banking system potentially diasterously for decades with the likely outcome of wholesale asset value falls akin to the 1929 crash. So many people are using their home as their pension pot. Homes are not cash. They become cash when you downsize. If confidence in the UK economy evaporates, homes are bricks and mortar. That's it. Their values become meaningless in a falling market where buyers prevail (the few that are around). Pension funds holdings in equities would be dramatically reduced in volume and values. Gilts and cash funds would prevail until asset values correct themselves, at lower levels. HMG would like this as this defensive move would generate lots more liquidity so it can support NR (and possibly other organisations in future difficulties).

We have not had a serious technical correction in the market since 2000, and before that 1992. We are now overdue some bad news.

I for one welcome all of this disrutption, and note the pain the financial services groups, notably the banks, who are all suffering. These are their rewards for imprudent lending. They are largely strong enough to swallow the losses, and rebuild their p & l and balance sheet numbers over time. Time to reflect and learn. Perhaps some sanity (without the greed) may arise in the coming 2-3 years. No gain without the pain!

For us mere mortals, we just need to focus on the daily grind of managing our lives, including our finances, and living within our means. If credit tightens, we must adapt.

As time goes by, more contributors to this blog seem to be seeing some sense. RP may or may not have been the main driver of this problem in the first place, but his sensationalist journalistic style really distorts the picture. He needs to get some balance. As others have pointed out, NRs loan book, upon which the BoE's loan is secured, is worth far more than the loan, so its not as if we are likely to lose our 拢730 and the loan book is good quality (not like the high risk junk that other European banking suckers have fallen for, allegedly). Also the the punative interest rate NR is paying works in all our favours, except the NR shareholders who need to do something about the business model and the leadership of NR. None of this is mentioned in RPs broadcasts. Peston, nothing against you personally, but please tell people both sides to the story.

I'm not sure I understand all the ins and outs and the timeline of the whole NR crisis.

However, what is clear to any observer of financial markets is that while they have some element of reality involved in making them work, there is also a lot of expectation and confidence that makes the markets.

In that regard, journalists such as Robert Peston never only report on the reality, they also, by definition, affect expectation and confidence levels. They have a journalistic duty, whether they like it or not, to report ethically and with consideration for the potential impact they might have.

My observations on NR are that news reporting has adversely affected the millions of 'normal' people who neither understand nor care about the workings of the market but simply have a mortgage or savings and are trying to do the best for their family. They were the ones lined up on the street and also the ones that will benefit from lower taxes if and when the BoE makes that potential future profit on the high interest rates it is charging NR. Whether that materialises or not remains to be seen...

[b]
The explanation is that the Bank of England can create money 鈥渂y a stroke of the pen鈥�. Parliament has made it the UK鈥檚 only issuer of legal-tender notes, and it can expand the note issue or credit a balance convertible into notes at virtually nil cost. Because of these special powers, the Bank does not need to borrow in the interbank market at a positive interest rate. Instead the interest cost on its 拢21bn loan (and indeed its 拢30bn loan if it reaches that level) is zero. So the Bank鈥檚 profit on the operation in the circumstances discussed would amount to about 拢2bn (that is, 6戮 per cent on 拢30bn).[/b]

I'm still waiting for a house price tank, and when it does, there are going to be a lot more MR's out there (I bet there already is, there just better at hiding the debt!)

The run on Northern Rock was waiting to happen. Their name had been all over the press for weeks prior to the run. It was hugely exposed.
The first culprits are those who changed the system surrounding bank supervision and the lender of last resort function 10 years ago when the BofE was made "independent".
It is in no way independent in the way the US Fed or the German Bundesbank is; that was clear enough 10 years ago but had not been tested until now. Had this not come out now a crisis might have been further deferred, but boy when one did come this would have looked tiny...!
Mr Preston has done us and the truth a massive favour. He understands the situation and the humbug spewed out by those who keep pouring gloss over everything. They made the BofE people independent in the sense enjoyed by those who head up the prison service - fall guys to pick up the blame if anything goes wrong.

I can't agree with the people that say that Northern Rock's position is sound.

Northern Rock had over 200 financial products. Now they might not all have been mortgage products but there's a possibility that some might have been. I realise that there is a variety of products out there that are sound, but there are also plenty that allow lenders to get access to funds they cannot, in difficult circumstances, sustain by using 'flexible' lending solutions.

We may be about to hit some very difficult circumstances: and Northern Rock has a loan book that has been expanded rapidly. Is it inconceivable that their mortgage products have been more elastic in their granting of funds? And that many loans will become bad more quickly for Northern Rock.

Northern Rock has sold a great deal through IFAs because of their good fees - anecdotally, I wouldn't trust a lot of the information included in mortgage applications written by IFAs. I know the bank checks - but people do lie, especially when it will not be their signature on the paper.

I'm shocked that people replying in what you would consider to be a higher IQ area of this website can't see a simple humorous post when one is made. (#1 for those still not seeing it).

That said, while the 拢730 figure was an effective method of adding meaning to huge numbers, it really could have been off set by a little info on the perceived risk, seeing as the only relevence "each of us lending 拢730" has is if it was lost.

I see we have some financially illiterate people here.

a) Northern Rock was not "solvent" at the time of the crisis. It was not able to pays it debts as they fell due. The fact that it thought it would not have to pay those debts for a while doesn't magically make them not debts or not due.

b) It is not a "sound" or "brilliant" business model to assume you can tap the commercial markets at will and at the price you want. Enron thought this - it's portfolio eventually made UBS over 2bnUSD so it was a "good book" too - and so did every dot com that went bust in 2000 and 2001. Hands up who thinks those companies were "well-run". Note Enron blamed the press too. This is not to say NR's board were crooks, rather they were incompetent.

c) Risk Premium obviously doesn't ring a bell to some here. Ever wonder why you can't borrow at the same rate as the British government? Thats because there is more risk you won't be able to repay. This is called credit risk and you pay for this extra risk. The BoE has lent to an insolvent company, dare I say made sub-prime loan. Anyone want to bet that NR is paying a lower rate than other bankrupt companies in the UK?

d) "But it has a sound loan book", I hear some cry.... No it has the chance that over a long horizon it can service the current debt with income. What happens when those people refinance to more attractive mortgages? What happens if NR's capital requirements shoot up? You happy having an increasing amount of your money saving incompetents? Are you happy it isn't going to schools? Or hospitals? Or in tax cuts? This isn't money cut from the money tree, this is money taken from elsewhere.

Does anyone know what the 'emergency' funding is for? Is this to service existing loan portfolio or to provide funding for new loans? My (probabaly naive) solution would be for the Government to take over the administration of the existing loan portfolio until paid off, carry on operating paying the current investors interest from the loan interest. The shareholders get nothing...the value of a share can fall after all and the loans were risky...nobody complained when the shares rose and so nobody should complain when the business goes bust from bad management decisions. Happens all the time.

I don't suppose mentioning how much interest incme the Treasury is making comes onto your agenda does it? If and when the Rock comes out of the slump then it looks like the Treasury may have done a good bit of business......

I always thought it was the objective of the 大象传媒 to present balance in their journalism this certainly isn't the case here.

I think Trever Wood's post at 25 is spot on and Robert Peston either a) Knows absolutley nothing about business or b) Is deliberately trying to cause the upmost unrest and damage to NR to gain publicity for himself.

Has Mr Peston run heaps of stories about Barclays borrowing huge sums from B of E and if not - why not.

Another so called journalist who would not know a real one if he hit him in the face.

Robin Bruce - you were wrong - the British after all are not sufficiently intelligent to appreciate irony.

Yet more irresponsible reporting Peston - You are supposed to be an economics expert, yet you fail to mention that the Rock is paying 6.75% for the pleasure and the borrowing is fully secured against the mortgage balances it holds.

Working for the 大象传媒 you are supposed to give an objective account of the story and not try to sensationalise and headline grab like some kind of tin pot commercial channel desperate for ratings.

There is one simple way around this as follows.

Firstly because of the current restrictions in the money markets no one is realistically going to be able to buy Northern Rock and take over the loans from the government.

Northern Rock as is must be allowed to go to the wall in a controlled and ordered way. It happens in insurance on a reasonably regular way as insurers go into run off or close to new business.

Many UK pensions are currently being run by companies that specialise in so called closed funds.

The government puts the bank into a type of administration and appoints a board to run off the business. The new chairman has effectively been put in place to do this as a man of integrity and knowledge to the financial markets.

The current NR is split into two in a controlled way. The savings bank is sold to another financial institution. Any payment received will after the finish be returned to the current shareholders, if there are any funds left.

The loans are believed to be too big for one company to take on so why don't they get parcelled up and sold off in smaller amounts. If as we seem to be constantly told that the loan book is good then there will be people prepared to bid for it in bits.

There are banks still offering 100% plus mortgages so they could bid for that part. Other bits could be sold off as well.

There must be a number of highly experienced ex bankers prepared to take on this challenge of managing the organised run off of Northen Rock.

I for one would have no qualms if it was done professionally and orderly and the financial markets would also approve of it.

Surely if a few knighted ex bankers could sort this out orderly over a couple of years then any peerages earned for this would be more than merited.

For those wondering about the downside well the current directors will lose out. The normal branch staff will be working for a stronger financial organisation and so their jobs are likely to be safer in the long run.

Anyone working in a mortgage processing centre will still have mortgages to process and administer.

If there is anything left after all of our loans have been paid back well then the shareholders could get that like in any liquidation.

The bank ends to deter future reckless activities but the innocent workers stand a better chance of continuing in a viable business.

I can't imagine why no one has not suggested it before?

since one can only report a comment on this blog and not recommend one i post this excellent piece from Robin Bruce:

"Yeah and don't forget that this is all your fault Peston. If it wasn't for you, Northern Rock wouldn't be in any difficulties at all. I have a source in the city who says that not only did you cause the consumer run with your blog post on the BoE dealings, you also caused the wholesale run we're now seeing.

Mr. Peston do you have a cv I would like to see a little more of your credentials beyond a few suspect media accolades!

You can't blame Robert alone.

Why do you think many of the hedge funds have made a packet over the last year going short in Northern Rock?????? Because a good deal of people have voiced concerns with Northern Rock's business model - way before any of this credit crunch really kicked off.

What a surprise another negative report about The Rock from one of the most biased journalists ever born.

Peston has an obession with running the Rock down.

Talk of Northern Rock being nationalized is rubbish because we will still make several hundred million 拢's profit - barely a sum you would expect a 'battered' lender to make.

Furthermore the board should not leave there has been an international phenomonom that no one could have predicted. The Rock was a victim. The board have done a fantastic job taking Northern Rock from a regional building society to the UK's 5th largest bank - a marvelous achieviement.

Rock Steady

I prefer the view, expressed by Tim Congdon on ft.com, that the Bank and hence the taxpayer benefit financially from this action.

Oh my god this subject really is so boring now !

Mr Peston was right to report the story - after all, imagine if the 大象传媒 had kept quiet and the bank subsequently collapsed, people lost their life savings and then it came to light that they'd sat on the story - there would rightly be outrage!

And one thing that nobody else seems to have mentioned, by breaking the story, the government was forced to effectively underwrite people's savings - so well done for that.

But publicity is a powerful thing and has to be handled with care.

When a washing powder company spends millions on advertising, despite the dubiousness of their claims, they can almost predict the increase in sales.

A famous jewellery chain cheerfully sold "crap" jewellery for years, until the boss acknowledged the fact and the companies sales plummeted.

Journalists have all this power - and more. Whilst we all know that advertisers will tell us anything to sell their products, we tend to trust journalists, particularly if they work for a respected organisation such as the 大象传媒.

So they have to be careful how they use this power.

"Due to the ongoing problems in the sub-prime market in the US, the Northern Rock has been unable to borrow money from it's usual sources and instead has had to borrow at a higher rate from the Bank of England". Unlikely to cause a run on the bank, and indeed unlikely to make it past the financial pages. But doesn't sound much of a scoop either.

"Emergency Loan", "What happens if the Northern Rock collapses", "Panic at Rock" - of course headlines like these are going to make ordinary people with savings on account there withdraw it double-quick.

Unfortunately the inform/entertain balance in journalism is constantly shifting towards entertainment and the "wow, fancy that" factor, regardless of whether the consequences are in the public good.

But is it the media's fault? Well no, sensation boosts viewer/listener/reader figures so perhaps it's our own fault for demanding it.

Personally I think the Govt and indeed the country needs to use the NR fiasco as the catalyst to re-examine its relationship with the entire financial services industry.

I work in a profession (not the financial services sector, thanks be) bound by a Code of Conduct that would see such wilful and flagrant disrespect for peoples lives as recently seen from Northern Rock (et al) rewarded with a very long spell counting the days at Her Majesty's Pleasure.

Northern Rock are a disgrace. The financial sector is a disgrace. We've seen pensions destroyed, we've seen public services destroyed by private companies and we're seeing lives destroyed, all, seemingly to fund the lifestyles of a bunch of poorly regulated, arrogant narcissists.

Come on, Britain, wake up.

Oh my god - am I the only person to realise that Robin Bruce (post #1) is being sarcastic. I worry about you people, I really do.

Of course Peston is not to blame for the collapse of the Rock, but I don't think anyone can say that the press, of which Peston (to his credit) was the forerunner, made a bad situation slightly worse.

What if another bank goes the same way?

How many banks can the state prop up at 拢30 billion a time?

The whole economy has been artificially and covertly inflated by imprudent lending. And the government has enjoyed the feel good factor from this hidden inflation.

I am a risk averse investor and despair at the opacity of the banking sector. I mean how can I find a safe bank.

Simple question - how many more banks or building societies are in a similar mess but not telling us?

I believe that the BoE is supposed to have good quality collateral posted against the loans it makes to NR. Of course that leaves the more exposed mortgages that are more likely to default on NR's books, reducing the average quality of mortgages funded other than by BoE lending, and thus making it less likely that wholesale funding can be rolled over as it falls due. Thus the BoE is less exposed than implied by Mr. Peston, but other lenders and shareholders become increasingly exposed.

The only reasonable way out of this is to wind down the low quality portion of the mortgage book before falling house prices lead to real losses from repossession sales failing to cover the mortgage outstanding.

You say that Northern Rock has borrowed 拢23BN which is effectively 拢730 of each tax payers money. What you have failed to do is tell the full story! You make it sound like Northern Rock has been given the money, they haven't it is a loan which means that they have to pay it back. As well as having to pay it back they have to pay interest which is quite a sum of money on 拢23BN. If the money was borrowed at an interest rate of 4% (I very much doubt it is as low as this) the profit would be 拢30 on each of the tax payers money which gives a total of 拢92million. If the Bank of England really didn't believe Northern Rock could keep up these payments do you really think they would lend such a large sum?
If I was a reporter I would at least attempt to tell a whole story. If I were you and couldn't get all information and facts to tell a whole story I would seriously consider whether or not I was in the right job!

Dear Robin - why have you not pursued the line that Rock is underwater on its capital adequacy and should have been shut down by the FSA? Its "regulatory capital adequacy" is arrived at through its own assessment of the credit risk on each loan, and we know they have overlent to dodgy sectors. The management team has an interest in understating the risk because then they need to hold less capital. Rock is itself a SIV that relies on its self-certification of its capital position - as reliable as its assessment of its liquidity position. This will all come out in the due diligence process of Flowers etc., and either (a) the investors will pull out and the FSA will have to shut it down or (b) the investors will demand that the government (taxpayer) recapitalise Rock before they take it off our hands.

The NR history is providing manna from heaven for the 'gotta blame' mentality in the city who are equally guity of neglecting the future.

Other than the backdoor nationalisation of NR, what other possible solutions are on the agenda?

Gentlemen you are paid big bucks to examine and provide solutions for the future not just bla bla about that which everyone is already enlightened.

Robert Peston is a Journalist with a responsibility to report the facts and offer where appropriate an opinion, that is all he has done.

Now is the time for a solution to the NR problem to be provided by the politicians and the city slickers, please get on with it and leave the journalists to do their job.

The Guardian estimates that BoE will earn 拢2bn from the so-called "subsidy" to NR.

Robert:

The Swedish govt's bail out of that country's banks in 1997 showed that swift action alone preserves value.they made clear that the bail out was just the prelude to sale of the banks, and that they wanted a commercial return. Brown & co have blundered in with no plan,a big cheque book, and seemingly no understanding of the people they are trying to negotiate with.

It's Barclays turn now to tap in into tax-payers money ! Who's next ???

Perhaps Barclays merit just as much attention as Northern Rock?

Barclays are not a bank that has extreme reliance on their mortgage business, and yet they appear to be in some difficulties. They are a bigger bank with many more savings at risk if they do get into trouble.

I wouldn't think the BoE actually have enough resources to guarantee all the money in Barclays should it get into trouble. Could be an interesting winter...

Of course there is no real liability on each adult in the UK of 拢730; but the figure does have rwo virtues.

One is that it scales the amount involved to something we ordinary mortals can relate to.

Secondly, it suggests to me that if there is a downside - the meltdown scenario of every mortgage defaulting - the 'hit' on the country's finances will be hard, but a long way from unsustainable.

PS I don't think RP appears in their dreams - more like their nightmares. Oh! my heart weeps for them.
Not.

....in response to "Northern Boy" (post no 43) - who says the NR book is worth 拢110 bn??? Bear in mind these so called assets were/are priced to model, not priced to market - this is, no one knows what the bonds are worth until someone tries to sell them. My guess is that you would have to pay someone to take them off your hands. Why do you think the B of E is shoring up NR?? If they did not, the Mortgate Bond market would be near completely wiped out in terms of value - massive amounts of so called wealth which has been used to bolster balance sheets and support further borrowing would vanish overnight. Hence the B of E bending over backwards to keep the NR boat afloat.

Taking a step back here, NR was not technically insolvent or in need of actual cash when they approached the BoE - they merely needed to know they had a facility upon which they may call. When this news broke it was clearly going to cause some panic, and in my view this panic was exacerbated by the fact it was broken not through the markets - who should be made aware in the first instance - but by a journalist on the 10 o'clock news (and whether you believe RP is to blame or not you can not say he didn't appear pleased as punch to be reporting it, which seems a little unprofessional when so many were potentially affected).

Fast forward a day or two and the 25% or so of NRs funding not needed from the money markets quickly evaporated as depositors withdrew funds. At what point NR has become insolvent is not currently known, so any speculation on this is merely just that - speculation. I presume that the BoE, HMT and FSA will be aware of this but given that we've no need to worry they may have taken to not telling us for fear of another panic.

However, I don't believe the wholesale run on NR is restricted to NR, nor was it based on their greedy or reckless lending. As RP has repeatedly (to his credit) pointed out, NR's mortgage book is very respectable. The recklessness was is not diversifying their funding sources. And while other banks fall over themselves in the proverbial queue to get their money out of the money markets (not renewing NRs debt being a consequence) this is mainly caused by the fact they are quite possibly in a position of frailty themselves - either needing money to shore up their own liquidity or having other doubtful debts on the horizon from other NRs yet to report on their positions/losses).

In the meantime, just have a look on the high st at who is trying to get those depositors in the door with rates of 10% (HSBC) - a sign they're trying help out the victims of the NR debacle or struggling themselves? We know in Q1 this year they were the first to feel the sting of US mortgage problems not even understanding the prepayment risk of US mortgage products. I wouldn't trust them with my money for sure!!!

So where next? Well, shareholders in NR will be lucky to get anything if the latest numbers are to be believed and they can feel mightily let down by the governance arrangements at NR, which the FSA should have challenged more rigorously (lesson for you Mr Sants?), and the executives who approved the stress testing of funds (Mr Sants has at least acknowledged this!). But claims that depositors are more safe there than anywhere else are misleading; safety to me implies certainty and I don't think anything is certain where NR is concerned at least until the new FSCS levels become clearer or a new owner is in place with an approved strategy.

The only remaining question will be, what about the rest of us, is there another NR lurking?

Robert, Robert, Robert ......just as it looked as if you were moving away from the sensationalism and more towards rational thinking, you come out with a formula which looks at the size of a debt compared with the number of taxpayers.

WHY?

Taxpayers haven't paid a thing!

& the debt is secured and (in the main) backed by sound assets!

I see no purpose in your linking these two numbers together other than some ego-centric desire to be at the centre of this story, to make it run-&-run as long as possible, and to stir irrational panic into an otherwise manageable situation.

But I'm afraid you really are making yourself look more absurd by the minute. How can anyone trust you when you quote "a reliable source"....most sane-thinking and knowledgeable people wouldn't touch you with a barge-pole for fear of seeing their thoughts turned into sensationalist claptrap!

Move on......the record's stuck!

Hmmm... 拢730 from me? That's not much to be honest. I'd rather have it go to the Rock to save it than to Mr Darling to waste.

#35 - "The Government" is getting rich on the back of the NR loan? How stupid are you? If the government makes a profit, it can be used for public expenditure or reducing taxes. It's certainly not as if Darling and Brown are going to pay it to themselves as some kind of bonus.

Round and round it goes.
Where? Nobody knows!
Houses built on sand in every land.
Standard & Poor your rating is low.
Will this mean we have less dough?
Banks bailed us out because we have nowt.
Where will it end? Perhaps around the bend?

Am I missing something here or will the BoE "magicking up" this kind of money create inflationary pressure? Today there's 23bn more in the UK system than expected - surely it can only be removed by Tax, Interest Rates or Inflation?

To put it another way, NR's mortgagees are still paying lower than a commercially viable interest rate so the rest of the system has to compensate?

Just regarding the idea that the government will be "making a 拢2Billion profit" from the interest payments on the 拢xxBillion ---- will they need to lend the Company some more money to be able to make these "interest re- payments" or will someone else lend NR the money to do that??!

If NR has about 拢100 bn of loans outstanding to punters (like me, actually), doesn't that mean that any buyer is going to need to find at least that amount to take over the company? I can't see any company having access to that amount of money other than by raising funds on the markets in exactly the same sort of way that NR, er, failed to do. Wouldn't the only other alternative be for the government to continue to guarantee loans (as in fact Lloyds apparently requested before all this became public)?
Methinks messy excrement / fan situation on the cards before too much longer ...

I'd still like to see a broader picture represented on this topic, Who else is looking for cash to hold up its business and to what extent. The Rock can not be the only one... Anyone?

Personally, I'd like my 拢730 of tax back if the best use of it that the government can find for it is to prop up a failed bank. And, unlike many on this board, I don't think that getting interest payments a little above the base rate is a good deal, especially when you consider the risks associated with NR and the UK housing market.

Everyone with a rock loan or mortgage should cancel their direct debits and standing orders on the 1st December.

With the rock the way it is, there is no way on earth they could take action against tens of thousands of people.

1st December - cancel rock DD day.

Robert, Maybe you should also write that the loan from the BoE is written off against a mortgage book of much higher value and therefore sooner or later in the worst case scenario the taxpayer would of course get their money back. This is sadly another example of you reporting half a story and casing problems. This is a disgraceful attempt by a suposedly unbiased 大象传媒.

The mess that is Northern Rock is not Pestons fault. The problem comes from too many derivitives in play with nothing to legitmately support them if called on.
With banks and particularly the Government having so much debt "off their balance sheets" the very notion of Darling or Brown sorting out this mess is laughable.
When something is bust it can have no value, that is the situation with Norther Rock.
The whole sytem has failed here, led principally by the FSA and an incompetant government. The B of E is also to blame for screwing up the offer made by Lloyds TSB.
Northern Rock must be allowed to go under for there to be some semblence of sanity return.
It is better to support the small number of Northern Rock savers than keep digging a deeper hole. The loan book could be transferred with no worries
If shareholders lose out that is the gamble they always took.
Teh system is grinding to a halt because banks are not coming clean with their liabilities, Barclays going to the B of E twice is no way to run a major bank.
Their sub prime positions must be marked to a reasonable level i.e 50% of par and then we can start sorting out all the knock on effects. Any other route is purely farsical.
Merill Lynch has shown the only true guts in getting its act together and the other banks should be ashamed of there antics to date.
Certainly if any bank thinks it appropriate to pay a bonus to any of its staff save their respective support staff, they should be stopped by the FSA unless they can show they are truly as sound as they preach which means only Lloyds TSB will be o k.
As for me well I intend to keep my money with Lloyds TSB and avoid the others like the proverbial plague.
RBS has lost the plot and paid well over the odds for something it nbever wanted, The attack on HSBC management has much more support that they care to admit and Barclays is now Barclays Capital who seek top suggest that they are imune from what everyone else is suffering, that just doesn't stack up.
We mustn't forget the pension funds and Insurers who are sitting on wadges of valueless debt now.
We have had short sharp shocks before and need one right now otherewise thsi will drag on for years like it did in Japan!

Hello Robert,

There is speculation on one of the bulletin boards that I read that the Northern Rock chairman is saying that NR has borrowed less than 拢20bn so far.

Now he may be wrong of course, but if he isnt wrong, then it can only mean someone else is now borrowing as well.

I think that we would all like to know if this is a story or just idle speculation. Are you able to do the digging and find us the truth?

Also, I was worried when Mervyn King said that he would liked to have sorted the troubles at NR out in secrecy. Whilst that might sound like a good idea, it really conflicts with the old adage, 'secrecy is the enemy of trust'. If we lose confidence in the BofE and the banks to let us know what their real financial situation is, we wont trust them, and demand higher returns for our money if we are going to deposit it with them. That would mean higher interest rates, lower investment and lower long term growth rates.

My view on this is simple, in the best interests of everyone, the Bank of England should make any major funding arrangement generally known as soon as possible after it has been agreed, for the good of us all. It must be charged with maintaining trust in the system, the only way to do that is to be open. And after all, it has stopped the run on the Rock without resorting to secrecy.

Chris wrote:

"Am I missing something here or will the BoE "magicking up" this kind of money create inflationary pressure? Today there's 23bn more in the UK system than expected - surely it can only be removed by Tax, Interest Rates or Inflation?"

Um... Where exactly do you think all of our money comes from?

It's ALL magicked up in exactly the same way by the banks. That's what makes a bank a bank. When YOU take out a loan, the bank magicks up the money and lends it to you... At 7% interest of course.

It'll only increase inflation if the BoE loans are new money and not replacing the inter bank loans which Northern Rock already had.

Jo #107 Keep a close eye on Barclays.

I sincerely hope not!!!

It seems to me that everyone who posts comments about the NR are either wildly optimistic about the banks situation or are complete prophets of doom.
Its the same about the comments on Prestons reporting. He is either the Michael Moore of financial reporting and is worshipped by his supporters or he is the devil incarnate responsible for the whole mess.
Lets face it the truth as always is somewhere in between. Sure the Rock is in a mess of mainly its own making but it aint about to go belly up nor is it going to make a phoenix like recovery and stay as it was. Its the same with Prestons reporting of the situation, he is a financial reporter for heavens sake so of course he had the right to air his scoop. However the glee in which he reported it (he was positively bouncing up and down with excitement) and the slant he put on the initial NR cry for help definitely panicked a lot of NR customers and led to the run on the bank. In his heart of hearts he and his fans must know this is true.
The sad thing is he was at it again last night. OK he was reporting the fact that the loan had topped 23 billion, doing his job as usual, but to say it has cost us all 拢730 each without telling the dumb percentage of the British public that this was A LOAN that will be repaid with over the odds interest resulting in the BOE making a nice little profit is again poor sensationalist journalism.
I,m an NR saver happy to keep my cash with them. Trust me I,m as tight as a crabs backside If I thought my money was in mortal danger I would have been first in line outside my branch in September. I have done my homework and she (NR)ain,t the Titanic but she will need to be salvaged and towed to dry dock.
So come on people lets use a bit of common sense when posting our comments on the NR or better still lets give it a rest and hey come on Robert do your job properly and report ALL the story in future.

Why is everyone so sure that the NR mortgages are such sound investments.
The credit crunch is not over yet and further difficulties will emerge. A general reduction in house prices is widely anticipated. Just how robust NR's mortgage book is will be tested over the next 18 months and the taxpayer, unlikely to have been repaid by this time, will still be exposed to serious risk simply to save a failed business model and management.

Has anyone got any views on the article in todays Journal (Newcastle) headed 'Reports of Debt May Have Been Exaggerated'? "Northern Rock's debt may have been massively over-estimated by the nation media. The 大象传媒 last night announced the bank had borrowed 拢23bn from the Bank of England" but the Journal has been exlusively told by the new Chairman Bryan Sanderson that the debt is "not quite at 拢20bn".

Is there a possibility that another bank is now borrowing from the Bank of England and it is all too easy for everyone to assume it is NR?

What is the current position with the Bank of England disclosing the fact that other banks are drawing on the same facility as Northern Rock - do they still report it?

The reason I take issue with Peston, is that he's deliberately stirring up posters like Dan (109), who seem to be gleefully hoping for thousands of NR staff to lose their jobs.

Of course, I have to ask myself why public money is funding a "blog". A blog is nothing more than one man's sounding off and personal opinion, yet the beeb are paying for it with our money.

Has the NR management's pay increases of 14% to 16% in June this year been reversed yet?

Above inflation increases are usually "performance related". But I guess in the current era of teflon leadership, even lurching their whole company towards bankruptcy, won't stick!

why didn't/doesn't preston report the other banks that have borrowed from the boe? why northern rock?

What qualifications do you have that allow you to substantiate some o your comments? Do you have experience of regulatory reporting? Are you a qualified accountant? I am concerned that your 拢730 comments are less vald than the ones that tell me that if I eat bacon or sausages I'll be in a box tomorrow.
Your assessment of the current situation is misleading and sensationalist.

PS I have current and lengthy experience of both of the above.

We the taxpayers may indeed have loaned Northern Rock 拢23bn, but what have we got in return? A charge over Northern Rock's assets. If worst came to worst, and Northern Rock failed, and the Bank were to sell of these assets, how much would that raise for the taxpayers. From the figures I've seen mentioned in reports over the last weeks, we, the taxpayers, would get back much more than 拢23bn.

A few points...

1) Robin Bruce's comments are excessive. However, the securitisation of lending in the mortgage industry is a complex issue - one which consumers are unaware of. Having an amplified media attention on one lender caused the run - you make the view on whether it's responsible journalism. large investment funds can sometimes jump on the back of this to make a quick buck on a falling stock. Look at what happened to A&L, they had no issues but stock plummtted 50% on a single day.

2) The credit cruch has been caused by irresponsible lending in the US, causing bad debt via the sub prime market, it's estimated there is between 拢50-75 billion of debt 'hiding' that has to come out sooner or later - some could have been securitised in the uk. This has caused the institutions who lend money to get really choosy - after all they don't want to lend to those banks in trouble.

3) Due to point 2 the choosy lending policy has now become irrational with everyone shutting up shop, and not lending at commercially viable rates.

4)Ironically NR is a prime lender with little bad debt but are reliable on wholesale secruitisation thus meaning their only source of moving the mortgage book on on renewals is to BofE. Once the credit crunch disipated they'll be able to move it off again and get back to normal and recover - possibly the cruch could finish in 18/24 months.

5) In the meantime they need to sit tight as do the chancellor and the BofE, unfortunately the brand has significant brand damage so need the immediate help on one of the three bidders to avoid a lengthy period of toughing it out to have any chance of getting back to normal.

I think this is a relatively balanced view.

Who chaired NR's Risk Committee ?

What is his track record in the derivatives field ?

So the questions are being asked now, who else besides NR is similarly effected? More importantly why? Huge bets are in play concerning these toxic waste dumps of so called ABP, and they are unravelling fast. It's in the interests of the banks and financial houses to conceal the enormity of the damage being done in the credit markets and elsewhere for the prime reason of self protection and bonus protection.My take on this ongoing fiasco is that what we see happening is market speak for "fessing up", without the fessing.Naturally, keeping as much of this financial carnage buried and hidden from prying eyes is an absolute essential for these so called "bankers" and investment houses in preserving their own cosy status quo. Which is why Peston is being vilified for being the canary in the mine.We can expect that this type of information will not be readily forthcoming, but will be continued to be extracted like teeth. It will continue to be cloaked in "efforts to protect the fiancial system" but the perpetrators won't pay the price I can bet. That all went out the window when moral hazard fell by the wayside. Darling's marraige with NR is perfect example of that.

110 Robbie, Barclays is indeed in the news, and a high street name around the country, so there are more and I guess this is the tip of the ice.....

I wonder If I can charge interest on the 750 shets I have lent the BoE to prop up NR. BoE should realise, like every other borrower, nothing is for free!

Slow with the news from the financial sector this morning Robert?
Too preoccupied with NR maybe. Have a trawl through the newspapers Robert. NR's position looks rather more stable than many other banks - good mortgage book, retail depositors money guaranteed, funds from the BoE replacing money market loans; three bidders for the company. Looks pretty good compared to the emergencies being signalled elsewhere in the financial sector.

Oh and by the way Robert apparantly NR is borrowng 拢730 from me to lend to others; well it doesn't feel like that. Maybe because its not true. The governement will either borrow the money or manufacture it - either way it will gain from the premium it charges NR. Nice business. As a taxpayer I could only ever be out of pocket if the Governement allows the value of NRs mortgage book (the gov's security) to decay - so it has a big big interest in not letting that happen.
NR will be stabilised and it will be sold on for about 拢3 - 拢4bn and rebranded. The gov will agree to its loans being repaid over a number of years. Apart from the compelling financial logic, the politics of the Labour Party and the importance of NR to a labour heartland will allow no other outcome.

Will the Northern Rock bail out affect us? only time will tell. However one thing that is affecting people in the Northwest, is the difficulty in selling a domestic house at a price that would have been considered reasonable three months ago.

Speculative builders are almost guaranteed to miss their targets this year, sale prices are declining and Valuers being more cautious with their figures. None of this has been seen in Land Registry indices because of the time between 鈥榰nder offer鈥� and 鈥榗ompletion鈥� [often over three months].

The current Northwest housing market was described this week as, [and I quote], it鈥檚 as bad now as it ever was in the early 90鈥檚.

But it will come to light, and when it does, will that Northern Rock loan book still look as rosy. That loan book that we as tax payers are underwriting, along with every other Government error of judgement.

In short we have a contraction in the money supply due to a reduction in credit availability, ultimately the effects of this will surface, and it could be a bumpy ride.

To my fellow bloggers, I suggest reading 鈥楾he Mystery of Banking鈥� by Murray Rathbard, you can download it for free off the internet.

Robert,

What is going on at the ECB?

I understand that they have been lending liberally to almost any bank registered with them, and have been taking dodgy CDO's and mortgage bonds as collateral?

If this is true, then you might think that they have problems at the Bank of England, but at least the BofE has collateral that is reasonably good value. What does the ECB have?

With all the writedowns in the value of these bonds, maybe the European taxpayer is facing the biggest fleecing of all time?

Hope you can investigate and find out the truth. The Bank of England is reasonably open about it's activities, but Lord only knows what the ECB is doing on behalf of the European public.

Anonymous, #51, re your point on moral hazard, the lesson here is not that banks can do anything and if it goes wrong the BoE will step in and everyone will be OK. Rather it's that if a bank's management screws up, its shareholders stand to lose most or all of their investment. One would hope that all bank shareholders are now looking beyond the headline numbers and asking hard questions of their directors. More than a few NR shareholders must wish they had.

Doesn鈥檛 Peston realise that the 拢23bn loan is at a punitive rate from the BOE. The result of the loan with be a reduction of the national debt by 拢2bn as eloquently explained on ft.com, written by a 鈥榩roper鈥� journalist as opposed to paparazzi
Peston.
Why does Peston not quote how much other banks have borrowed as a comparison. The Rock is the UK鈥檚 fifth biggest lender, of course you are talking billions. The loan works out at about 15000 average houses to put it in perspective. Other banks have borrowed from the Central European Bank, where do you think their money comes from Peston, the money fairy? Oops no it鈥檚 the tax payer again.
Your journalistic style is not worthy of an organisation like the 大象传媒, you seem to fool some of the people some of the time, go and get a job with the tabloids

The fault for the current chaos lies not with the 大象传媒 or other media outlets but with those in the City who encouraged this dodgy practice and got large fees in the process, along with NR and the regulators. The market makers if they had done their homework would have realised the NR's multiple (like sub-prime mortgages) of these short term loans was too high. They should have stopped lending on such a scale, or scaled back since the start of the year. This 23bn don't forget is essentially going to fat cats in the city and elsewhere who are being able to get all their money back at the tax payers expense. They have essentially taken no risk for a very large reward. What should have happened would have been a quieter rescue and some form of Govt order suspending all payments of such loans by NR to the various city fat cats.

re Poster 109

Never have a I heard so much rubbish. You're seriously suggesting that everybody defaults on their mortgage by cancelling their payments to Northern Rock.

Believe me, Northern Rock will take whatever action is necessary should anybody think they could get away with this ridiculous strategy.

By the way, as nobody is bothering to mention that NR HAVE NOT taken 拢23bn from the BoE (because it isn't sensationalist and doesn't sell papers), I will. THEY HAVEN'T.

Who do you think is also tapping the BoE for at least 拢5bn. Surely not Barclays who took 拢20bn only a few weeks ago ?? Who knows ! Find out.

There seems to be a ridiculous feeding frenzy against NR on these pages. It's like the lowest form of tribal bonding and it's quite sad.

Get some perspective. NR have taken a loan from the BoE which is secured against Mortgage loans which they have to and will repay after providing the Govt with a very good return along the way. Well played the Govt, nice little earner.

Why don't we all just leave NR be to resolve its funding and 'direction' issues and move on to some other frenzied attack - though I don't suppose Mr peston will let that happen.

GROW UP EVERYBODY !

Am i the only person who is now getting sick of the back and forth about who's fault it is?

Northern Rock business model was not sound and highly risky. But nobody cared about this when they were lending money to people to buy their dream home...

Now you have people jumping on the back of Peston's etc's stories believing they are 'informed' and know what they are talking about.

The only people that know how much NR have borrowed are the BoE, the FSA and NR themselves. Do you really think they would let it slip to any two bit journalist?

Peston - taking the approximate NR borrowings (a loan mind) dividing it by x amount of tax payers and then publishing the figure of how much it costs each person is just fanning the flames. Do you really hate NR? All you seem to be doing is turning public opinion against them. The board have done enough of that themselves.

I say leave them alone and see where we are in February. And are you people forgetting there are 5,700 in the NE alone who may lose their jobs? There are a lot more people involved in NR than Applegarth and his lot. And now the new chairman says keeping jobs is not his priority, and that he answers to the shareholders. That says it all. But does he know most of the staff are shareholders and some have lost thousands. Lions definately led by donkeys.

And if people are going to ask for a refund of the 拢730 tax paid, can i have a refund for my taxes that provide asylum seekers with cushy houses and lifestyles and what the Queen 'earns' for doing sweet fa?

To Dan at #109

Idiot. Don't waste our time.

Go on, cancel your DD. After 1 month you will be sent a letter asking for your arrears. You will then have solicitors send you a letter asking for your arrears.

At 2 months legal proceeding will start. And NR WILL take your house.

After all, you signed a legal agreement.

So you will either be homeless, or if NR fails its loan book will be taken over by someone else so your debt will have to be paid to them.

Or, sell your house and try to get a mortgage with adverse credit, in a market that is being reigned in.

Hello, is that Ocean Finance?

Are you protecting London banks by keeping the spotlight on the Northern Rock? I noticed you had a go at Scottish and Newcastle Breweries as well. Were you bullied by a geordie or something?

David Harrold wrote:

"Other banks have borrowed from the Central European Bank, where do you think their money comes from Peston, the money fairy? Oops no it鈥檚 the tax payer again."

Actually it might as well come from the money fairy. It certainly does NOT come from the tax payer. I get the impression that you and most of the people reading here really don't know where money comes from at all.

An amazing level of ignorance... Especially considering we all spend about 1/3 of our lives trying to earn the stuff the hard way.

It will be interesting to hear from the academics out there who they believe will benefit from this turmoil in the US sub-prime housing market (and may future UK turmoil)such has those companies that have similar genetics to that of the bluebottle or vulture. In fact, it wouldn't shock me if the major players haven't already created a model to see how they might benefit from the chaos and if by creating the monster in the first place then seeing it's demise their long term gains will be more than satisfactory whatever the consequences of the victims.

Your briefing of John Humphrys was pretty easily swept aside by Darling this morning who made it perfectly clear that the NR has good assets and the Governments clear intention is to stabilise its situation. The 拢100bn mortgage book is good and at 拢100bn worth a conservative 拢4bn - over 拢6 a share. Looks like your fox is shot Robert.

Robert,

Please can you be a little clearer. We are not each lending Northern Rock 拢730. As you stated the treasury is indemnifying the loan. I.E. the exposure (a very apt word for the current situation) that Mr. Darling has taken on on behalf of the British taxpayer would only be that much in the event that every mortgagee defaulted and every house used as colatoral was worthless and the NR had no other assets. You know very well that this is just not the case.
Probably a more important story is to find out if the treasury is getting any recompense from the BoE for the indemnity. As you mentioned the BoE is charging a punative rate for the credit line, that is in turn indemnified, so are taking no risk for greater reward than normal. If you could use your contacts to find out if any payments are being made into the treasury that would be worth reporting - imagine the scoop of showing that the British taxpayer is actually making a profit out of the NR situation! If TB were still running the country, there would probably be an OBE in it for you :)

No doubt Northern Rock were given their sound business plan by their financial advisors Citigroup and Merrill Lynch who have both had to fire their bisses this week because of the financial holes they have dug both themselves and no doubt their clients into.

Trust me there is going to be some absolutely monumental lawsuits over all this

I think that fine financial spokesman Mr H Simpson of Springfield summed it up best "D'oh".

I am reminded of the Burmah Oil crisis of the mid seventies. Burmah sat on a 50% holding of BP shares and had borrowed heavily in the USA to finance expansion. As a result of a big fall in BP share value the Burmah loans became unsecured and the largest financial collapse in history was imminent. The labour government under Harold Wilson made a rescue payment to Burmah but took the BP shares in return.
Years later a Conservative government sold the BP shares at a whopping profit for us taxpayers.
Sometimes socialist intervention in capitalist matters can be beneficial.

Ray, in posting 140 if the Northern Rock was as sound as you say and they have a fabulous book of loans then why has no one who knows anything about banking come in to buy them?

To date it seems only venture capitalists and publicity hungry media types (yes you Richard Branson) are interested. When we see a big name with lots of experience in banking then I'll have a bit more confidence.

I'll tell you why because the loans aren't going to be worth that or anywhere near that amount when it all unravels.

There is a huge amount of business tied up in medium term fixed rate deals that have yet to unwind. When the 4% fixed deals on 125% mortgages come to be refinanced at 7% then we will see the quality of the book and the people they took on!

Taxpayers paying 拢730 each is a lot less than they'll pay when approx 6,000 employees are on the dole because of your acid mouth Mr Preston - and remember most of these employees are currently tax payers too!!! It's awful to think that a man of your position may be to blame for this, exculating things out of proportion - but we all know though not to take in everything these pathetic journalists write, you'd never make a good agony aunt!!

#141, again some finance 101:

a) BoE is a public institution, where do you think the money that the BoE has lent NR has come from? Whether you play games as to who did the actual lending - Treasury vs BoE - it is still public money ie belongs to tax payers.

b) NR without the BoE loan is insolvent. You can tart it up as "Due to a freezing of the money markets, we are unable to roll over our loans" but that is a fancy way of saying we cannot pay our debts as they fall due, ie the very legal definition of insolvent. Think if you relied on being able to take out a new credit card and balance transfer everytime the 0% period ended and you suddenly had to pay interest and were unable to. It is basically what happened to NR(as a side question, hands up those who think that person was a genius or had sound financial planning?)

c)It is thus ironic that given the whole issue has come about due to people mispricing credit risk that people should think lending to a bank that is insolvent is risk free and so when that loan is at a higher rate than good quality banks it is somehow "profit". Add a couple of zeros to your salary and you could be a hedge fund manager specialising in CDOs....

Ray #140

I fear there is a fundamental misunderstanding about the value of the NR mortgage book.

Let's agree that there is, for the sake of argument 拢100 billion of value in the security and, say, 拢80 billion of loans outstanding. That does not mean that the loans are fully secured.

If 拢30 billion of those loans were advanced as 125% mortgages, and the rest of the loan book is fully secured, that still leaves a 拢7.5 billion shortfall in the value of the security (assuming the value of the properties remains the same).

My point is that we are not being given the full picture as to the value of the UNDERLYING security value that is being passed to BoE.

I read RP analysis on the beeb web site and it precipitated the postponement of a family weekend in the new forest and a drive to Newcastle to be amongst the first to get my cash out. Bearing in mind that at this stage the BoE had not offered a guaruntee and I had considerably more than 30K in NR, this was an entirely rational response. I have an economics degree and am fairly informed about markets. I found the coverage offered by RP to be entirely objective and, given the paucity of hard facts knocking about, high quality information. Why do people always want to find somebody to blame!

Firstly the loans advanced to NR are secured. If you accept that the loan book at NR (with one of the best arrears records in the business - a widely accepted fact) is of fair to good quality with reasonable LTV ratios, then the BoE is making something of a "profit".

Secondly, the banking system relies on some notion of lender of last resort. Using this facility does not make you technically insolvent. By asking for this facility to be made available may signal that you believe you will be soon without appraoching the central bank. But given that all banks have access to this and choose not to use it does not make NR insolvent - it is securitising it's more illiquid assets to ensure it can raise sufficient liquid funds to run its day to day operations.

Companies do this every day. The fact that NR are paying over the odds for this privilege means that their Shareholders will be adversely affected as servicing this debt will become, over time, prohibitively expensive. However, it does not make them insolvent.

I'd also suggest that the BoE may make changes to the reserve ratios soon to ensure that they can afford further such loans in a way that has less effect on inflation than merely "printing" more notes.

Lastly, can people on this blog please have a look at the risk reward relationship. The amount of people claiming to be risk averse is obscene - we all are!!!!!! Risk averse means wanting to be compensated for taking risk. The extent of one's risk aversion will vary according to many things and just because you might be more risk avers than the next person doesn't make you any better or indeed better off.

But hey, why let simple things like that stop you from trying to sound intelligent!!??!

Ian 144, The answer to your question is straightforward. There remains a serious liquidity problem in the market and other banks are taking big hits - HSBC last year and ML and Citigroup more recently have come clean, others have yet to do so. Some are borrowing heavily from the ECB and the Fed. Their eyes are on their own well being (maybe even survival in one or two cases)right now. Preoccupied with NR, Robert Peston has seriously under-reported the much larger story.
If you think NR mortgage book is shaky how would you decribe the assets of banks with a chunky share of rebundled American sub prime?
The share of NRs mortgage book with the kind of 125% loans you quote is less than 3%. So 97% falls outside your scenario. Once the financial market settles down over the next couple of months there will be plenty of interest in NR and its assets - which will continue to be sustained by BoE as confirmed by Darling this am - and worth a very conservative 拢6 a share.
The BoE has a clear view of the scale of the borrowings required by NR; it is not frightened off and has plainly taken the view that is not going to let the bank fail because of the likely damage to the UK financial industry. So the value of NR assets will be will be largely maintained and then realised either through a properly priced take over or through the sale of the mortgage book maybe in parcels small enough for the market to compete for and digest. This process is now started but at an early stage.

Could I please invite Mr Peston to do some research and give shareholders some advice about the possibility of legal action against Northern Rock? It's still early days of course, but a lot of private investors who are not speculators have lost a lot of hard earned money (by bailing out or hanging on). There has been lots said about protecting account-holders, but old-fashioned shareholders underpin business, the markets, the city et-al and the activities of NR directors appears to have been totally reckless. They should know their 'market' and the fundamentals of their business strategy - it doesn't take Einstein to put a shortage of wholsale funds at the very top of their corporate risk assessment.

Hi Mitch of #145, if you are an employee or ex-employee of NR then it is no wonder they got into trouble. If less people are paying then the amount per head goes up not down.... Think back to primary school arithmetic.

Neil# 147

I think you will find that if 拢30bn is 125% then 100% is 拢24bn and 25% is 拢6bn not 拢7.5bn.
Also the share of the mortgage book accounted for the 125% loans is NOTHING like 拢30bn.
But putting all of that aside, your calculation assumes that all loans were taken out yesterday. But they, and other mortgage loans, will have been spread over perhaps the last 5 years and more. Over the past three years national house inflation has been 20%, so (assuming the average duration of a mortgage is 3 years) the assets behind the morgage book have increased by 拢20 bn. And even using your figures of 30拢bn for the 125% loans, the asset value would have increased to 120% leaving a possible shortfall of 5/125 or 拢1.25b if every single one of the borrowers defaulted! But lets assume a default rate of 20% (huge by industry standards); then the exposure is 拢250m at worse even on YOUR ASSUMPTIONS. Because the 拢30bn is an heroic overestimate so too is the 拢250m.

Ray #150, you seem to be contradicting yourself. If the other banks are truely shaky - and there are rumours in the market to this effect - then this will not be a "temporary" freezeup of the interbank market which means the tax payer has an open-ended in time and money investment in NR. The BoE is not "frightened off" because it is public money and was probably ordered to do it by the treasury who underwrote the debt economically and politically. However to date their balance sheet has scared off every single investor who doesn't get unaccountably invest the public's money and how many banks do you think the BoE can rescue?

RE #149, yeah the loan to NR is collateralised and so are all the subprime mortgages - hint CDO = COLLATERALISED Debt Obligations - which kicked off this mess. So were all the mortages that caused problems in the late 80s crash. If there is a fall in house prices as per 80s how good do you think that book is going to be, historical default rates aren't the best measure because we've had a rising market for years. Quick question for such a wise man - skittish economy, massive reduction of retail access to credit and unknown effects of chancellor playing around with CGT that make NR's book more or less risky?

Danny 154
No contradiction - the big banks are not shaky but 'shaken' - quite a different sentiment. It is mostly their profitability in the current year that is being hit. There may be other smaller banks also with much overvalued assets - a problem NR does not have - where liquidity difficulties make their position more severe. But the Fed and ECB - if not the BoE - will keep putting funds into the market and liquidity will improve. And if the BoE has to come to the rescue of another UK bank we will not know about it. It may already have done so - NR was a compelling lesson.

As regards interest in NR, three serious bidders have gone public during a period of the most extraordinary turbulance in the financial markets. The markets will settle again; NR will be configured to attract more interest and the value of its mortgage book will be substantially realised. Watch it happen.

In her quiet and measured way this morning on Today Programme, Dianne Julius tore the heart from Robert Peston's ( and other hostile NR posters) arguments. Good that she invited for her inside understanding and excellent that it was Jim Naughty that she talked to; maybe the Today editors are beginning to get the message.

So what did she say?

First, that while the Fed and ECB recognised the serious liquidity difficulties in the market and successfully acted, the BoE sat on its hand for 5 weeks doing nothing except courting the words 'moral hazard'.

Second, that NR was a solvent Bank not exposed to the sub prime market.

Third that it was the failure of the BoE to increase liquidity by lending at lower inter bank rates for three months (not overnight) that led to the run on NR. No other country suffered a bank run.

Fourth, that had the BoE offered a borrowing facility to potential buyers the problem that the BoE had created would have been solved.

The picture is a crystal clear. The NR business model was jeopardised by the failure of the BoE to ensure liquidity in the market as did other CBs. But its assets are still good and given the borrowing facilty now in place they can be properly realised.

Ray #156

That may be so, but the problem now is that BoE and by extension this government and the taxpayer now have an exposure to NR's liabilites whereas they had none before (unless one chose to invest in shares in the bank or deposited money there).

If the housing market drops significantly then that exposure could prove very costly in both hard money and in political capital.

I cannot believe the naiivety of Ray Phillips in post 156.

Lets be very clear about this. The Northern Rock business plan was fatally flawed by being over reliant on the borrowing of short term loans. A true schoolboy error if ever there was one in banking.

DeAnne Julius is far from a disinterested party here. She was one of the founding members of the Bank Of England Monetary Policy Committee so she helped create the framework in which the B of E now works.

Also Dr Julius is a Director of Lloyds TSB who wanted a cheap 拢 30 Billion loan from the B of E (i.e. you and me) to buy Northen Rock.

If the business is that good why did she and her colleagues want us to subsidise their bid?

If Northern Rock is such a good bet as Ray seems to feel why couldn't they get the money at commercial rates?

Perhaps it is not as good as Ray thinks and not such a sound company!

It will all come out in the end.

I'm sorry Ray Phillips, but the NR business model was jeopardised not by any failure of the BoE but by its unique reliance on one source of funding, namely the wholesale banking markets.

The BoE is the lender of last resort. No bank should be relying on it for any part of its business model. Northern Rock must take its share of responsibility, both for its failure to do contingency planning for an entirely forseeable state of affairs (credit crunches have happened before) and its dramatic and irresponsible increase in lending during the spring and summer of this year.

Mike B, expect lots of legal action over Northern Rock and equally over Citigroup and Merrill Lynch (who happened to be Northern Rock's advisors by the way).

I wonder how much of Merrill's and Citigroup's declared losses to date relate to Northern Rock?

If I was going to sue anyone I would go against the advisors who have much deeper pockets than Northern Rock.

I would imagine a lot of people working at senior levels in banks or in the City will be avidly checking their Directors and Officers Insurance cover at the moment.

Anyone wanting to know the true state of the Northern Rock might want to read the attached.

It is the current London Stock Exchange report on Northern Rock with links including the up to date filings with the Stock Exchange; how many free shares directors were awarded this year in April and how many shares they sold last year at prices around 拢 9 a share.

It is all very informative!

To Mike B on post 151:

I take it that you were happy to take the increasing dividends when NR was undergoing rapid growth and being increasingly profitable? It doesn't take Einstein to realise that the value of shares can go down as well as up-get over it.

Of more concern than Mike's punt on the stock market is the fate of the Northern Rock foundation on which countless good causes in the North East rely for funding (via 5% of NR pre-tax profits). It is good that the Wearside MP raised this issue in the commons yesterday.

Ian 158 and Alan 159

Yes I am all in favour of clarity Ian. But repeating RP's mantra does not make it true.

The NR business plan was not fatally flawed by its borrowing strategy; it could have covered its position through proper insurance arrangements - King says this clearly in his interveiew today. So the business model was sustainable even in difficult market conditions.

But NR did not insure against illiquidity and so made itself vulnerable. It was King's job to ensure the market did not become illiquid. He failed to do so.

It was the FSA's job to assess risks - it too failed to predict the BoE would sit on its hands while the system of interbank lending ground to a halt. It made the same call as NR but neither got close to predicting the lamentable showing of the BoE.

As regards DeAnne Julius and LloydsTSB - of course the company would ask for borrowing facilities as part of the deal. The BoE's dreadful performance in August gave LloydsTSB little or no confidence that the BoE would ensure sufficient liquidity in the market. And now the BoE has effectively provided the guarantee it denied LloydsTSB and is trying to pass the buck onto Darling - as the Economist editorial said a month ago, 'The BoE - the Bank that got it Wrong'

Ian you seem to think that ML's and Citigroup losses include loans to NR; I know of no default by NR and the assets behind its mortgage book are not linked to the sub prime market. Making bricks without straw to make castles in the air while whisling in the wind perhaps?

Ray #163, lets me go through this as slowly as possible.

Without BoE's loans, NR is unable to meet it's liabilities that would make it insolvent. I am amazed that you think an insolvent company has a "great" or "sound" business model.

NR relied on being able to roll over it's short-term loans and there always being liquidity and always being small jumps in rates. In August neither was true. Locking up in markets is not uncommon, it happened in a major way in other markets in 87, 97, 98, 2002 and now. A business model that assumes that it will never happen - especially given it has happened - is not a "sound" one.

As for a "proper insurance policy", it was not the run that caused NR's problems but rather made them worse.

As for the quality of the book, it is entirely dependent on the rate of re-mortgaging away from NR, stability of house prices, unknown effects of the massive change in CGT, the state of the economy and the financial positions of it's mortgage customers. One can safely assume thus that the loan book is not "risk free" and so NR loan rate should not be that of the base rate and so the BoE is NOT making a "profit", it is getting compensation for the risk it is taking. That the compensation is set at the right level is rather undermined by the fact no one else is willing to take it.

As for liquidity, the ECB and the Fed do not have inflation concerns to contend with so flooding the marketplace with cheap money was an option for them. It is not one for the BoE.

Danny 164

I will use your pace...

NR was a solvent bank not exposed to the subprime market. (DeAnne Julius, AD and MK all on 6 Nov)

Its business model depended on adequate liquidity in the market. It did not require that the market was ALWAYS liquid. But that liquidity difficulties would be quickly resolved by the Central Banks as indeed they were in the other periods you list- a crucial point that you fail to mention.

Adequate insurance arrangements against illiquidity would have protected NR against the locking up of the market (DJ and MK 6 Nov) and the failure of the BoE to act early and decisively enough in easing the market freeze (DJ 6 Nov)

The run was the consequence of these failures. You seem to agree and as you say it (the run) made things worse.

As regards your points on the quality of the book, your considerations apply to every book of any mortgage lender. What we understand about NR's book is that it is not exposed to the American sub prime market and that it does not have a high level of default.

Ray, lets put this is small words you can understand.

1) There was a flaw in the NR borrowing pattern in that when it wanted to get money it couldn't. It did not spread its risks by using different sources of investment. This is a very huge flaw in any business plan.

It is not unlike going abroad on holiday expecting to get money from an ATM and paying for things on your credit card only to find that there isn't an ATM nearby and that local bars don't take credit cards. There needs to be a plan B! It is clear now that NR had no plan B.

2) Liquidity crunches happen. That's just the way of the world. The other banks expect this and build in reserves to take account of this. This is why no other bank is in the same position. To use an analogy NR have been running their car on the reserve and are now complaining that they have run out of fuel when they can't find a petrol station. The primary blame lies with the NR board not the B of E.

3) As to the B of E offering Lloyds TSB a cheap loan. That is not their job plain and simple. They are the lender of last resort not a competitive bank looking to pick up market share. The lender of last resort has to operate at relatively punitive rates to not only discourage reckless lending but also as a means of punishing transgressors.

4) Offering Lloyds TSB a cheap loan would almost certainly be illegal and construed as market distortion. To take this to its logical conclusion who shouldn't they offer cheap money to? Could I have a cheap B of E mortgage? After all it is our money they are dealing with!

5) Moving on to Merrill's and Citigroup they had disclosed multi billion losses on CDO's and their like. Who is not to say that theses write downs don't include some of the parcelled up NR mortgages? As NR's advisors they would be expected to lead from the front and take up some of the debts offered. We simply do not know whose mortgage is involved yet.

Danny (many posts), your comments re the riskiness of NR's mortgage book is hard to gauge by the (until recently) availability of cheap credit and fixed teerm deals.

So without referring to any assumptions a la Mike, Alan, Ian or even Ray above, let's just compare it to its competitors shall we? As I say, Risk/Reward depends on your own circumstances and preferences and whatever tinkering may be going on with CGT the fundamentals remain the same - NR's assets are of comparatively good quality with very limited exposure to LTVs>100%. Can I ask why the doom and gloom when many are predicting a worst case fall of between 10-15% or at best a cooling off? Even 20% takes us back only two years in prices, when most of these mortgages will have been fixed.

And the "schoolboy error" accusations of how the bank borrowed short to fund long shows how little some people understand banking. All banks rely on this for funding to some extent. The "schoolboy error" that was made was failing to stress test the liquidity scenarios to sufficient extremes (e.g. whether prolonged by a lack of action by the central bank or by a massive failure at another bank). To my mind, liquidity is paramount over capital, and the FSA may have taken their eye off the ball due to the new Capital Requirements Directive.

It seems that some of us have a clear understanding of what is going on, but different interpretations. However, many readers as they admit above are not aware exactly how this has come about and some sensationalist statments/soundbites from various parties are not helping to improve things.

The plain fact is we don't know how big a hole there may or may not be in Northern Rock.

There are lots of banks that have not yet delivered results, including Northern Rock. Their end of year 2007 results will make things a lot clearer.

Despite profits being up 0.7% in the first half of this year the Northern Rock board increased the interim dividend by 30.3%

By the end of January 2008 when the Northern Rock results for 2007 come in it should all be much clearer.

Then we can all judge the true state of affairs on the declared results.

Ian 166,
Thank you for commenting on my posts. I will do you the same favour and use small words. The episode is about the management of risk.

YOU SAID 鈥楾here was a flaw in the NR borrowing pattern in that when it wanted to get money it couldn't. It did not spread its risks by using different sources of investment. This is a very huge flaw in any business plan.鈥�
I SAY, there are always risks. NR and the FSA assessed the likelihood of prolonged illiquidity to be remote. Countermeasures should have been put in place even so because the impact of the risk was big.

YOU SAID 鈥業t is not unlike going abroad on holiday expecting to get money from an ATM and paying for things on your credit card only to find that there isn't an ATM nearby and that local bars don't take credit cards. There needs to be a plan B! It is clear now that NR had no plan B鈥�.
I SAY: It is not remotely like your analogy; credit cards have no intrinsic value. A 拢100bn mortage book does and is being used to secure loans from the BoE.

YOU SAID 鈥� Liquidity crunches happen. That's just the way of the world. The other banks expect this and build in reserves to take account of this. This is why no other bank is in the same position. To use an analogy NR have been running their car on the reserve and are now complaining that they have run out of fuel when they can't find a petrol station. The primary blame lies with the NR board not the B of E鈥�
I SAY: Yes liquidity crunches happen 鈥� but they are characterised by being short lived due to the intervention of central banks. We don鈥檛 know whether or not any other bank is in difficulty and your analogy is awry. A more apt use of your imagery is that there were plenty of petrol stations but none was selling petrol because they were keeping it for their own fleet of vehicles. And the wholesale supplier just watched the market seize up.

YOU SAY 鈥� As to the B of E offering Lloyds TSB a cheap loan. That is not their job plain and simple. They are the lender of last resort not a competitive bank looking to pick up market share. The lender of last resort has to operate at relatively punitive rates to not only discourage reckless lending but also as a means of punishing transgressors.'
I SAY: the first and overwhelming priority of a central bank is to ensure the well being of the financial market as a whole and the efficient operation of the systems that underpin the market. All else is subordinate to that overarching requirement . And to put that requirement at risk in order to punish 鈥� transgressors鈥� defies belief - the proof of the pudding is now in the eating!

YOU SAY 鈥� Offering Lloyds TSB a cheap loan would almost certainly be illegal and construed as market distortion. To take this to its logical conclusion who shouldn't they offer cheap money to? Could I have a cheap B of E mortgage? After all it is our money they are dealing with!
I SAY, Lloyds TSB did not seek a CHEAP loan. They sought a funding guarantee; very prudent in the light of the BoE鈥檚 dire performance in carrying out is primary task. In the event the BoE has not only provided a guarantee but also the draw down.

YOU SAY ,鈥橫oving on to Merrill's and Citigroup they had disclosed multi billion losses on CDO's and their like. Who is not to say that theses write downs don't include some of the parcelled up NR mortgages? As NR's advisors they would be expected to lead from the front and take up some of the debts offered. We simply do not know whose mortgage is involved yet.
I SAY, this is just conjecture. But it seems far fetched. Besides the BoE is standing behind NR and has replaced commercial loans 鈥� thus loans to NR from the money market are amongst the most secure.

In reply to #138 Colin Smith.
Yes I do know where the European Central Bank gets its money.The ECB is designed to be independent of political intervention, both from EU institutions and from member states. It also has financial independence by virtue of its having its own budget, separate from the EU budget, sourced from the NCBs. Its political independence was an attribute taken from the bank it was modelled after, the German Bundesbank, due to a consensus amongst economists that an independent central bank is the best way to avoid manipulation of the macroeconomy for political purposes. Furthermore, not only must the bank not seek influence, but EU institutions and national governments are bound by the treaties to respect this principle by not themselves seeking to influence the decision-making bodies of the ECB.
Basically NCBs are funded by tax payers so I reiterate my original statement regarding the money fairy.

Teddy would like to invite Ian, Alan and Danny to his birthday party. Sorry Ray but you have upset Teddy.

Teddy, I take it all back; NR is waste paper; White Knights are loopy; RP is a paragon of measured and fair reporting; the BoE is led by a proven genius on high moral ground; Ian is the king of apt analogy; Danny revealer of great truths and Alan the resounding echo of HMVRP.
Surely such recantation deserves recognition?

Ray,
Teddy has forgiven you and you are welcome to attend his party. Invites will hopefully be sent out in the new year.

Just a quickie
Regarding the BoE lending NR money at a 'puntive rate' and thereby earning all us poor taxpayers a 'healthy return' on the money we have (inadvertently) invested.

Yes - this would be so, IF NR were in fact paying the interest, but if I have this correct, NR cant meet those payments either, so we are postponing payment of the 'punitive' interest for up to FIVE YEARS - effectively lending THEM the money we are making from them but they can't pay, so we extend more credit.

Anyone else ever see a Laurel and Hardy sketch 'The Furniture Payment'?

"Is that the money that I gave to you, that you gave to him, that he gave to her, that she gave to me, that I gave to you, that you gave to her to pay my rent?....

I think I am having deja-vu here.

So - will those friendly bankers allow us asset rich but cash poor home-owners to dip into our equity again this coming year (oh come on chaps, just one more time - hey!) just to pay for Christmas this year ... oh ... and next year's new car ... and the family's holiday in Florida this summer (the dollar's so cheap we wouldn't want to miss out) ... and those overdue home improvement (after-all we won't be moving this year) ... and (dare I say it) the kids' school fees (wouldn't want the little blighters to slum it at the local co-ed). Hmmm! what do you think? Well, perhaps not this time - And, all this just as we've all max'd out on our lovely Technicolor credit cards. So what's the answer too this conundrum? - Well, of course - as luck would have it (and as usual) it's all somebody else's fault - so let's have a go at them. Who do we blame now, well, it's obvious - it really must be our employer's fault. After all, if they hadn't given us jobs then we couldn't have got ourselves up to our eyes in debt, and if they'd been paying us properly we wouldn't have had to borrow so much in the first place - so then, let's make 'm pay! Its time for wage demands, come on - who's first? And who cares if that stirs the Bears in the City ... give me a return to the good old days of inflation (remember that, inflation) the tried and tested way to de-value our (non existent) savings ...oh ... and our burdensome debts too, at least for those that keep their jobs and that can keep up with the interest payments. Some of you must remember inflation, sure you do? Not only does it comes with sky high interest rates (up to 30% APR on credit cards), it brings currency controls (no more unnecessary holidays in the sun), rampant unemployment and massive personal and corporate bankruptcies (all very Darwinian). In fact, if we make a really good effort and inflate the economy just enough, then we might even avoid our house prices dropping like stones and wouldn't that be good! But we better not go too far - or the Government and their evil cohorts (our employers) will catch on to what we're up to and they'll inflate the economy some more just for themselves, and wipe out the real value of those horrible pension things, you know, the things that they've been trying to shake loose of for all these years. Inflation, sky high interest rates, de-valued or worthless pension funds, and vanishing savings - IMPOSSIBLE you say - well, so too was an old-fashioned run on a British Bank!

There is a lot of general ,and sometimes emotional information about.Does anyone have the forecast income ,cost,profit and cash flow for the ROCK for the next three/six months .We all need this to become better informed and make our judgements on oncoming events much better balanced