Treasury Rock Losses
At last a bit of good news for Northern Rock and the taxpayer.
It has sold a chunk of assets – some equity release mortgages – and will repay a bit more than £2bn of the £26bn lent by all of us to the troubled bank.
So our overall exposure to the Rock, including guarantees for other lenders, comes down from £57bn to £55bn.
Which may not be huge progress, but at least the trend is in the right direction.
And, what is perhaps more important in a symbolic sense, the Rock does not appear to have received a fire-sale price. It is receiving a 2.25% premium to book value from Tony Blair’s new employer, .
What of the chancellor’s hopes – which he to the Treasury Select Committee – that we as taxpayers will ultimately get all our £55bn back?
Well, I can reveal that the Treasury has already incurred a notional loss on one element of its exposure.
You may remember that back on November 19, I pointed out that the so-called “premium” on the interest payable to taxpayers by the Rock is being rolled up into subordinated term debt rather than being paid in cash.
John Kingman, the Treasury official in charge of steering the government through the Rock crisis, told the Treasury Select Committee yesterday that the Treasury’s holding of this subordinated debt is less than £100m so far – though the holding is increasing all the time at a rate of about £6m every week.
Here’s the thing.
The Rock had already issued about £750m of this subordinated debt to investors. And the current market price of that “lower tier 2 subordinated debt” is 65p in the pound.
Which implies that the Treasury is incurring a 35p loss on every pound of subordinated debt it receives from the Rock.
If the Treasury’s holding is around £100m, which is what Kingman implies, the loss to date would be £35m – hardly calamitous, but the price of a school or two.
By the way, with this subordinated debt trading at substantially less than par, the Rock’s shares should in theory be worth zilch – since shareholders are last in the queue in any wind-up of a business.
But what strikes me about the pricing of the subordinated debt is that if the government were to nationalise this bank, there would be a most compelling punch-up between the hedge funds who hold the bank’s shares and those who hold its debt – with each claiming the moral high ground and first right to any spoils.
Other gloomy news this morning is the disclosure of a £100m deficit in the Northern Rock pension scheme – which is a worry for current and future Rock pensioners and is one more liability for any potential rescuer of the troubled bank.
I also have a bit more detail to add to what I wrote yesterday on ’s scheme to convert between £12bn and £15bn of the taxpayer Rock loans into triple-A rated bonds for sale to international investors.
In an attempt to reduce what would be colossal fees of £250m payable to the underwriters and arrangers, the Bank of England’s own name would go on the deal as one of the lead managers – along with Goldman, and .
And to achieve that all-important triple-A rating which would make the bonds sellable, Goldman has been talking to – the huge US insurer – as well Buffett (whom I mentioned yesterday).
Goldman’s hope has been that one or both of them would share the liability of guaranteeing or “wrapping” the bonds, to reduce the exposure of the government and all of us as taxpayers.
The deal hinges on two considerations. Will Brussels allow it, or will the Eurocrats rule that the deal falls foul of rules prohibiting state aid to the private sector? And would it be prohibitively expensive for the Rock?
Those are substantial hurdles to surmount.
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All said, Board should meet all Stakeholders.
Lender of Last Resort (LLR) is not a state aid. It is therefore legal and can continue (as long as borrower's operation is profitable)
LLR facility is part of monetary policy (rather than fiscal policy).
Sterling Monetary Policy falls outside Euro Monetary Union and European State Aid rules.
That may be why the other borrowers of LLR facility can remain anonymous and can continue under "other assets" category on Balance Sheet
Could we have some explaination of the qualitiy of the dept sold. Have JP Morgan cherry picked the best loans, and will UK "taxpayers" be left with only the dodgy loans on NR's books if this goes on?
JPM have taken the first step in a process that I have previously advocated on your blog. The only long term solution to the problem is for the Banking sector in the UK (Banks and Building Societies) to get together, carve up the assets into small blocks and each take a part of the assets. The securitised assets could surely also be transferred to new owners.
Some years ago I took out a mortgage with the Bank of Kuwait and found myself 4 years later with the Birmingham Midshires. The same needs to be done now leaving a digestible rump with the current share holders. The actual assets in NR just now are only a very small part (5%?)of the total mortgage assets of the Banks and BS in the UK.
Interesting reading as usual Robert.
Regarding the rumour that government debt to NR may be wrapped to facilitate a securitisation: if I understand correctly, this debt is secured against a slice of NR's mortgage book. So wrapping the debt would bear many similarities to guaranteeing the performance of Granite bonds (the brandname of NR's securitisation platform). This being the case there are a few observations to make:
- it's not too bold to say that, given Granite's name in particular, you wouldn't find any monoline(s) on the street prepared to guarantee (i.e. provide CDS) in the same mammoth volume as the amount the government is presuambly seeking to wrap
- given where Granite bonds (even with guarantee) price right now and current fears over strength of the monolines, even if the government can wrap their exposure, they will pay a substantial premium over its "typical" levels
- or are Goldman hoping the newly packaged debt will look "sufficiently" unlike Granite bonds? Again, it goes back to the observation that the collapse in UK/European mortgage-backed has more to do with market unpopularity/illiquidity, rather than concerns over the actual credit performance of the underlying mortgage credits (ie. UK mortgage payers, who up to now have not shown notable increase in default rates). The whole market has been tarred by the brush of a handful of US sub-prime borrowers...
Crash bang Wallop style of reporting is tiresome.
M&S report 2% drop. Preston writes the end of the world. Other retailers have reported 15 % drops in sales. Preston reports nothing.
Northern rock is rescued to stop all banks having runs on them by panicked public. Every bank in Uk breathes sigh of relief. Preston goes on for weeks and weeks about it. The alternative was melt down but he ignores this.
A little bit of calm thinking has been abandoned by Mr Preston before he writes.
Sadly he represents a view of the ý.
These are equity release debts so JP Morgan are banking (no pun intended) that over the long run that they will profit handsomely from this deal.
In the end, as an English taxpayer, I can't get too worked up about the NR situation because as I understand it, what has happened is that an accountant at the BoE is instructed to sit at a computer and enter £25Bn on £50Bn or whatever in an electonic ledger and that gets loaned out to NR against 'real' assets i.e. properties.
The BoE does'nt even need to print the stuff (money) anymore so in the final analysis does it really matter?
That is, won't 'creative accounting' save the day for a long time to come despite the warnings issued by the likes of Dan Atkinson ('Fantasy Island').
Maybe I'm missing something crucial here, in which case, I'm sure our more knowledgeable posters will put me straight.
So, JP Morgan manages to cherry pick some of the performing loans off NR's books, leaving the tax payer to take the hit on all the subprime crap left over?
Just why is this story being sold as though they've done us all a favour?
Hi Robert, I have an unsecured loan with NR - if NR starts selling off their asset book piecemeal (and this looks like the first step) what do you think is likely to happen to the unsecured loan book? I've looked all over the place for information on this, but nobody ever seems to mention this - only mortgages.
thanks!
"At last a bit of good news for Northern Rock and the taxpayer."
Why?
We all knew that NR holds some assets that are saleable - no doubt there are plenty more that can be released in dribs and drabs, if the overriding objective is to create a popular illusion that there is really no downside to the taxpayer loans/guarantees.
Equity release has surely always been a winner for the lender - premium rates of interest charged on wholly secured loans - and it's not really a surprise that an institution is prepared to pay more than par value for an existing portfolio.
Perhaps a slightly penetrating enquiry would be to establish how much over par this package of loans would trade at in a genuinely free market - then we could see just how much NR has had to discount from free value in order to secure the sale.
The really telling question concerns what's left at NR, and how much is going to be the overall nett cost to the taxpayer to get our loans repaid and guarantees extinguished.
None of the £55 billions actually exists; they're just book-keepers' entries. But the interest that our Bank of England earns on these ledger entries is real enough - even if it's just on the £24 billion, and not the rest which is just a contingency. And it's money commercial banks could have made themselves and aren't.
Sooner or later banks will remember that they make money by lending it to credit-worthy borrowers. Like Northern Rock.
There is no reason to suppose that the Northern Rock's principle asset - its mortgage book - isn't a strong asset. The interest and capital repayments are coming in as ever, and go towards the big profits the BoE is making out of this. Profits the commercial banks aren't making. Yet.
Here we have an enterprise which is solvent, yet begging for government money, and we give it. But instead of charging a hefty fee (to give the taxpayer his share) we give them money at a bargain basement price, and loose 35 mil! So let's just mark up the price by 50% so we can be sure to get our money back and some extra. This is not rocket science. Who is arranging things on our behalf? Why are we effectively giving away 35 mil to the very owners who drove the bank to collapse? This has to be changed, so they are the ones who pay to us!
BTW: can’t wait to see the hedge funds tear into one another. Please keep us informed about that.
Is the Treasury's debt lower or upper Tier2 debt? If, as I suspect, it is 'upper' tier 2 debt then it is less vauluable than lower tier 2 debt and should be valued even lower than 65%.
JPM, a somewhat large bank with plent of clever managers, that so far hasn't really written down much in this climate, takes on some of NR's mortgage book at a premium. Buying things for more than they're worth - that's not normally good business, is it?
So:
Why? What's in it for them?
Did Tony ask them nicely to start getting Gordon out of a hole?
Or do they think NR have undervalued their book?
Have they perhaps even cherrypicked the best loans from the book at a premium over the average price for loans on the book?
Maybe they like the business the funds owning NR throw their way?
Or are NR talking up the deal?
"that we as taxpayers will ultimately get all our £55bn back?"
You do know that people will believe you? You do know that all over the UK, you're making people believe that the tax payer has given 57b to NR, when it hasn't. You do know the damage that these misrepresentations cause?
You do know that 60% of the loan to NR has gone straight into the taxpayer's pocket, because they withdrew their deposits? You do know that if you whip more of these people into a frenzy the other 9b left will also go?
I don't know what NR did to you, but it must have been serious for you to be so desperate for NR to be liquidated. Ot is it simply something to tell your grandkids?
Your gutter press tactics are shameful.
I've been reading about this £100m black hole in NRs pension fund. And yet I also keep reading about the importance of NRs charity foundation which receives 5% of profits and other benefits. Shouldn't the charity have started at home? It seems absurd getting out the begging bowl at the Treasury, letting down their staff's pension and at the same time dishing out millions to a charity.
Other Chris (No.5), well said!
The unholy mess of NR is being sorted and the taxpayer may even make a profit out of it. There are more interesting and important things happening in the business world.
MOVE ON, Robert.
PS. Some of the drivel being posted on your blogs must really depress you
As Equity release schemes tend to have been taken out by older people and dependent on the exact details these should be premium assets as usually they carried a high rate of interest but were 'backed' by income from pensions possibly rising with prices- no problems with loss of jobs and inability to pay- and represented a lower percentage of the then asset value than Buy-to-Let & house purchase mortgages.
Depending on the characteristic and demographics of the portfolio, a 2.5% premium to book value could be a very interesting 'punt'.
Isn't there more than a bit of irony that securitisation is what caused NR to come unstuck but securitisation is now coming to its rescue.
Oh here we go again. For those of you who are blaming PR for NR's demise you really need to grow up. Your like a broken record. What happened to NR was at the hands of their exec board and business model. PR reported it - thats all.
I for one am grateful for RP for reporting the news as it is. NR has itself to blame no one else. Its about time that these instituations got their payback! It will serve as a lesson for all other banks/business society's out there!
As Equity release schemes tend to have been taken out by older people and dependent on the exact details these should be premium assets as usually they carried a high rate of interest but were 'backed' by income from pensions possibly rising with prices- no problems with loss of jobs and inability to pay- and represented a lower percentage of the then asset value than Buy-to-Let & house purchase mortgages.
Depending on the characteristic and demographics of the portfolio, a 2.5% premium to book value could be a very interesting 'punt'.
Oh here we go again. For those of you who are blaming PR for NR's demise you really need to grow up. Your like a broken record. What happened to NR was at the hands of their exec board and business model. PR reported it - thats all.
I for one am grateful for RP for reporting the news as it is. NR has itself to blame no one else. Its about time that these instituations got their payback! It will serve as a lesson for all other banks/business society's out there!
To Andy #9 - the reason Robert continues to talk about NR is because it has ramifications for each and every one of us, due to the folowing salient facts that you seem to dismiss:
1) It's the first run on a bank in 150 years - you seem to think that this is NOT an indicator that something is wrong in the banking system
2) The US banks have sold UK banks hundreds of billions of pounds of SIV's and CDO's that were GUARANTEED triple-A rating, which have now been downgraded (by the US itself, surprise!) to triple-C rating, thus rendering them all pretty much worthless. This is obviously NOT a problem in your eyes.
3) We are running approx 12 months behind the US in the credit crunch. Our housing market has not collapsed yet - but it will - and then, as well as our banks having to deal with the worthless crapola the US has foisted upon us, they will have to deal with our very own sub-prime turmoil. Obviously, this won't affect you.
4) We all know politicians lie. It's their job. We all groan and shake our heads when another one gets caught with his trousers down. Notice, Andy, that Gordy and Darlink are telling us everything is under control.
Keep up the good work, Robert. History will recall you as an honest man.
Post 9, Tell me if you understand what is happening here, if as you say 60% of the 55 billion (that equals 33 billion) has been returned to depositors yet Northern Rock's debt has not reduced as the depositors cash has been replaced by the Bank of England then the Bank of England has basically written 33 billion of new cash increasing the money supply and increasing inflation. Surely rather than get defensive about a very poorly managed bank it makes sense to ask the question why our government feel the need to add further inflationary pressures to the British tax payers and please don't tell me you actually believe that real inflation is along the 2% line if you check the make up of that index then you will see those figures are not worth the paper they are written on.
Please tell me the Government has no intention of guaranteeing the NR pension scheme or are NR employess now civil servants.
Comments by John Watson, pensions trustee noted on the ý news article but am I right in thinking he is also a NR employee/former NR employee and therefore not really as independent as 'trustee' sounds.
I'm not sure I understand this "subordinated debt" business, and what it means when it's "trading at 65 p in the pound".
Does that mean, in layman's terms, that the taxpayer has just given £35 million to Northern Rock?
Well Robert,
By the looks of the previous posters to this blog at the time I write this (1-9) it looks like people are finally tiring of your sensationalist and idiotic reporting.
Good.
Post 9, Tell me if you understand what is happening here, if as you say 60% of the 55 billion (that equals 33 billion) has been returned to depositors yet Northern Rock's debt has not reduced as the depositors cash has been replaced by the Bank of England then the Bank of England has basically written 33 billion of new cash increasing the money supply and increasing inflation. Surely rather than get defensive about a very poorly managed bank it makes sense to ask the question why our government feel the need to add further inflationary pressures to the British tax payers and please don't tell me you actually believe that real inflation is along the 2% line if you check the make up of that index then you will see those figures are not worth the paper they are written on.
When you mentioned Warren Buffett I assumed you were just giving an example of a reinsurance business, not a company that had been approach.
I had read that Buffet, who has only just got into this business, was going to keep to US 'local government' debt insurance. If it came off presumably the Buffet company would have an currency exchange rate hedge to finance in addition to the reinsurance risk.
The fact that the equity release portfolio has been sold doesn't say a lot for the quality of the rest of the portfolio, in particular the "buy-to-let" portfolio.
Still believe Northern Rock should be nationalised and sold piecemeal when and if the property portfolio regains its value.
Any idea how much is tied up in commerical property, that could be the biggest black hole of all
I have tried to log several items on this blog and get the system error every time.
ý invest in some more bandwidth!
So, JP Morgan manages to cherry pick some of the performing loans off NR's books, leaving the tax payer to take the hit on all the subprime crap left over?
Just why is this story being sold as though they've done us all a favour?
Robert, you should take the increasingly desperate attempts to rubbish your reporting on this and other related issues as a compliment of the first order. You have clearly rattled the approriate cages! The sub-prime 'securitization' debacle has yet to work its full misery on western economies.
"Tony Blair has taken a part-time post with US investment bank JP Morgan."
"Northern Rock has agreed to sell £2.2bn, or 2%, of its mortgage assets to US investment bank JP Morgan."
Beginning to read like a Robert Harris novel
Andy -
Why do you think this £57bn doesn't exist?
It's simple:
NR lent money to people.
they themselves borrowed this money from other people and banks.
these people and banks wanted it back so NR have borrowed it from UK plc and given it back to them. so money has changed hands. Uk plc's only money is taxpayers money, (unless it borrows itself as in gilts).
So this is real money from public funds. If NR doesn't repay it then it comes out of taxpayers money. In the unlikely event that it didn't repay any of it, as an extreme example, the government would need to collect around £1000 for every man woman and child in the country to make up for it. Are you quite happy to write out a cheque for this?
Now you may understand why it is newsworthy.
#7
Adam
Get your facts right..from what I have read about NR I have gleened that they do not sell to sub prime customers / mortgages...a fact lost in the hype..the fact of the matter is that NR have high quality loans / mortgage book...
Jo
#7
Adam (Sun Reader)
Get your facts right..from what I have read about NR I have gleened that they do not sell to sub prime customers / mortgages...a fact lost in the hype..the fact of the matter is that NR have high quality loans / mortgage book...
Jo
Driving back from Edinburgh tonight and having just passed the Royal Bank of Scotland's headquarters "campus" I was amused in an ironic way to hear a report on Radio 4 news that said that the Govt were disappointed that the UK banks hadn't stepped in to save NR in the same way the Bank of America had stepped in today to save some US version of NR the name of which I can't remember.
The difference is of course that American banks consider themselves to be an integral part of the American community.. UK banks have removed "community" from their spellcheckers.
Post 1 is absolutely right!
Loans taken from Fed, ECB and BoE do not count as State Aid or taxpayers money. The Fed, ECB and ECB are legal entities granted independence by respective governments.
These loans are open market operation to maintain financial stability and liquidity, similar to foreign exchange intervention.
Loans taken from Treasury will count as State Aid and taxpayers money because Treasury is the Government's Treasurer.
In the good name of unbiased reporting, please recognize this distinction and refrain from using "taxpayer's money" as this confuses the general public.
Excellent news, so we might get £2bn back leaving our exposure to the Crock at a mere £55,000,000,000. Well break out the champagne, I'm so pleased we've only got 55 billion on the line instead of 57.
Everything the government has done so far around this entirely predictable fiasco can be summarised in three words:
READY.... FIRE.... AIM....
Is this continued use of the word 'Eurocrat' really appropriate?
A quick search on Google for the term 'eurocrat' suggests that this word is generally accepted to have Eurosceptic connotations, and it seems unfortunate that these otherwise first-class journalistic commentaries are spoilt by this small element of political bias.
I think it would be worthwhile for Eurosceptics everywhere to consider whether they are really, in principle, against having common rules prohibiting most state aids throughout the 30-member EEA, or whether they just like moaning about anything which comes out of Brussels and which impacts on their domestic government's precious 'sovereignty'.
Robert Peston claims that if NR subordinated debt is trading at 65 pence in the pound this implies that NR equity should be worthless. The fact that it isn't shows that the market isn't valuing NR properly.
This argument doesn't really work. Suppose that there are two possible outcomes for NR. In one, 'administration', equity is worthless and debt is worth less than its full value (how much less depends on how much the liquidator can sell the assets for). In the other, 'nationalisation', the equity shareholders will get something, and the holders of debt will get paid in full. If markets think both outcomes are equally likely, then if you average over the two outcomes on average debtholders expect to get less than full repayment (so debt trades at a discount), and shareholders expect to get something (so equity still has some value).
Quite simply Northern Rock is the preffered lender to councils the breath of the Country...Its these liabilities the government is worried about not the savers...All previous entries on blogs outlinning this point have been removed by the ý....and it has not in any financial broadcast noted this very important oint