Banks' scary auction
How do you cause a run on a bank?
Well, according to the wags in the City, you put a brilliant economist and two former Whitehall permanent secretaries in charge of the .
It's not the funniest joke ever and it's not fair. But it contains a grain of truth.
The Bank seems to have lost the feel it had for markets during the previous few years when successive deputy governors were former investment bankers (also, the previous Governor, Eddie George, had a nose for the important weather in the City, even though he was a Bank lifer).
So will the Bank redeem itself with tomorrow's Β£10bn auction of three-month loans?
Well, it has already injected just a bit more confidence in markets simply by announcing that it would be having the auction. Bankers are reassured that the Bank is at last prepared as a matter of routine to lend longer than overnight and against a much wider range of collateral than hitherto. By way of evidence, the interest rates at which bankers are prepared to lend to each other have come down.
But this very success could also spark disaster.
The Bank is charging a penal, minimum interest rate on the three-month money of base rate plus one percentage point, or 6.75 per cent.
Why? You all know the answer, so repeat after me: "moral hazard". Yes it is once again because of Mervyn King's understandable fixation on spanking the banks for getting us into this money-markets mess in the first place.
But here's the problem with his refusal to charge a market interest rate, as opposed to a punitive one. A bank would have to be truly desperate to want to take advantage of the pricey money - and heaven help said desperate bank if its identity were to leak.
The big banks, , , and so on, are awash with cash and have no problem borrowing from other banks at the interbank market rate of 6.34 per cent. So it would be totally irrational for any of them to borrow from the Bank at 6.75 per cent and none of them will do so.
The only banks for whom it would be rational to take advantage of the Bank's auction would be those smaller banks in danger of running out of money and to which the other bigger banks don't dare lend.
In other words there will be a massive stigma attached to accessing the Bank's new facility. And for that reason, no bank would do so unless it were in pretty dire straits - which magnifies the stigma.
That said, in theory the names of any borrowers won't be disclosed. But I am not sure that's sustainable under Stock Exchange listing rules. Asking the Bank of England for this money is so plainly a massively price-sensitive event (it would knock the relevant bank's share price for six) that the borrowing bank would surely have to tell its shareholders that it had done so. Just remember how the share prices of and were pummelled by unsubstantiated rumours that they were running out of cash.
There's only one bank which can take advantage of the auction with impunity. And that's - simply because its reputation has already been smashed up by having received emergency loans from the Bank of England. In fact, it would probably be irrational for Northern Rock not to participate in the auction.
The risks of doing so for any other bank are daunting, to put it mildly.
Some bankers are therefore trying to gee themselves up with the thought that Mervyn King might yet have a Damascene conversion.
If at this last hour the Bank switched to charging a market rate, all the banks would be delighted to participate in the auction - because there would be neither be a prohibitive financial cost nor a devastating reputational one.
I'm 
°δ΄Η³Ύ³Ύ±π²Τ³Ω²υΜύΜύ Post your comment
Still trying to kick Mervyn King are you Robert? To be honest, it's getting really boring now.
Robert
You have conveniently ignored the fact that many thoughtful people believe that the biggest mistake the Bank made was to brief you rather than make an announcement to stock exchange. It was your sensationalist and breathless explanation on ΒιΆΉΤΌΕΔ news that was bound to engender panic. They should have known that go in for that kind of thing: private equity, investment bankers, Liars loans, microsoft vista etc.
If you are an economist, as you claim to be, I cannot understand why you want to blame the credit crisis on the Bank of England, unless you are in the pocket of the labour party like every other ΒιΆΉΤΌΕΔ journalist. You may as well re-name it the LBC.
To be frank, your opinions are so biased I find it offensive that you are paid with public funds. But then I doubt you will publish this.
Sure it's a massive stigma if they need to access these funds.
But that's the whole point isn't it?
To make the Banks think again about getting themselves into bother with dodgy practices.
Who'll suffer? The managers and the stockholders. The people who should understand all this.
But that still doesn't mean there'd be a run on the bank. What would cause a run on the bank would be someone popping up on primetime TV saying "Oh my god, what a crisis, bank X has to be bailed out"
But noone would be stupid enough to do that. Would they?
I'm sorry but why exactly are we angling to let the banks off so lightly?
These I would remind you are the august financial institutions that - with tacit Govt approval - created record household debt levels, drove up house price inflation to their own ends, helped produce a record trade deficit and supported private equity deals as against real venture capital.
Now they're asking for lenience? You must be joking. I'd not just administer corporal punishment I'd want some to face the death penalty.
The banks want free money to make money.
In market don't you have to pay the cost for what you want.
Have you ever read about Cost benefit analysis. What is wrong with banks saying some deals are not worth the cost. As a small businessman I do that every day.
Basically it comes down to free money for the wealthy and that's just GORDON BROWNS ECONOMIC POLICY
The BoE rate of 6.75% is not a "punitive" rate. If no big bank will lend to a particular institution even at that rate, it means they have a view on that institution's default risk which puts the market rate of the loan much higher. That is the starting point of the stigma - if you need the BoE here, you're a risk. The joke of this "moral hazard" is that even with a 1% premium, the BoE would still effectively be subsidizing, via a lower-than-market rate, insolvent institutions.
It isn't rocket science the Govenor of the Bank of England has sought to find an avenue to retreive his initial stance that banks who screwed up don't get bailed out.
But it is to no avail,
Alistair Darling has shown a complete lack of understanding of events and the commitment he has given is both incompetant and irresponsible in extreme teh man must go.
Business has winners and losers and to bail out losers of one sector
(the banks) at the expence of all others in industry is insane.
For the FSA to have caved into the banks demands shows a total lack of judgement and balance.
How many proprietary desks were shorting 25% of Northern Rock and other second tier banks whislt their mouth pieces were pleading for calm!
The duplicity of it all shows how London has lost its crown.
It's a total sham and the as yet final problem still unknown is: how many investment and pension funds are holding 100's the trillions of pounds of now worthless structured investment derivitive paper.
The real question we must all now ask is what actually constitutes a solvent position and what do we mean by assets. Until that is made clear on a globally accepted basis we are all up the creek without a paddle.
it's more important to be pragmatic than right. i think king fails to see this. also less of the preston bashing. he is merely taking a more prudent line in solving some of the problems. we are gaining nothing by kicking the banks when they are down.
This is spot on. The BOE really wants to cut its own nose over all this. No wonder sterling is going through the floor. Those in the know can see what a mess the BOE is making of this. If we're going to have a soft landing institutions need to put oil into the wheels and not sand. Who knows what he is thinking?
Robert, I believe your reporting of the Northern Rock situation is a disgrace. Everyday the ΒιΆΉΤΌΕΔ publishes more and more negative stories concerning this bank and the so called βglobal credit crunchβ, this doesnβt help the banks that you consistently mention, investors, and savers, not to mention the whole of the UK economy. Please stop sensationalising this situation, Northern Rock simply asked the Bank of England for a loan because it couldnβt find credit elsewhere. That is what a sensible business would do, after all doesnβt the Bank of England has a legal duty to control the economy?
The ΒιΆΉΤΌΕΔ should be ashamed, as in my view their over reporting has caused thousands of people to loose money!
I don't think Robert is attempting to 'spank' Mervyn. It is really a very simple problem. No matter what the Bank does, easing the strain for cash-strapped banks by providing extra liquidity whilst avoiding rewarding excessive risk taking (also known as "moral hazard") will result in an unavoidable stigma for any institution which takes advantage. Expensive money is arguably better than no money when you're in trouble.
The BoE's hands will remain tied until the lending drought eases, which will only end when the full extent to which banks are exposed to the subprime market is known. Until then, the best the BoE can do is provide funds at a punitive rate. The alternative is to bail out excessive risk takers and face future consequences in something more painful than a credit "crunch".
Give up Mr Peston or come out as a Nu Labour supporter and state u r toeing their line.
We know who to support and it is NOT Alistair Darling!!!!!!!!!!!
How do you cause a run on the bank?
One missing ingredient Robert. I can't believe you have forgotten. Let me remind you - A sensationalist media.
I see no harm in naming a shaming poorly managed banks. Why should they be protected.
Who's "preston". If we are to have less "bashing" it should apply to all, including journalists. I'm sure Mr King would appreciate it.
Don't the frothy excesses and rapid crashes of the last couple of decades tell us that Mr King's insistence on charging a punitive rate for this facility is the right thing to do? Sadly, I fear that a Catch-22 might develop where he is proved to have been right only after he caves in to pressure to be more liberal and a much more serious correction eventually ensues. I just hope he can keep his nerve.
Everything was hunky dory under Eddie George wasn't it?
But let's not forget that Mr George himself acknowledges that the low interest rates of the post-9/11 period were politically motivated (more important to avoid a recession than to control monetary inflation) and encouraged a debt bubble to get out of control. And this is the problem that Mr King has been left to deal with.
There's no perfect solution to this, but once again Mr Peston seems to think that doing whatever his banker mates want would be a good plan. Personally I think it entirely appropriate that this money be lent out at a punitive rate. I don't see it would be so bad for a few more banks to have their reputations damaged, if they have been taking excessive risks. Apparently the government is going to bail out depositors anyway, so protecting the banks is merely to shield the city boys and shareholders whose greed got us here in the first place. It's these people who are whispering in Mr Peston's ear and trying to influence the BOE into being unwise.
If we allow this kind of excessive risktaking to continue in financial institutions we are going to end up with even worse problems than we already have. So sneering at Mr King's concerns about moral hazard seems a bit silly to me. I agree with the first post, it's definitely time to stop the King-bashing.
A ΒιΆΉΤΌΕΔ story a rumour that Northern Rock wiLL withhold their dividend which will or won't
going xd tomorrow.
No official announcement before trading ended.
I feel that the ΒιΆΉΤΌΕΔ have behaved badly .
Did you really expect a man who from his recent actions clearly has a very tenuous grasp of the real world to understand the simplist of market forces.....I have no doubt that Mr King is horrified that some people lie on their mortgage applications....perish the thought
RE: Northern Rock.
Hi Robert,
If you have any more "insider information" same as just released regarding the cancellation of the dividend before an official RNS is released, could you please send it to my e-mail address. I will give you a heafty kickback for this service ;-) Thanks in advance.
John
'Penal rate of interest'
- that's OK with me, since it's my tax money being lent to prop up a bank that's in temporary trouble due to it's chosen business model.
'A bank would want to be truly desperate to use this new BOE facility'
- that's OK with me too. Why should I think it a good idea for my money to be used to rescue a bank, other than at a penal rate?
'The only banks that would want to use this are banks that no other bank would want to lend to'
- so why would I want to see my tax money lent to it?
If its bad business for other banks to lend to it, then it's bad business for tax-payers money to be lent, other than at a penal rate.
'The risks of doing so [borrowing from the BOE] for any other bank are daunting'
Northern Rock is solvent (by all accounts), and the depositors' money is guaranteed by my tax money. Why does NR have to be sold? Why can't it just carry on, albeit with much lower profits?
Who would be upset about this, or if a few more NRs were forced out of the woodwork?
Answer: the shareholders!
The 'risks' you refer to are all shareholders and directors risks, since depositors are currently protected by tax-payers money (and a good thing too).
'Their investment would be knocked for six'
- and why not?
Anyone who buys shares knows that they can go down as well as up. Are you really suggesting that tax-payers money be used to subsidise them as well?
If King starts to charge a market rate, as you suggest he might, this is exactly what would happen. The situation would be that bankers, shareholders and depositors will all be protected from any misfortune stemming from bad business, and the protection will all come from taxpayers.
I don't see anyone suggesting that borrowers also be protected by tax-payers money!
The banks make vast profits while the government sits back and lets them urge people into lifelong penury, all in the name of free-enterprise market economics. And you suggest the tax-payer might effectively insure the directors and shareholders in this game? I think not.
J K Galbraith called it "socialism for the rich".
For everyone outside the city looking at this, MK's actions have seemed to be perfectly sensible. The banking community needs a damned good slap in the face to ensure it learns the basic common sense lesson that the tenor of your financing needs to match the nature of your assets. Aside from a limited number of banks there won't be any major consequences as the profits will just be made elsewhere - hedge funds shorting shares etc. Great PR too for the diversified banking operations who can prove they don't need the emergency fund.
In fact, I'm struggling to see a downside to this.
Robert,
Good comment - whatever the rights and wrongs, and who is to blame, you hit the nail on the head here in that it's a catch 22..
If Merv King wants to uphold the correct priciples and not subsidise the banks in geneeral, he might create a run on another bank (as like you I assume the news would leak of banks taking these punative loans)..
So he might well have to go for a more pragmatic pricing policy on these bonds..
Andy
This is how you cause a run on the Bank! I give them Β£100.000,=. of my savings
2. they invest it.
3 they loose it.
4.The BoE bails them out!
5. I get my money
6. The CEO gets a bonus!!???!!
You've got to be kidiing? who runs this sort of economy?
Next ABN AMRO ?
RTCB
Robert,
You`re reporting of the NR story is sensationalism to the extreme. You are a disgrace as someone has said above. You are costing folk money worse you will probably cost folk their jobs. How do you sleep with that on your consience?
I hope you get sued for insider information.
Look, I'm no economist, but that might qualify me perfectly for various high paying jobs in the city. Anyway, here's my take on it.
Amongst all the issues with "Moral Hazard", isn't there an argument that even if the BoE lends, the higher rate WILL punish those sufficiently to discourage moral hazard. If I run a hardware store and prove a bad credit risk, often I will be penalised by higher purchase costs (through COD terms of payment). My costs go up, my profits suffer.
This is effectively what happens when a bank goes to the BoE for cash (or any other bank for interbank loans where a risk premium applies). There are commercial consequences for their poor business managament, but such consequences might not necessarily be apocalyptic.
So, if a bank's profits are reduced, then arguably heads will roll. If they don't, then it has little to do with the BoE and a lot to do with the ability of shareholders to control or sack directors when they under perform, which is a different issue all together.
Ciao for now.
I'm utterly staggered that some of contributors on here are blaming the Northern Rock fiasco on Robert Preston and the ΒιΆΉΤΌΕΔ!
Who decided that City institutions are beyond scrutiny and who decided that when they screw up that the general public shouldn't be told.
It's high time people did understand that whilst making huge amounts of money and paying themselves massive bonuses how little "real" value the financial institutions are adding to the UK economy.
A bit short on logic, this posting. If the big banks are awash with cash as you claim, Mr Peston, then the only ones who might consider taking advantage of the BoE offer are the smaller and weaker ones, whether the money is lent at the interbank rate of 6.34% or at the BoE rate of 6.75%. Whether their identity is then kept secret or not won't depend on what the interest rate is. If big banks don't need the money, they wouldn't take the reputational risk of borrowing from BoE even at the interbank rate.
And if big banks won't lend to the others at the interbank rate, even with appropriate collateral, then the market rate for such a loan is by definition higher than this. So Mervyn King is quite right to insist on a higher interest rate for this use of public money.
All of which underpins the suspicion that all the cries for earlier BoE support were just special pleading from big banks that wanted to cut the cost of borrowing funds to get themselves out of the liquidity hole they'd dug themselves into.
'Penal rate of interest'
- that's OK with me, since it's my tax money being lent to prop up a bank that's in temporary trouble due to it's chosen business model.
'A bank would want to be truly desperate to use this new BOE facility'
- that's OK with me too. Why should I think it a good idea for my money to be used to rescue a bank, other than at a penal rate?
'The only banks that would want to use this are banks that no other bank would want to lend to'
- so why would I want to see my tax money lent to it?
If its bad business for other banks to lend to it, then it's bad business for tax-payers money to be lent, other than at a penal rate.
'The risks of doing so [borrowing from the BOE] for any other bank are daunting'
Northern Rock is solvent (by all accounts), and the depositors' money is guaranteed by my tax money. Why does NR have to be sold? Why can't it just carry on, albeit with much lower profits?
Who would be upset about this, or if a few more NRs were forced out of the woodwork?
Answer: the shareholders!
The 'risks' you refer to are all shareholders and directors risks, since depositors are currently protected by tax-payers money (and a good thing too).
'Their investment would be knocked for six'
- and why not?
Anyone who buys shares knows that they can go down as well as up. Are you really suggesting that tax-payers money be used to subsidise them as well?
If King starts to charge a market rate, as you suggest he might, this is exactly what would happen. The situation would be that bankers, shareholders and depositors will all be protected from any misfortune stemming from bad business, and the protection will all come from taxpayers.
I don't see anyone suggesting that borrowers also be protected by tax-payers money!
The banks make vast profits while the government sits back and lets them urge people into lifelong penury, all in the name of free-enterprise market economics. And you suggest the tax-payer might effectively insure the directors and shareholders in this game? I think not.
J K Galbraith called it "socialism for the rich".
It seems that many of your readers do not realise that one of the main tasks of the BofE is to keep sufficient liquidity in the banking system to enable the banks, their customers and depositors to function normally in the 'real' economy.
Early August, when interbank lending began to seize up, the Federal Reserve and the European Central Bank pumped tens of billions into their money markets. What did the BofE do? Sit on its hands. I'm afraid Mr. King was asleep on the job,and that is why he deserves the criticism he has received.
What will he do tomorrow? We'll know very soon. I am not optimistic.
At the risk of sounding simplistic; the horse has already bolted and the problem has existed for a long time.
People need homes and have a need for ever larger mortgages in order to buy one. Lenders need borrowers and this leads to an ever increasing price spiral. Nobody in goverment complains (increasing revenue to the treasury in the form of stamp duty and inheritance tax) and added profitability from lenders is also a rich scource of revenue.
In view of this I would have thought it was encumbent on the Bank of England to act quickly and quietly to help the lender having a cash flow problem, this would allow them elbow room to help those borrowers in trouble, rather than the panic reaction of a repossession order. This helps no one>
As for controlling lending criteria; how in a free economy can you do this? Goverment is unlikely to make a move; the political fallout on different fronts could be quite embarrassing..reduced revenue, many questions on the govt's housebuilding policies etc.
I don't know the answers, but I think a little common sense applied might not go amiss.
Why not focus on the real story:
These practices were to blame for the crisis in America and will be the cause of the next crisis here.
The FSA have not done their duty. The Treasury only care about the feel good factor. King understands that the party can't go on forever.
If it were a battle between good and evil, Mervyn would definitely be Luke Skywalker. You seem to be on the dark side and you know what happened to Darth Vader.
Dear Robert,
Thanks for keeping up the good work. Hopefully the BoE will cave in and we can carry on making millions happy in the knowledge that the taxpayer will always bail us out!
PS the cheque is in the post...
Surely it is irrational for Robert Preston or anyone else to suggest that the governor of the BOE has a misguided fixation about wanting to spank any bank that gets into finacial difficulties purely as a matter of priciple. Why on earth would someone in his position wish to do that knowing that this would adversley affect his personal standing and the credibility of the BOE. Instead Mr King should be given credit for not wanting to give away, too readily, the nations money to unscrupulous commercial banks and financial institutions.
As far as people from outside the banking industry can tell this problem appears to have been precipitated when the big banks and commercial institutions decided to slow down lending between themslves. Even though the big banks are supposedly awash with cash. In that case why should these institutions expect the BOE to pump an ocean of money into the commercial banking system for them to quickly gobble up and grow even fatter at the nations expense.
What concerns someone like me is this. Did the big banks and large finacial institutuions deliberately bring this about knowing that they would benefit, from any problems associated with sub prime lending, at the expense of the smaller weaker banks. Rightly or wrongly that is the perception many people have of how big banks and large commercial institutions operate. So presumably if the BOE had pumped "willy nilly" money into the commercial banking system then it is fairly certain that these instituions would have benefitted to an even greater extent. One might be excused for believing that such a scenario was hatched some time ago in the expectation that the FED and the BOE would readily capitulate.
The remarkably reliable source(s) that Peston "has learned" from in the unfolding NR saga are beginning to intrigue me. He is out first (again) with the news that NR is U-turning on its interim dividend promise. Within hours, the bank confirms it. Makes me wonder if there could be a latter day Deep Throat out there, lurking in the shadows of a Newcastle underground carpark?
Niels, Denmark
"Northern Rock has confirmed that it is cancelling the dividend that it was due to pay to shareholders next month.
First news that the payments would be withheld came from the ΒιΆΉΤΌΕΔ's Business Editor Robert Peston. "
From an article on the ΒιΆΉΤΌΕΔ website.
Is this inside information?
Surely news items such as this should first be announced via RNS and not by the ΒιΆΉΤΌΕΔ
The remarkably reliable source(s) that Peston "has learned" from in the unfolding NR saga are beginning to intrigue me. He is first to post again, this time breaking the news that NR is U-turning on its interim dividend promise. Within hours, the bank confirms it. Makes me wonder if there could be a latter day Deep Throat out there, lurking in the shadows of a Newcastle underground car park?
Niels, Denmark
Or it could simply be that the higher interest rate reflects the lower quality collateral that the BoE is willing to accept against their loan.
Reading between the lines, it is the same collateral the other banks are currently NOT accepting to lend money at the interbank rate.
So why must the British public bear this percieved higher risk by lending at the market rate when the other banks are not willing to take this same risk?
If God forbid, the BoE start accepting CDOs as collateral then I hope the interest rate would be much higher than the current 10 points above base.
More slagging off of the BoE *yawn*.
People need to grasp the simple fact, the Central bank is a bank of last resort. If the bank system was healthy, this lending from the BoE shouldn't have to happen.
The banks love the good times, yet we're expected the bail them out when the going gets tough for them, win/win situation for a bank!
Chiming in from the other side of the ocean:
BoE can say that it is acting for better interest of the public as a whole, because it wants to avoid runs on banks, and collapse of banks, because many depositors have much more in a given bank than their deposit is insured for. However, propping up bad banks with BoE loans is seen as rewarding bad behaviour and is in general not considered proper capitalist action.
Perhaps, if the amount of money depositors are insured for were increased, and yearly recalculated based upon inflation, then there would be less risk of a run on a weak bank, as most depositors would be covered. In addition, there would be less rationale for BoE lending money to bad banks, because depositors are already protected. In due process, the weak bank could be bought out by a more solvent bank. But it might not even come to that, if there is no significant run on the bank.
In any case, banks like NR wouldn't be able to be acquired for a promise, a song, and a penny. I wonder if perhaps certain powers in the larger banks weren't letting NR 'run onto the rocks' in order to salvage it for little expense on their part. Each of them would probably see how low NR stock could sink before they would make an offer for it, playing a waiting game against each other.
Now, I am a Yankee and don't know much about your royal banking system and its laws. But I do know common sense.
Robert,
I can't believe you're trying to get the BoE to fund incompetence at market rates. The Bank have acted correctly on this, the interest rate should be punitive, although personally I'd prefer to see it set slightly higher.
I don't want to bail out incompetent banks, least of all at market rates.
Dear "Pest on the ΒιΆΉΤΌΕΔ". Let me get this correct about hedge fund gambling with shares in the banking sector. The hedge funds borrow a bank's shares from investors and pay a rent. These shares are used as a stool, being something you can rely to stand upon, by the bank to keep their head above the parapet. The shares instead become a stool, being something that comes out of a babies bottom, and the bank finds itself stood in it instead. Indeed in the case of the "Rock", up to it's neck in it. Therefore, is it not the case, that hedge funds owned by banks who no doubt would normally lend to the "Rock" are in a no-lose all win situation for they can cause the demise of the "Rock" by grabbing it by the throat by not lending it money, make a substantial profit when returning to stock and then maybe even buying the "Rock" at a very under-valued share price. Something I might add that the ordinary shareholder could not envisage being able to do. Therefore, the allowing of borrowing of bank shares or indeed any financial institution in the hedge fund regime should be outlawed and regulated immediately out of the gambling world of the stock market. In fact the scenario is down right scandalous.
Everything looks easy in hindsight and this is just another example of the British (especially the media)
obsession with a scalp.
Mervyn King is presiding over an important and dangerous market climate which no amount of textbooks can prepare for. Maybe he won't get it 100% right but as in most jobs, he should be able to learn from the experience and ensure this never happens again. Mervyn King didn't bundle CDOs, loan to subprime u.s. citizens and nor did he construct NRs books. Time to give up the armchair/hindsight expertise.
If Banks unable to access money market funds offered savers a fixed term bond at say 6.3%, they could persuade savers to lend to them at just below the interbank rate.
6.3% would match the best "clean" account according to moneysavingexpert.com today.
I assume this might attract a mixture of existing customers topping up to their FSA protected Β£ 35 K limit and new customers switching funds to reduce their exposure in accounts with other banks with balances exceeding that limit.
This highlights why Mervyn King is right not to bow to pressure to cross the "moral hazard" line.
Given that the decision taken in 2001 was "wrong", it is important to remember that 2 "wrongs" don't make a "right".
I prefer it if Mervyn King didn't blink at this time. Instead, let the management of UK Banks innovate and adapt to changing circumstances to secure their businesses, which is what they are paid handsomely to do.
As a prior investor, liquidated about 6 weeks ago, in NR - I would like to know if the FSA is going to launch an investigation into your blatant release of market sensitive information, the misreporting and sensationalist activities of the ΒιΆΉΤΌΕΔ recently.
As an NR depositor, who did not try to withdraw savings, I would like to know what our reward is. I refer to the news that the sheep you so effectively herded into a hysterical and irrational mob are now being rewarded by NR without penalty for believing your sloganeering.
I was an NR investor, but liquidated about 6 weeks ago upon reviewing the less than confidence inspiring records outside of NR of some of the non-execs, and while I did consider leaving until they went xD I am glad I sold then. However, I would like to know if the FSA is going to launch an investigation into your advance release of market sensitive information on the dividend, the misreporting of the stability of the institution and the generally sensationalist activities of the ΒιΆΉΤΌΕΔ recently. A two minute slot by the genial chap with a mouth full of gobstoppers on ΒιΆΉΤΌΕΔ24 may do for Blue Peter cats β but letβs have the ΒιΆΉΤΌΕΔ properly and independently investigated on the real issues. As for NR I would also urge remaining shareholders to question the non-execs closely as to what information was discussed at the board meetings in the last six months.
As an NR depositor in excess of the protection limit I kept a close watch but did not try to withdraw my savings, having a view that the problem was one of transient liquidity and that assets exceeded liabilities by some margin β not a situation that should be compared with BCCI. I would now like to know what my reward is for understanding the reality of the situation and maintaining faith in the institution if not the management or non-execs. The news that the sheep you so effectively herded into a hysterical and irrational mob are now being rewarded by NR on their return for believing your sloganeering is beyond my comprehension and I will now move my money β not because I can, or worry for the future of NR, but because I feel badly treated as one of the customers who didnβt believe the ΒιΆΉΤΌΕΔ hype.
I think its time the ΒιΆΉΤΌΕΔ took some weight out of the PC and self protectionist management and enabled the staff to provide the service according to the charter without fear of being a scapegoat for managements inability to be accountable.
> If at this last hour the Bank
> switched to charging a market rate,
> all the banks would be delighted
> to participate in the auction -
> because there would be neither be
> a prohibitive financial cost nor
> a devastating reputational
> one.
Letβs say that DodgyBank plc needs money because it hasnβt enough cash to meet its obligations. There is no incentive to go to the Bank instead of SomeOtherBank plc because the rate from either is the same. But SomeOtherBank plc would know through the City grapevine that DodgyBank plc is on the ropes. To cover its risk, SomeOtherBank plc would either charge an extortionate rate, or refuse altogether, whereby DodgyBank plc goes to the Bank for its doe.
But how does the Bank cover its risk? If it charged 6.34 %, it is throwing money away compared to SomeOtherBank plc in the free market.
So you are asking the Bank to lend at below the Market rate, because otherwise DodgyBank plc would be able to ask the market for the money, not the Bank. QED?
Of course no-one, apart from NR is going to touch this loan facility, with a barge pole, the city leeks would make certain they were found out and then they'd get caned like NR. But if no-one touches it, it gives Darling the opportunity to pop up on the box and say "See there is no liquidity or banking crises, after all, if there was, the loans would have been over subscribed? So everythings fine" A marvellous piece of spin and doubles all round for the Treasury, FSA and BoE! Except no-one in the banking world would fall this piece of smoke and mirrors stunt...?
Scamp #28 has got it right. This crisis is NOT of the BoE's making nor of the ΒιΆΉΤΌΕΔ's. I'm given to wonder just who some of the contributers to this blog are... city gents, NR shareholders, the mild mannered janitor at the BoE? ...could be!
As others have pointed out there are three basic problems currently unaddressed.
1. Where are all those worthless bits of US debt papers lurking?
2. A UK housing market grossly overvalued and therefore the banks' asset sheets equally overvalued... no wonder they are reticent to lend to each other.
3. The banks' universally held believe that they are to be bailed out without question when they get it wrong.
I find it remarkable there can be any up ward movement in stocks and bank stocks inparticular while these issues remain unresolved. And the fact that bank stocks continue to rise seems to indicate a 'head in sand' type of perspective.
It all feels a little like how the last days of pompeii must have seemed... everyone trying their level best to carry on as normal despite the ever worsening smell of bad eggs!
When people buy a house over 25 years they frequently take 2 or 3 year mortgage deals confident that they can negotiate another deal when that expires.
In essence Northern Rock did nothing different. It relied on the BoE to ensure the stability of the money markets to enable it to renegotiate its deals. There has been no evidence that the loans it made were excessively risky.
It seems that the only "moral hazard" involved was to assume that the BoE would manage to ensure that the money markets functioned. Penal rates of interest for wrongly making that assumption seem like double jeapordy.
If banks, as companies, perform badly, then surely their share price should suffer. If NR collapse through their high-risk strategy, then they deserve to get bought out!
A number of partisan comments refer to the 'advance' release of information on the market affecting their share prices. Sounds like sour grapes to me!
Are they not aware that the holy grail of journalism is to break a story?
And, if interested parties accuse Preston of affecting the market by commenting in the first place, what would he be doing if he didn't - withholding information?
Another Catch 22!
Robert, did you feel an enormous sense of pride and acheivement when you saw the queues of panicking investors, including many pensioners, pointlessly withdrawing their funds from Northern Rock, which is still in business now, incurring withdrawl penalties and suffering great personal anguish and worry?
Preston - its about time you mentioned Northern Rock's good points:
Solvent
Net assets Β£5.00/share
Potential eps 100p
An honest, moral, ethical, charitable company with competent management.
The company has been assaulted by the parasitic city wide-boys; and its about time short-selling was denounced and legislated against. Its a practice without merit.
Northern Rock should go-it-alone,it does not need to sell itself off cheaply
If you really want to see a financial crisis, ensure that Mervyn King is hounded out of office and replaced by a goverment patsy at the beck and call of Darling and Brown. It would make Black Wednesday seem like Christmas as the pound dives and even the manipulated CPI spirals out of control upwards.
Ignoring the chinese whispers e-mail suggestions from previous comments, this whole episode since 9 August has been a basic problem of supply and demand.
Lack of money supply linked to increased demand forces up prices, right?
HMG and BoE has decided not to stoke up M4 - the actual supply of real liquidity beyond its already all time high levels of around 14%. Petrol on burning flame springs to mind.
Result of this. Illiquidity and panic.
The longer term implications of the credit squeeze (I am old fashioned and like this phrase better) and bank run on NR are really worrying.
1. HMG intervention with its "unlimited guarantee" to depositors has "quasi nationalised" our economic thinking. Money supply and demand is now controlled indirectly by State intervention. Judging by this week's rhetoric in Bournemouth, this is just the tip of a massive iceberg in free economic and political upheaval.
2. HMG is committed to borrowing more and more money to fund its political agenda pledges in the public sector for schools, NHS etc. Who pays the interest bill? We do. I am not even going to ask the obvious "value for money?" question. I'll leave that to others.
3. HMG tells us we are nearing full employment. Our UK social bill will rocket if unemployment rises through economic slowdown, triggered by the sub prime crisis and bank run. That is on top of the increasing overdraft of UK plc through Gilt issues to fund future social promises. Already house prices are falling...and that is before the HMG promises to deliver 2 million more new homes in the UK in the next 10 years (green belt and SE England question ignored here!). Who on earth is going to afford to buy them. If unemployment rises, more benefit claimants, less tax revenues collected, more HMG debt, and bigger interest bills HMG owes to Gilt holders. Housebuilders are already warning of slowdowns, and that means their landbanks will drop in value over time, their building costs remain fixed, so they run into losses building new homes as they cannot pass on their costs in higher prices as people won't pay. Oh, and I forgot, the demographics of the UK are shifting. From 1 in 3 adults not in work today, read 1 in 2 adults by 2027. More services, costing more money paid for by less people in work over the next 20 years. Yikes!
4. Debt is harder to come by. Our entire economy is built on the premise that our assets rise in value ad infinitum and we remortgage like crazy releasing cash into the economy to spend. Those days are now over, certainly in the next few years at least. Credit is tightening both in access and volume. Our economic growth targets now have to be met with good old fashioned trading. Luckily it seems, that part of the economy is holding up, and will become increasingly important over the next few years. Let's hope HMG does not bugger this up either.
We are as a nation, sleepwalking into really turbulent times. I just hope we have the skills and resolve to navigate this period as a United Kingdom.
PS: If I was a hedge fund manager, which I am not, I would wait for the moment a predator makes a derisory offer for NR. After all, a largely fixed income portfolio of mortgaged assets will, in time, make money, especially when liquidity and borrowing costs fall. Trouble is, I am not sure if time is on NR's side. I suspect there are some irate shareholders who will place the final nails in NR's coffin shortly, once NR goes ex Divi - or not!
questions and comments
Does the auction "of promises" (last resort) establish our very own set of "subprime banks"?
Advice to Northern Rock borrrow the 10bn lot and relend to the others in the same set at the same rate on a business footing with a few less leaks and smears. This will break the current armlock provided by the greedy and aquisative big three.
Hence a currently diverse range of banks can be maintained for customer choice with the bottom three or so providing their very own overnight basis. The big three have inadvertantly collaborated to provide the next OFT investigation this country needs. Those that sit at the head of the feast may not have spilt their wine but they have most definately been sighted with gravy on their cuffs.
Something completely different, if Mervyn who has done well enough gets it, let Brown take to the stand on Pensions and other strange lapses in legislation.
When I bought my first house, I was in the unfortunate position that mainstream lenders (i.e. the big banks) viewed my wife and I as too big a risk for their money and therefore wouldn't lend to us. So we had to go to a 'sub-prime lender' and borrow at a punitive rate (incidentally, after 2 years of no missed payments we were then charged an astronimical penalty to switch to a better deal with another lender).
Why then, should banks expect to be immune from this kind of market force i.e if you are viewed as a credit risk you either borrow at punitive rates (by the way 1% above base doesn't seem punitive compared to the extra 3.75% my friendly sub-prime lender was charging me) - or you don't get the money at all.
So in our Capitalist model - market forces are good enough for Joe Bloggs borrower but large financial institutions must be protected by Joe Bloggs tax payer.
Socialism for the rich indeed!
Robert,
While I understand the necessity for the coverage of the auction, I just do not understand your point of view!
Firstly are you accusing the BoE of charging too much for the money it put out to auction? Surely that was the point of the auction, money was made available at a rate that those in dire need could access, yes it would reduce their profits but importantly it was made available. That no banks took it up surely is a good signβ¦yes?
Please if you are going to report, report, if you have a point of view, then express it, but this constant sniping at the BoE for doing its job relatively well in the circumstances it finds itself in isnβt helpful.
Iβm not sure if youβre angling for a big fat cat head of corporate communications role at a retail or investment bank but by the quality of your reporting it certainly seems that way.
One of the BoE's jobs is to ensure liquidity in the market. If it had done so instead of looking for high moral ground NR could have continued to borrow from the money markets. But the BoE did not ensure liquidity and NR was unable to raise money and there was a run on the bank. When the scary scenes of queues of depositors snaking around our high streets hit the media MK at last understood his mistake. He is culpable.
The bottom line is..
The economy is buoyant.
God bless UKA,I mean the Queen.
Don't make me laugh !
Inflation in the UK is at least 14.7%
(MR3)..as at end Sept 2006..last data I could find on Inland Revenue website
If you earn less than Β£20000 per annum,price inflation is somewhere around 20%
If you're net income is less than Β£15000 ,price inflation is over 30%.
Quoting RPI is a joke.
Most people are morons,but sooner or later they realise that they are being lied to about their imaginary wealth.
When the house market crashes,as it will,they will realise how poor they really are.
The price of food is soaring.
Taxes are soaring.
Most wages below Β£20000/annum are stagnant.
Public sector spending is continuing to soar.
The public sector pension liability will bankrupt the government within 10 years.
People, particularly the young, are not worried about debt or defaulting on it.
As for the banks ...
The whole banking system and the economy is on the edge of an abyss.
I live in the real world. I have no money in the bank.
Why would I want to lend a bank money as an unsecured creditor only for it to shut its doors on me if it went bust.
When the derivatives markets start unfolding....buy Gold and Silver (or their stocks) quickly..like I already have.Silver is my favourite for what it's worth.
See you in Monaco...or are you going to Liverpool the European city of culture ?
For the person on the 25th who wrote "no wonder Sterling is going through the floor," I'll trade you as many of my $ as I can scrape up in exchange for as many of your Β£ they are worth.
Dear "Pest on the ΒιΆΉΤΌΕΔ". Let me get this correct about hedge fund gambling with shares in the banking sector. The hedge funds, which can include those owned directly or indirectly by banks who themselves lend money to other banks which includes those banks whose shares the hedge funds borrow from other investors on which they pay a βrentβ to those investors. (intake of breath) Shares at which some point in time the share issuing bank may use as a stool to stand upon to keep their heads above the parapet. However, instead of being used as a stool the shares may in fact become a stool. A stool the bank finding itself stood in, or in the case of the "Rock", up to it's neck in it. And what a stink too I might add. Therefore, is it not the case, that hedge funds owned by banks and similar financial institutions who no doubt would normally lend to the "Rock" are in a no-lose all-win situation for they can cause the demise of the "Rock" by grabbing it by the throat and squeezing the proverbial crap out of it by not lending it money and consequently make a substantial profit when returning the stock to the lender having bought it and maybe even the "Rock" itself at a very under-valued share price. Something I might add that the ordinary shareholder could not envisage being able to do but will substantially suffer by the antics of itβs fellow shareholders. Therefore, it must be the case that the allowing the borrowing of bank shares or indeed any financial institutionβs shares in the hedge fund regime should be outlawed and regulated immediately out of the gambling world of the stock market. In fact the culture is down right scandalous and corrupt.
HBOS is the one I am worried about in terms of exposure. I had a call from them regarding a missed payment and they basically sent my details to the collections department even before I received a letter stating that I had missed my payment on a credit card...I have lost all confidence in the British Banking sector. I might as well invest my money in a Banana Republic bank for all I care!
Clearly Mr Peston is awaiting a well paid job in government.
Why hasn't he written about Gordon Brown's design of the UK's Bank regulation system?
Their is no hope for democracy with lazy journo's like him working in prominent positions within the ΒιΆΉΤΌΕΔ.
If you remove the emotive and sensationalist language, then this report seems credible and informed.
I'm just surprised that the ΒιΆΉΤΌΕΔ still allows its staff to go in for sensationalist reporting.
Enough doom! People's money is as safe as it can be...should they take it out and move banks, best of luck, there are risks wherever you go. I believe that the Northern Rock 'brand' is as good as any other bank. I like the bold way that their staff have got on with life, working big hours in an attempt to reassure. I know that my bank, one of the big five would not manage that...they struggle with day to day stuff! I'm a teacher and I see NR as a fighter that will come out of this bigger and better, regardless of the outcome. Rocks are made of strong stuff...Northern ones are just damn hard!!! Time will show...
I agree with Mr.Marshal's previous post but would add to his comment about all of us being ,"Up a creek without a paddle,"I would add,"With a huge "ROCK" tied around our neck's!"
I agree with Mr.Marshal's previous post but would add to his comment about all of us being ,"Up a creek without a paddle,"I would add,"With a huge "ROCK" tied around our neck's!"
Doesnβt all this ring bells? A world banking system that in major sectors operates in what can only be described as pyramid selling, i.e. the parcelling up of loans into grade risk assessed packages and sold of to the highest bidder, and when it looks like some of these packages are about to go bad they are sub divided and parcelled up and sold of again. This same and other unsustainable practices have and are still is being used today across the banking industry including the loans, insurance, mortgage, stocks, pensions and more sectors. During the last year or so we, the general public, have via the media begun to realise just how precarious our bank and building society accounts are let alone how any of the provisions we may have made for old age.
History is filled with examples of causes and effects and it is also filled with examples of unlearned lessons. The beginning of the last century was marked with a series of cataclysmic events that shaped the rest of the century, and are continuing to effect our society today nearly a century on. In the 1920s poor weather conditions combined with questionable banking and investment practices fuelled a world wide depression that fuelled a world war during which the only organisations to benefit were large manufacturing companies and the banks. Then as now whistle blowers shouted out when sharp practices become institutionalised, but little was done for fear of rocking the boat. Then as now people questioned the reasons and methodologies of organisations that were set up to protect the ordinary person but they did little or nothing for fear of rocking the boat. Am I worried about how the worldβs economy is running? I think the word worried would be an underestimate. Am I worried that history will repeat itself with all its awful consequences? I think the word I would use is terrified. Why then do I continue to work to earn a living, pay the mortgage, and continue to carry on when I have no trust in our institutions or politicians? What else can I do when no one who can make a change wants to rock the boat.