Rock rescue explained
The scale of the the Chancellor has today promised to provide to Northern Rock is breathtakingly large and without precedent.
The Treasury has said that it will guarantee bonds to be issued by Northern Rock both to repay Β£25bn of loans it has received from the Bank of England and to provide it with sufficient additional funds to run itself as a going concern.
So the taxpayer would support this bank to the tune of well over Β£25bn β and could still be providing at least some of this financial support five years from now.
No British Government has ever provided financial help on that scale to a business.
The Treasury would be guaranteeing the principal and the interest on bonds or βnotesβ to be issued by the Rock.
That effectively turns those notes into Government bonds, gilt-edged stock.
It means that Rock will be able to raise a colossal sum and at a relatively low rate of interest rate.
What would that be worth to the Rock?
Well itβs difficult to be precise, because it depends on what happens to money markets over the coming weeks, months and years.
But the value of the guarantee to the Rock would be more than Β£1bn, according to my calculations β based on the price at which Northern Rockβs existing mortgage-backed bonds were trading in the market on Friday morning.
Or to put it another way, the guarantee would be the equivalent of a one-off injection into the Rock of more than Β£1bn, a subsidy of that amount.
That said, the Treasury says that the Rock would pay a fee for this succour β though it doesnβt specify how much the fee would be.
Right now, the bank could not afford to pay anything like Β£1bn in cash as a one-off.
And if it paid that amount in equity to the Treasury, the bank would end up majority-owned by the public sector, it would be the equivalent of almost total nationalisation.
In return for propping up the business, the Treasury is taking control of what happens to the troubled bank, turning its shareholders and board into bit-part players.
The Treasury will determine which of the groups promising to rescue the Rock offers the best business plan.
At the moment there are three front-runners: Olivant, the consortium led by Virgin, and a standalone plan being developed by the Rockβs current board.
However the Government hopes that when other financial groups see how generous the Treasury is prepared to be, they might be tempted to come back with new offers β though they would have to move very fast to meet a tight timetable.
Detailed proposals from the rescuers are to be submitted by February 4 at the latest β so that a decision can be taken a couple of weeks before March 17, which is the expiry date of the European Commissionβs approval for the current state-aid package being provided to the Rock.
I am told that its primary consideration in choosing the winner of a contest to control the Rock will be the speed at which taxpayer support can be withdrawn.
Which implies that if one of the contestants were to offer less to shareholders while pledging to do without the public-sector crutch quicker than any of its rivals, it could be the victor.
And for those who fear that the Treasury will be providing cheap money to a Richard Branson or some other entrepreneur to enable them to make a quick and easy fortune out of the Rock, the Treasury has said there will be restrictions on dividend payments and on selling the business, until we as taxpayers have got our money back.
Whatβs more, the Treasury has lost its fear of owning some of this business.
It says it will take a stake in the bank by being given warrants.
That would provide taxpayers with some of the upside, if the value of the bank were to bounce back at some point.
So to call whatβs on the table a private-sector rescue is a misnomer.
Really it would be a partial privatisation, or a public-private partnership.
Which is still a bit of a humiliation for the Government, because it was never its explicit ambition to go into business with a provider of commercial mortgages.
Whatβs more, the Chancellor canβt be certain that a private-sector rescue will be agreed, even with the provision of so much taxpayer help.
So he also lays out the basis on which the bank would be nationalised, if all else fails.
As Iβve said before, nationalisation would be carried out through legislation.
And the Treasury would pay to shareholders what it thinks the shares would be worth absent any taxpayers support β which it believes would be pretty close to zero.
I'm 
°δ΄Η³Ύ³Ύ±π²Τ³Ω²υΜύΜύ Post your comment
Looks like a good, old-fashioned subsidy.
What a farce!
Using heaps of public money to support a company with a failed business model...
...and all in the name of keeping Labour MPs in thear seats...
Since our banking system is built upon debt, and unpayable debt at that, a periodic failure of the banking system is inevitable, and healthy, unless we want the banks to end up owning everything. The logic runs as follows: in a simple system, where Β£100 is deposited in a bank, and the bank lends say Β£90 at 5%. At the end of the year, the bank has Β£105. Where did the extra Β£5 come from? Only from a further bank loan, or from a loan from somebody else who has gone into debt. Sooner or later this system has to be 'adjusted', either by inflation( which effectively cancels debt) or by borrowers going bankrupt (the debt is cancelled as unpayable), or by the bank going the same way( too many unpayable debts counted as assets). Can the estimable Robert Peston please tell me if i have this right?
Several months ago a number of organisations submitted business plans to buy Northern Rock.
2 months later those business plans, submitted by those groups are in tatters.
The groups were unable to raise the finance that their business plans relied upon.
Despite this, it now looks as though one of those groups will still end up gaining control of Northern Rock, whilst the taxpayer shoulders the risk.
Clearly, the previous board of Northern Rock had a failed business plan... the potential new owners have not had the most promising start.
Hi
What's so special about Northern Rock? When Equitable Life got into trouble through a flawed business plan, did the Treasury come to its rescue? No! Instead the people who had their pension savings in the Company took the hit. So again - what's so spaecial about Northern Rock?
I thought NR was in hock to the tune of more like Β£50 bn right now - so what about the other Β£25 bn?
I am slighlty sceptical whether NR will be able to meet interest payments on these gilt edged bonds. Presumably they can only be issued at a rate which is just slightly lower than libor - or why would anyone want to buy them?
They will need to pay out over a billion a year from profits in interest payments to bond holders, which seems a tall order in the present climate and would leave nothing left for shareholders' dividends.
It still seems that NR is de facto not a going concern. It should be wound up and the mortgage book sold off in chunks. Like this we end up throwing more good money after bad.
"As Iβve said before, nationalisation would be carried out through nationalisation."
Quite so.
It seems to me that, under this new plan, the taxpayer is in for less and for a shorter time that he would be if the bank were nationalised. This isn't mentioned in Peston's typically bleak portrail.
Does this mean, in effect, that the government proposes going into the monoline insurance business just as more experienced players are fighting shy of that market?
I'm just so relieved that the Treasury had a spare Β£25bn kicking about with which to support Northern Rock through this sticky patch.
Exactly how many hospitals/prisons/road improvements could this have provided..?
What a pitty the Government couldn't save all those village and town Post Offices. A regional bank gets Β£25 Billion of aid in a few months, but the whole postal network only Β£150 Million a year!
Slowly by surely HMG is getting to a solution for the Northern Rock debacle: it is called nationalisation.
It would appear that the stock market does not agree, since the share price of Northern Rock has increased 30% on Monday morning back to the 80p it traded at before Christmas.
I wonder if the European Commission will allow this "risk-free" private sector solution? Northern Rock will be trading in a preferential position to other mortage banks throughout the EU.
As ever a great post cutting to the heart of the issue. What I still don't understand is how this will get past EU law - doesn't this bail out amount to illegal support under EU competition law?
Robert, you seem very keen on the idea that this is a 'humilation' for the government. But why is its so? It's hardly their fault that a bank had such a lousey business model, and given the City was valuing it at billions only a year ago it's not as if anyone else had a better idea of the problems. Of course the government doesn't want to have a stake in a commercial mortgage lender - but to say that ignores the reality of why they have had to do so.
There are problems with our system of retail deposit protection (if you believe such a system is necessary - standard free market theory would say otherwise) but I don't see why having a 100% guarantee would have made any difference. In fact it might have worsened the sitaution if NR had been even more reckless.
"As Iβve said before, nationalisation would be carried out through nationalisation."
This sentence just about sums up your coverage of the Rock affair - narrow, self-referential, and ultimately useless. Can I have my Β£120 ΒιΆΉΤΌΕΔ tax back please?
So let me see if I've understood this: some dodgy debts will be packaged into something that looks different and then sold on under another name, but the risk of the original debts remains there (just transferred to the taxpayer).
What could possibly go wrong with that?
1. PRINCIPAL. See para. 5.
2. True, but there are two key differences. First, although the loans will need to be consolidated on the public balance sheet, and in theory the increase in the national debt should push up the cost of borrowing, the reality is that this will have no impact on the price of Gilt-edged securities, and so - for now - any "cost" to the taxpayer is completely notional. That must be balanced against the definite cost to the wider economy but also to the taxpayer specifically through benefits and suchlike of allowing the bank to fail. Second, this needs to be compared against previous ill-starred interventions such as Rover and Railtrack, which definitely had real costs. By contrast, Northern Rock is a bargain.
I see that the market is thoroughly impressed.. It's down nearly 150 points!
Both the ERM and NR fiascos were caused by rising interest rates. The NR costs Β£25b, the ERM cost Β£5b (Treasury estimates). This is Gordon's ERM^2.
Wake Up Peston, Sub-Prime's true colours are starting to surface.
I say let the rock die. Gov. can not afford to manage through this process with other banks should they also start showing their sub prime hand
Now we are nearly back where we started. Remember how Lloyds was willing to take over Northern Rock if the Treasury guaranteed reasonably-priced funding? I bet there are many in the government and the Treasury who are wishing that they had accepted Lloyds' offer at the end of the summer, and thus avoided the last few months of turmoil and damage to the reputation of UK plc. All we need is Lloyds to re-enter the fray, now the funding it requested in the first place is available and we back at the beginning.
With this new cheap money available expect the big financial institutions to be appointing advisers this morning. If Branson thought he was going to be picking up Northern Rock on the cheap (it would have been a disgrace if a man who keeps his money abroad to avoid tax had enlarged his opaque empire at taxpayers' expense) he will now have a lot of competition that is a lot more credible than he is.
Again how can the UK government ensure that the ROCK is AAA+ rated if the number of defaults on its mortgage base begins to rise?
If the UK gov had 25 billion in new government debt to issue it could have invested this in metro lines for all the UK towns and cities, boosting cancer treatment, rebuilding the navy, finding a cure for AIDS, fusion research, super conductivity energy trasmission (you get the idea...)
I was in business 3 years ago with another business that failed due to extreme market pricing for gas and electricity on the commodity markets of the UK which wiped out our cash position - the business failed as did several other small independant energy billing suppliers for the want of a loan to buy energy.
There must be 10,000s of SMEs that have a similar story of liquidity.
This stinks!
Its great to know that a 20% mandated vote to a politcal party can contrive the conditions to have millions in fees paid to rich american banks, private groups like Virgin, divert funds from core services to prop up NRK.
It isnt corrupt - but then to an outsider it looks like institutional corruption at its highest level.
The UK gov gets its mandate from the voters and in return somehow the small executive of a dozen people get to direct the 100,000,000,000s taken in tax.
Where did it ever manage to get the mandate that a minor bank would be able to raise 25,000,000,000 in GILT edged bonds??
Give me 25 billion I will go and buy some gold and manage it as a reserve...
Might even make a bit over the next 5 years to pay back in the POT..
Two options totally unknown bloke with 25bill in GOLD
or totally in-solvent bank with dubious loans book.
This would make a great film!
Is anybody going to make money out of issuing the bonds?
Let me guess, more commision for Goldman Sachs?
Is it not true that after we hear the chancellor, the Govt. will eventually be making money out of this?
Is it not true that at the end of the day, the taxpayer will not be loosing anything?
Is it not true that the Govt. has actually taken the right decision re: The Rock and not made a mess of public finances like we had in the 80s and 90s?
The NR share price is up 42% this AM!
Investors can see a government over a barrel looking for anyway out it can and that means the potential of loads of money for them.
The latest deal is an absolite disgrace. Vince Cable sums this whole disaster up incredibly well in his comment.
I bet Lib Dems are wishing he had stood for their leadership now.
Surely when the problem arose NR's loan portfolio should have been divided into, say, 4 categories. Each UK clearer should have been compelled to buy a percentage of each at a discount related to category.
The buyers, who have massive profits, should have been enabled to claim the loan purchases as capital expenditure and relieved accordingly.
In this way UK plc would be seen to close ranks to support itself and there would be no recourse to public funds save for the tax breaks. As the tax breaks would be on current, and not capital, account in the Government's books, there would be a much smaller and much more flexible impact on PSBR.
Simultaneously the clearing banks would benefit from the PR of doing something for the nation as a whole, and not such that of their shareholders.
No government can buck a market and this one certainly does not have the capacity for a second bail out.
No. 5
Why is NR so special ??
Silly boy
29 Northern MPs
Now you know why its a SPECIAL case.
Would the Government have put all that money into Northern Rock if Alistair Darling had not had his mortgage from NR? He should have declared an interest and stood back, saving the tax payer a huge sum of money!
Why is this a humiliation for the government? The government has little choice but cope with the circumstances which the private sector has created. It cannot wave a magic wand to change market conditions. The humiliation is for those private sector bankers who created this mess. Why is it that Peston, most of whose sources appeared limited to the bunch of usual gossipers in the city that most journalists use (and yes, I worked as a journalist reporting the city so I know the circumstances) - why is it that Peston is always so ready to repeat Tory phraseology? I don't want Labour propaganda from the ΒιΆΉΤΌΕΔ, but I don't want Tory or Liberal propaganda either. A little more circumspect use of words and a little more balance please.
They should let it collapse , it is natural selection and bad mgmt .
What will happen when the next one goes under ?
"I am told that its primary consideration in choosing the winner of a contest to control the Rock will be the speed at which taxpayer support can be withdrawn.
Which implies that if one of the contestants were to offer less to shareholders while pledging to do without the public-sector crutch quicker than any of its rivals, it could be the victor."
The winners in this contest will be a New Breed of Entrepreneur immersed in the Total Information Awareness Environment/Space of Socialist Capitalism and Altruistic Hedonism, where Creative Public Service guarantees every Personal Reward in return for all of the Wealth that Innovation and Creativity deliver....... with Wealth being not defined by how much one has in store but by how much one has been able to spend/give, creating Opportunity for others with the Sharing of Great Wealth in Order to Create more Wealth.
After All, whenever Wealth is defined/refined into a practically worthless piece of paper which costs next to nothing to Print, everyone can have money to spend creating the Flow of Ideas and the Energy and the means to Make them come True.
And sharing those Ideas to make them come true, keeps those ideas true in Peer Review and Support.
And it is nothing less than a Network Internetworking Revolution heralding the Foundation of and Facility for a New World Order Program built around paper Wealth for All to buy goods but Goods supplied to Order ..... Imagined and built for the Future to engage Society and Population in learning how to learn to create for the Future rather than living in the Past. Change, the buzz word of this millenium, cannot be achieved unless one is prepared to Change Everything, and starting at the very top with a Change to Command and Control Infrastructures allows immediate transfer down, throughout and into every System which is artificially controlled/halted in development with the supply flow of paper printed to represent wealth.
In the NeuReal World Order System, the Sharing of Knowledge will Create Servers and Goods which Money cannot buy but which are donated as Reward for Great Public Service, to define the Invaluable Worth in Both.
And it is with IT and Communications and Media, that the New Picture will be Presented as they show its Lead Great Games Players at their Work, Rest and Play with none disadvantaged in learning and opportunity because of the witholding of money [as is causing the global crises today] or its holding by banks and individuals who would abuse and are unworthy of its powerful control because they cannot spend it freely because of what they do ..... Exercising a Perverse Proxy Control.
"Which is still a bit of a humiliation for the Government, because it was never its explicit ambition to go into business with a provider of commercial mortgages." .......I would disagree fundamentally with it being described as a "bit of a humiliation for the Government" unless of course, you would wish to specify the Federal Reserve-led Administration of the US Government as being the Government which has brought on the humiliation.
What Great Britain has done [and you can ponder exactly who and what that might be], and is going to ensure for future generations to come, is that the recklessness endangerment of capital based trading markets are never again abused and held to proxy ransom by a fiat currency, with the present dollar currency being the bearer and sole trader of that misfortune/global scandal.
Should you care to disagree, we can delve a little deeper into the shenanigans and expose the elements which prove it to be so. Be warned though that the tales which you will discover/uncover, for they are well documented, will make for extremely unpleasant reading for dumb arrogant empire builders thinking Missions Accomplished rather than Missions Impossible.
And anything less than such a Complete and Fundamental Change will Fail.
Why didn't the Government act like this over Equitable Life? Why was it allowed to sink - taking much consumer confidence in savings with it - while the Rock has to be protected at all costs? What's the difference?
The whole Northern Rock fiasco seems to be a cover up of the true extent of the UK banking problems.
NR just seems to be the face receiving the kicking while other companies avoid getting their name dragged through the mud.
Allience and Leicester is STILL offering 'Unlimited Prime' mortgages, despite recently reporting on sub-prime losses.
It seems to be a veiled fact that NR do not offer sub-prime mortgages.
It's also kept quite quiet just how low arrears in NR mortgages, under half of the national average.
If NR is 'troubled' in 'crisis' or whatever, what does this say about the other institutes?
I think the reason that the Government is 'supporting' NR is it's a cover up of the true extent of the problems - if the Rock is allowed to go to the wall, than surely some of the more irresponsible lenders should also be devoid of BoE/gvmt support.
I notice that a few of the banks that were flapping last year are flapping less since the BoE injected more funds... that's been covered up nicely.
Leave the Rock alone, they're less corrupt than most banks...
Northern Rock is back.
Newcastle United are back.
What a belta.
What is so special with Northern Rock?
Why is it supported to that extent?
Will this be applied to all companies which are facing similar problems (in other industries) ?
It is not right and i cant understand the reason behind it.
Fascinating reporting, Robert, but I'm still curious about NR's future business model. Are they (NR and the government) hoping that market liquidity will ease sufficiently in the near future for NR's existing business model to be continued as soon as the current crisis is sorted?
This surely requires that the current fears of a recession are groundless and that property boom will continue after a small hiccup.
Or are they prepared to change the business model to something more robust, which will survive a recession and the putative end of rampant house-price inflation?
A further relevant question is whether the existing economic system which has supported so much debt-funded aquisition activity will change in response to the most recent crisis (as it generally has done to previous crises)?
If it does, then this would again impact NR's business model.
COMMENT 34.
WELL SAID, Looks like a bright outcome for NR
This solution is entirely a political one designed to achieve two things....
Save northern Labour seats.
Prevent any and all merde from sticking to Chairman Brown. The line 'not me guv' must be deliverable with absolute conviction and free from fear of contradiction.
It is intresting and I would of thought contray to all the rules regarding transparncey in business, that Mr Branson has accompanied Chairman Brown on his Far East jolie. Are we to suppose that a deal regarding NR has not been tied up over China skies. Furthermore, yet again our great and glorious leader delivers news of dubious joy while absent and unavailable to answer questions to which the taxpayer is entitled to some response.
BUT the customer/houseowner/mortgagee still has to pay the monthly payments to a business with a dodgy business plan - so what happens when the interest rates go up or will GBrown keep those down and other businesses afloat as well, to keep Labour back benchers happy and Labour voters voting? USA and France might complain of government subsidies and other mortgage banks in trouble might be looking for the same level of help!
Gordon better get some sleep or hope for another plane crash!
Are UK citizens going to be able to purchase these bonds?
One thing that's never been mentioned is who were the institutions that were lending NR their money in the first place... Is it possible to name and shame these numpties?
I say send for Kevin Keegan. He looks very fetching in his Northern Rock shirt, and, like Mr Darling and Mr Brown still has a full head of hair and a fine way with words.
Darling, Brown and Keegan also has just the ring to it. And Kevin has just the business nous that the two reformed radical socialists from the '70s are missing at this important juncture.
DBK (see what I mean about it running naturally off the tongue Robert)could also bring back the male perm while they are at it.
70s retro chic is just what we need to smooth away this little local difficulty, not some clever calculated tricks from the school swots at Goldman Sachs.
Common sence prevails at last.
The Goverment knows the only way of getting its money back is from a profitable Northern Rock.
Administration or selling off chunks of mortgages, I'd say the goverment would be lucky to see 20 billion of its 25 billion back in the present market, it has choosen to wait for the market to recover.
I just wonder if another bank gets into trouble will the goverment coming running with wads of cash?
Wait for the European dimension.
Europe will complain this is a subsidy.
Gordon will reply that its best for Britain and British jobs
... showing his anti-Europe credentials at a time when he is under attack from his own left-wing regarding the European constitution.
Europe will back-down as they already have his signature on the de-facto constitution they want.
Smoke and mirrors.
The reason Northern Rock is important is that confidence is vital in the banking sector. Hardly any of us can live a day without a bank or its services. Governements have driven us away from the cash economy, so without a healthy banking sector we're in a mess.
This underpinning of the financial sector is also vital to our international reputation and invisible earnings.
I'm pleased to hear the PM confirm that he's not trying to push a Virgin solution. Shareholders were clear last week that their offer - to take more than half the bank, get us to refinance it, then charge for use of the Virgin Money brand wasn't acceptable. And it's unlikely to be even if they let us keep just over half of what we already own. The proposals from Olivant or a carry-on bid from existing management are far more likely to go through the essential shareholder approval process.
I just cannot detect the sense behind this strategy. It just seems like the worst kind of boomerang strategy that can be played at the moment. Markets are not coming back up. Post New year value rushes have petered out and stocks are in decline (again). Is this really the time to underwrite what no private sector institution will underwrite. It is a bad bet going worse. If the private bidders were keen they would have jumped in November. But things, as they say, have got worse since then. Of course, NR will have to be knocked down at florr value because no government can afford to go into an election with such a albatross on its back. Personally, i see teh government having to write off a lot of its loans - wait to see what is recovered in the next five years.
Should not Northern Rock shares be suspended for two-weeks, whilst the bidding process is completed? As the company is technically insolvent is it right for open-trading of shares offering the nirvana of state-backed rescue?
What happens if no bid is acceptable? Will politically-connected hedge-funds not attempt to pass their holdings unto the gullible? And what benefits await JP Morgan and members of it's board?
Let's hope that the LSE exercise full and open oversight on the politically mischievous bail-out for the friends of New Labour!
Am I allowed to be a little apocalyptic on here?
Really Robert, as much as I admire you for tackling the NR problem in such detail, you are doing a slight disservice to your readers by merely scratching the surface of this corrupt banking system that we are all indebted to.
What about the downgrade of AMBAC on Friday from AAA to AA rating? I think we should be addressing the implications of this - it's far more devastating than NR.
You're not keeping us to date, Robert!
Couldn't the government have just put all the Northern Rock debt details on a disc and then lost it..??
I think it's disgraceful the way the government are supporting Northern Rock.
Providing them with a get-out clause in the shape of a 'new business' while the tax payer pays the debt.
I say let NR go under. It's a business company just like any other, which unfortunately has failed.
Would the government come to the rescue of all Business Companies that failed? I don't think so.
Grow some balls Gordon Brown and let NR bear the brunt of their error.
Why is NR so special ??
Silly boy
29 Northern MPs
Now you know why its a SPECIAL case.
If you think a bank collapse is going to turn the North into a Tory heartland, you forget what happened to that area the last time they were in.
Northerners haven't.
Banking is, and will remain for the foreseeable future, one of Britain's biggest economic Raisons d'etre.
If the government lets it fail, we are in BIG trouble.
To Bill Wilson (#5) :
the answer is simple : Northern Rock is a major employer in the Newcastle area and the majority of that region's voting is in favour of New Labour. Equitable life was less "geo politically" focussed. Hence we are seeing a bail out of NR as opposed to EL which was hung out to dry.
Lots of people ask why NR is supported and not Equitable life and other businesses.
Surely the answer is that if a well known name like NR goes bust the potential economic ramifications (bearing in mind it is in the banking sector) are of a different order of magnitude to that of most other business types.
Had it gone down then we would also have seen queues outside other banks/building societies as people who dont understand the whats going on decide to take their money an pout it under the mattress. a stable banking system is essential to a modern economy and you simply dont want to consider the consequences if a run on several banks, or the system , started.
So, because people would panic, the governement needs to ensure that NR doenst go down, and that custoemrs with money in NR dont lose it.
Simple really.
Well said 42. 70s retro hard work and realism is what's needed to fix the debacle created by the City's love of school swot sheep. Hundreds of kids with no experience of changing market conditions. The 'This time it's different' brigade getting carried away with their spreadsheets.
The IMF has been warning for a while about the UK housing market being overvalued by as much as 40%.
Has anyone got a figure for the taxpayer's losses if we see that kind of adjustment in the next 5 years?
Gordon Brown...? Anyone...?
Would this breach any EU rules on state aid? Corporate welfare at its worst.
But we're told time and again that issueing bonds is not possible to finance things like public transport schemes. How's this different?
That should shore up Labour's vote in the North East very nicely. Can you imagine the same (or any) level of support for a regional bank in the South East?
Robert, any idea what this plan means in terms of the Govt's Golden Rule? Will the Northern Rock's debt still be added to the public sector debt (thereby leading to a breaking of the rule that debt should not exceed 40% of GDP)? Or is the plan a way of escaping that particular embarrassment?
This deal is a disgrace.
1. NR market cap up around Β£120mn this morning - a direct measure of the transfer of wealth from UK tax payers to NR shareholders. And that doesnt take account of the wider moral hazard across the rest of the banking system.
2. NR cannot meets its debts as they fall due and so is insolvent wihtout government support. It should be nationalised for Β£1 and then sold back to the private sector ie wiping out the shareholders and maximising the return for the taxpayer as NR creditors. This deal leaves the shareholders with all the upside apart from the vague flim flam about warrants, covenants etc.
3. And the securitisation is just smoke and mirrors that will generate more fat fees for lawyers and investment bankers. The taxpayer remains at ultimate risk. So why not keep it simple and leave the debt on the Bank of England balance sheet (no reason it cannot stay there indefinitely) or issue gilts. Do HMT really think people will believe that this 'meets our stated objective.. to ensure the Bank of England's loan facilities to the company are repaid in full, with interest, upfront as soon as the funds are raise' Repayment of the Bank by the Treasury doesnt count I am afraid!
But we're told time and again that issueing bonds is not possible to finance things like public transport schemes. How's this different?
Looks like a sensible solution, govt gets interest on its loans and avoids the problems of wholescale job losses in the North East. Bond purchasers get low risk returns on their money. Shareholders get the opportunity to recover the money they have lost. Employees get to keep their jobs. Potential buyers get cheap company with massive upside potential if they can manage it well.
Well said #34.
The Rock is back and so is Special K.
Happy days.
I am in interested to hear how the taxpayer will benefit from warrants taken by the government in NR. Presumably what you mean is that the government get a windfall - the taxpayer doesn't get anything.
The bank had a bad business model and was going down the tubes. So we have given it a shedfull of money and they can go away and have another go. With the same people and the same business plan? Or has someone given them a new plan?
And why was your report on the 8am nes in dollars and not pounds? Just because we haven't joined the Euro doesn't mean we joined the Dollar, unlikely for you to have kept that quiet?
I'm sorry to keep on about this but does it really matter?
The BoE has created the money needed by NR out of thin air, as is their remit, it is loaned secured against real assests i.e. properties and all is well.
Yes?
Two things:
1) The real issue here is the conflict between savers who thought that a bank deposit was pretty risk-free, and the same organisation raising funds through an extremely risky means. There's a risk-imbalance there that was always going to blow up. The govt should let NR sink or swim by itself, force NR to put cash on deposit at the treasury to cover depositors funds, and if the firm dies, consider whether there was illegal action on the part of the board. The govt should NOT be protecting shareholders from normal market risk.
2) What's this set as a precedent. What will the govt do with the next org that has a problem - throw another Β£25bn at it? If not, what is so special about NR?
Looks like a sensible solution, govt gets interest on its loans and avoids the problems of massive job losses in the North East. Bond purchasers get low risk returns on their money. Shareholders get the opportunity to recover the money they have lost. Employees get to keep their jobs. Potential buyers get cheap company with massive upside potential if they can manage it well.
Andrew from 11,
Re: A regional bank? Are you joking? NRK had nearly 20% of the nationwide mortgage market in h1 2007! Doesnt sound regional to me!
This has to be the most predictable set of events ever;
BoE will reach a compromise
Virgin will acquire
NR will be rebranded
Value will be restorted
At 63p a share (from Β£14) it was a bargain. At 85p its still a bargain.
If you dont own NR shares but some now. If you do then you have my apologies.
If businesses as incompetent as Northern Rock are not allowed to fail then the whole country is heading to Noddy land.
To me, the clear answer, after the emergency solvency needs were met last autumn, was to break up the bank and sell all the mortgages to the other mortgage lenders in the UK. None of them wants to take the entire book but I am sure they could have divided it up among them. They are good mortgage assets and valuable and would return to the taxpayers most, if not all, the lent money.
Instead, NR will be kept going at an astounding cost to us taxpayers, simply to protect a few jobs in a Labour constituency.
There are two serious flaws in Ms Brown & Balls economic plan. The raising of house values to fund the economy and the subsequent allowing of leaches to suck the system dry. Alas, the economy and the ordinary man in the street will now suffer whilst the leaches will just get fat sucking the life out of some other system. When will the world learn that gambling is a sin for a good reason.
Just a small question,who is going to buy these bonds and why should they,especially when you see the state of the Housing marketand the Stock market.
As can be seen in the finance indutry at present,they all seem to loathe in lending out to each other,let alone buy bonds.
One of the BoE / Treasury / FSA's jobs, and a very important one, is to ensure the stability of the banking system. Therefore they _must_ support the Rock (and any every other retail bank in difficulties) to avoid a radical breakdown of the banking system - which would be bad for anyone.
That implies they always have a financial liability to the banking system and in particular to banking mishaps - whether caused by bad bank management or not. That cost will always exist, whether it's a liquidity, savings or loan guarantee, and whether it's an actual cash cost or the imputed cost of a guarantee.
It's the government's _job_ to keep the banking system stable and that is what they're doing and I'm afraid it has a cost. You can argue they're doing it well or doing it badly, but I don't see how you can that they should somehow be avoiding the cost.
Northern Rock is in a hole. In order to pull it out Darling of the Bankers has jumped in with pick and shovel and is now busy heading for Australia.
More complexity is how modern politicians answer a problem. To what was a relatively simple but messy problem of a broken bank - albeit a rather large one - that needed to be cleaned up quickly, we have added a massive sum to public sector debt, when we can't really afford it, whilst spreading the risk out over a period of at least five years.
It reminds of the old insurance advertisment `we won't make a drama out of a crisis'. But then they are politicians and they have their needs.
People seem to be under the impression that Β£25bn is going to be spent and then it's gone - that's not what is happening. There could be a loss if house prices tumble, but obviously even if they fall by 20% that's not gonig to be Β£25bn.
"Banking is, and will remain for the foreseeable future, one of Britain's biggest economic Raisons d'etre."
I'd go further than that.. It's Britain's only economic raison d'etre and the reason for that is that this confounded Govt and the financial services sector have engineered the economy that way..
Simple question... What would provide the greater overall benefit to the NE or anywhere.. a Northern Rock or a car builder?
This blog should be done in real time so responses from the writer can be seen. May be we could start a youtube debate!
The Northern Rock coverage by the media, was and continues to do exactly what the Labour government expected and needed them to do- inflate a small time, northern bank with entreprenueral spirit of a labour background to be the scapegoat for the seemingly catastrophic liquidity crisis many banks are experiencing still.
The real matter of whether or not money is injected or not is irrelevant since money itself is only a store of worth. Printing money in the long run will have no impact upon the nominal monetary base since most of it isnΒ΄t even seen! ItΒ΄s velocity is so high in the UK that a quick upsurge in the money supply will only rise prices for a short term period, investors may not even react- in the long run we are all dead and in the long run money is neutral! See LucasΒ΄s work.
How often do we pay for things with cash exactly??
What we could do with is compulsary economics classes for all. Financial literacy is and will consistently fail in our country if the government continues to allow people from uneducated, low income backgrounds to pay for the price of debt.
The latest turmoil in financial markets may undermine even this generous (to the existing shareholders and the new ones) plan. While LIBOR may have come down, it doesnt mean the turkeys can finance - there are two ways in which firms & banks can lose access to debt markets via price and via volume. I suspect NR remains an unpopular borrower and even a Β£1 billion subsidy from the cretin Darling (plus whatever new equity is put in) may still be insufficient to persuade banks to lend.
Remember that the government is having to guarantee all NR borrowings. The Β£25billion only covers the direct loans. One wonders what seniority the government guaranteed bonds are getting?
The plan is doomed to fail and warrants are only a compensation if they can be converted into the underlying at a future date.
NR should be let to sink, this is not a north / south divide thing this is all about what happens to a business when things go wrong.
Is the government now is government going to now bail out every failed company because it sure as hell looks like it has set a precedent.
The very idea of Virgin taking it over would be worse than leaving it to fail.
The NR brand is undeniably doomed but then so is the past it's sell by date Virgin brand across the board.
Branson is a venture capitalist, his intention is to sell the bank on as soon as he can to make a profit for himself preferably in a tax haven.
The answer needs to be to take NR back as a Building Society with a Golden Share for the taxpayer after reducing the assets down to Β£30bn.
I am not a share holder or a customer of Northern Rock. I do not see why my hard earned tax money has to be spent on a Bank that is going out of business. I would rather the government pay me back the estimated Β£2000 that it has cost each tax payer to hold up this failing business. Why doesn't the government invest the Β£25 billion pound in manufacturing which will generate real wealth for the country. I live in Derby where Rolls Royce have announced it will make 2500 hard working honest people redundant, I hope the government will be supporting these people the same as it seams to be doing with the gambling bankers at Northern Rock.
#8, James
You just don't get it, do you. The country is in as long as was previously thought, and for the same amount, except this time its a guarantee, not a loan (big deal - the two are virtually synonmous - or would you like to guarantee my mortgage, I truly can afford it). Its just this way, we only get the downside. We get no upside (apart from the guarantee fees) but suffer hugely from the downside.
The reason HM Govt is guranateeing these loans is no external guarantor will touch them with a barge-pole, except for an unbelievably large fee - are we going to get this, or will the government allow this to roll up, if it is charged at all?
Where's the European Commission when you need them. This still stinks of state aid.
No solution to me seems ideal, but the fact is that the government has committed billions of our money to a rescue/support package. If Virgin buy it, turn it around and then sell it, then they will make a huge profit but the risk seems to be with our money. The Government will only get its bonds back. Hopefully in the deal the Government should get a slice of any enhanced value as it has taken the risk. If this were to happen at least ultimatley the tax payers will get a return for the risk. Then the Government can waste more money on think tanks and ill thought out iniatives.
Please can someone quickly clarify how other banks/corporates will be able to raise money via bond issues when NR bonds will be virtually risk free i.e.fully underwritten by the govt?
Β£25 billion is one hell of a lot of debt for a tiny bank in Newcastle.
Actually there is a recent precedent to the Northern Rock rescue: the Channel Tunnel Rail Link (ref. NAO Report HC302, 2000-2001 Session), where the Govt. stepped in (in 1999) to provide gtees for Β£2.65bn of bonds to support the private sector concessionaire, London & Continental (LCR)
Interestingly, under that restructuring, the original shareholders of LCR were allowed to keep their original investment! Will that happen as well for Northern Rock?? Both disasters were a result of financial mismangement.
Robert - do you think, Darling and Brown are handling this issue, keeping the potential recession (may be depression) in US market in mind?
John Constable #66:
"The BoE has created the money needed by NR out of thin air, as is their remit, it is loaned secured against real assests i.e. properties and all is well.
Yes?"
Well err, no.
Whether the Bank of England flicks a switch to create electronic pounds or revs up the printing presses, the principle is the same. The government is creating a massive inflationary tidal wave.
In addition, houses are not so safe as they once were. Oh didn't you know? According to RICS, the UK has SIX TIMES the proportion of subprime mortgages that the US had. Just wait until the Rock mortgagees REALLY start defaulting - that's when the trues picture will come out.
This is shamefull.
These "bonds" that the Government is guaranteeing are simply all the sub-prime loans that Northern Rock has made, and as our property market goes the way of the US, the taxpayer will be left holding the can.
#42 - if we're going for 70s retro chic then I'd rather see Gene Hunt from Life on Mars take control of Northern Rock.
I'd buy shares just to be at the AGM!
Why stop there?
The Government should underwrite the value of all our houses, not just NR mortgagees'. Then they should subsidise "hard-working young families" to get on the housing ladder. And while they are at it, the stock market is in a bit of a mess, so they should underwrite share prices as well.
Inflationary? No problem, subsidise energy and food as well!
Can we finally put this northern MP seats nonesense to bed? And only 29 seats at that, very few of which would change because of this.
General Elections are not won and lost in NE England. Ask any political scientist or commentator. They are won in and around Greater London, its boroughs and suburbs, particularly the floating working class voter in SE England.
A "Southern Rock" would have been equally supported, perhaps more so if political reasons were at the forefront. As mentioned the reasons are more to do with preserving banking and financial confidence, our primary sector after all.
my equitable life pension and my partners both went down the pan in 2000. i was paying in the maximum possible allowed under the tax rules. many others lost a lot more than me.
but now i know how it works...
non labour southerners - zero subsidy
labour heartland voters - Β£1bn
vote conservative at the next election ?
you betcha
#3, where did you learn arithmetic. I know our education system is a joke. If the bank lends 90 at 5% interest it has 4.5 not 105 - the 100 belongs to the depositor. The person paying the debt has usually earnt that money either by investment or by production. If I am not a car builder and I lend that 100 to someone who is then he has created added-value to the previous scap metal he had.
Reading an article recently the writer used the phrase that it (The monoline insurer problems)was "another fissure" opening up in the Global credit crisis.
This image seems to sum up what is happening both worldwide and to the government's efforts to try and save Northern Rock .
Each attempt to build a structure for rescuing the Bank is undone when the land beneath the scaffolding starts to slip away before work has even begun.
However ------Given the guarantees to be put in place will there be anywhere I can buy Northern Rock Bonds through National Savings (or something like that)??
I would like to be given the chance to hedge my position as a tax payer in all this.
Rather than give the upside asdvantage to outsiders (non-UK taxpayers) who aren't carrying my own downside risk...
Is it a good plan by Darling? Well, the city financiers seem to think so with (as I write) a 33% increase in the share price. I have to agree with several posters who are puzzled as to why this is a "humiliation" for the gov't. But, of course, we have been here before. When you "broke" the story about NR problems your sensationalist reporting/approach certainly inflamed the situation. We had wrinklies queueing to withdraw money - in one case from 4am for Β£200 - and yet you never mentioned the statutory safeguards for deposits below Β£33k. So please, Mr Peston, if you return to this story, give us the facts and not your "analysis" of the situation.
I can't work out from the above what precedence these Government guaranteed bonds will have over NR's assets relative to existing claimants (Granite bonds etc). If there is a house price crash later this year with associated mortgage defaults reducing the value of NR's assets, would these bonds be the last in line, resulting in the Government potentially having to fork out the full Β£25 billion? The IMF says our house prices are overvalued by 40%, so that doesn't seem a particularly unlikely scenario.
Spending Β£25 billion propping up the UK's bloated banking system seems a hideous waste of money when you think what else could be done with the money. Much of the banking sector is no longer actually creating wealth by ensuring efficient investment in industry, but merely finding new ways of printing money (CDOs etc). For the good of the rest of the economy, the banking sector needs to be pruned back, not encouraged to continue behaving as it has.
This will mean that if we save one, we will have to save them all. What if a larger bank goes south, the bill could reach Β£100 billion and why stop at banks should we not rescue big businesses as well to save the investor from losses.
The government is representing the people then I do not think that all the people want the rescue and cost Β£27billion. There are more important things that needed the money.
Business is Business, you make profits or losses and you succeed or you donβt. Putting money in a bank is to help that business grow (or not, but controls are in place to hopefully stop the losses) it can only pay interest if it loans it out and receives interest. The people who drew their money out are the ones that caused the problems and the greed of share owners to get a higher return and the high bonuses to pay make banks and companies take higher risks.
To late now but it will be hard to refuse any one else.
As a footnote I find it hugely amusing that Tory party is today attempting the re-writing of history. They "blame" only past Labour regimes for nationalisltion when I recall Rolls Royce 1971 Ltd was a Tory nationalisation, wasn't it?
Regimes of all hues get forced into nationalisation when market failures threaten some cherished or vested interest. NR is no different.
Our only concern should be that it is done efficiently and at the least economic cost to us all. We are in the hole and we should stop digging as soon as possible. I fear that we will be stuck with NR until the World's credit markets recover some mutual trust - a month, year or several decades from now - if I could tell I would be a billionaire!
Whilst I am by no stretch of the imagination a marxist, this is crony capitalism at it's very worse. NR is not "the banking system" it is a rather minor bank whose incompetent managers made it "temporarily" insolvent - is there any other kind of insolvency? - and whose bankruptcy would have had minimal impact on the rest of the financial services as no one was lending to it at the time and most of it's assets are already securitised. It has smallish deposits, no real investments or pensions arm and so could have been allowed to go under with only a political cost - which of course is the one that cannot be paid.
As for A&L, they had a management that was competent enough to secure funding before the money markets locked up and not after. This is the difference between a "well-run" bank and a useless one. Of course they are paying a penal commercial rate and not some subsidised government rate.
Finally, are we really meant to believe that Gordon Brown has been wondering around China with Branson and magically comes up with a deal that is bad news for taxpayers - who cares about them - but great for Virgin, great for the people who happen to return 29 Labour MPs and great for some hedge funds that might have made some noise.
TO POST #89 - TIMM
May i correct you here. Northern Rock doesn't actually have any sub-prime mortgages.
Northern Rock simply processes them and makes a profit from admin fees etc. The sub-prime mortgages that northern rock offer actually belong to the Lehman brothers who you will have seen have recently made record losses lately
The proposals, as I understand them, are astonishing in that the taxpayer appears to be on the hook by way of guarantee for bonds which will be backed by soem lower-grade assets. All the prime stuff will be used to back the Wreck's "granite" and covered bonds programme. Most of the rest will be put into a special bond-issuing vehicle which will be backed by Treasury guarantee - AND the "granite" and covered bonds can still dip into the vehicle's assets if they run short of cash for their obligations. The Treasury's position is like having a third mortgage on your house in a falling market. If things get too bad the first mortgage will be paid out, maybe even the second mortgage, but the third will be depending upon the market value of the ornamental gnomes and the garden shed.
so basically they are paying the eventual winner to take the thing off the governments hands.
Dont you think its about time that someone stood up for the employees, the people who have saved this bank from falling months ago & saving the taxpayer and shareholders millions. Talking about the shareholders, the people who thought it would be clever to buy shares when the company was falling to pieces and now complain when they dont see a return.
"DONT FORGET ABOUT US, ROCK ON"
You know. The more I think about it, I think it is a good idea.
If the lending market continues to go breasts-skyward I think having a semi-nationalised bank who my have to lend in a more moral way would be a good thing.
Guy
And people wonder why it is that an increasing number of people in Scotland want independence and the opportunity to escape from this gambling den and their representatives in the Treasury.
Personally I think this is the best solution out of a difficult situation. The strength is in the detail. Never administration or nationalisation are good or better directions. We can say this shouldn't have happened, but it did, and it has. What I want to know is that the lions share of the public money will come back, the chance the treasury itself can benefit from any rebranded NR recovery, that a competant private management team are at the held, savers money safeguarded and mortgages processed. As for current shareholders, they are at the bottom of the heap IMO. They went along with the former boards high risk credit supply, high profits stategy that fell flat, and caused this mess. Buyer beware!
#88
why let facts get in the way of the story? You've been bitten by the Peston pessimism...
"Subprime mortgages are now more common, accounting for 8 per cent of the overall UK market..."
"The share of [US] subprime mortgages to total originations increased from 9% in 1996, to 20% in 2006..."
The US has a greater culture of self-employed and hence self-certified income earners, much more likely to be high risk and sub-prime. Lenders here have already tightened lending criteria recently. The UK is more likely to weather this storm than not...
The Northern Rock share price is up 47% today whilst the overall stock market has gone down incredibly today.
A fall of nearly 5% on the Footsie 100 today alone.
Surely that tells you all you need to know about how generous this deal is to the shareholders and any potential buyers.
I wouldn't worry about Branson or Olivant taking over. This deal over the bonds will bring in some serious players to feast on the corpse that is Northern Rock
Wow - can I use this mechanism to issue some personal bonds guaranteed by the Government so I can buy a nice bolt hole in the Bahamas ?
The Character Assassination of Northern Rock by the Coward Robert Peston continues. How come, Robert, you have managed to get every idiot in the country thinking NR has borrowed 50 billion?
Surely it goes like this: (not counting retail deposits)20-odd billion to replace NR's existing debts, followed by 20-odd billion in guarantees to anybody who will provide liquidity, thus replacing the aforementioned debt. It's like balance transferring your credit cards, is it not? Albeit on a larger scale...
Yet your tabloid-friendly reportage suggests that this bank is stowed-off with trucks delivering bundles of Β£50 notes, taken directly from the coffers of some hospital; as you know, this is not the case, yet you seem content to let every moron with Wi-Fi believe that they are being robbed.
Or would the more optimistic headline: "Government steps in to protect economy, saving thousands of jobs" not have got you as much attention?
Get back to us when public spending is actually affected.
PS - No 89 (among others)get your facts straight before posting a comment.
Would the Tories blame GB for the global financial chaos and the loss in the financial markets around the world?
Do they agree with the BOE help to NR? Or have they now changed their mind again?
Is it not true that what is now happening in the economy, it is due to the Global financial uncertainty and not self made recessions like we had in the 80s and 90s?
Should we take heed of boy Dave, the person that was responsible during the MISERABLE and INCOMPETENT Lamont years of the early 90s?
When did the government consult me to use my money? This spending was never part of any manifesto and is tantamount to theft!
Meanwhile the hedge funds and city speculators make a 50% gain on Darlings announcement, whilst everyoneβs pension fund dropped significantly today.
What will the government do if every household in the country makes formal demand for immediate repayment of Β£2,000 each?
Itβs time for Nu Labour to go.
No 83
"Where's the European Commission when you need them. This still stinks of state aid."
Already sorted.
Sign here for reducing your billions rebate.
Sign here for the NEW CONSTITUTION ( Sorry Treaty)
Thanks, what was that you wanted ??
#88 Paul .. thanks for debating this, I was beginning to think that maybe I was cracking up.
But I am not, it is the system that is rather shaky.
You say that the Government (via the BoE creating say Β£50Bn) is making a massive inflationary wave.
Surely even Β£50Bn is a small proportion of the total amount of money in circulation, which must number some trillions of pounds.
Regading NR's loan book, I understand that NR had a tiny number of 'sub-prime' mortgages compared to their competitors.
Also, the majority of mortgagees with NR would have put down something from 5% through to maybe 40% deposit, so there will be a cushion of equity that would need to be devoured before NR itself was 'out-of-the-money'.
This is a shocking and unbelievable outcome, and will eventually lead to the heads of at least the chancellor and possibly the PM. The government is planning to give away a business for free for which it will bear substantial risk and provide an enormous amount of financing. Almost any business could survive if offered the same ludicrous subsidy. The government do not have the balls to face reality and instead they will squander the nations resources to avoid near term pain.
With the provision of such enormous cheap funding, taking the liquidity and mark to market risk out of much of Northern Rock's business, any of the major UK banks could acquire and absorb Northern Rock - a far safer option for the tax payer than giving it to a chancer entrepaneur with relatively tiny financial resources. This safe option would at least lessen the chance of business failure by placing it in stronger hands and avoid massive private sector gains at taxpayers expense being rubbed in the nations face in several years time.
Still it would seem highly likely that this plan is laughed out of Brussels. No reasonable person would consider it anything but massive state aid. For the long term health of our financial system Northern Rock should be allowed to fail and broken up. It is a banking minnow and if it cannot be dissolved successfully then our entire banking system needs to be reformed.
With regard to the Goldman proposal, I confess to being totally bemused. The bankers will get paid handsomely (again) to structure and sell a bond issue which does nothing to reduce the Governmentβs risk exposure nor the price at which this funding is financed as the bonds will never trade through gilt spreads. This seems barking to me. I can only conclude that the Government is hoping that the contingent liability represented by the guarantee (which is in truth every bit the same risk) will appear to be a less direct form of risk and allow the exposure to be taken off balance sheet β in other words, the Government wants to do a bit of Enron style creative accounting.
good shout, northern rock needs a buyer or public opinion will turn strongly against the government.
Have the events of 09 August 2007 been shoved under the carpet (hint Lloyds TSB)? What will the bond scrip have as its term and its return? Other than the reported merchant banker Β£125 m fees, (for what?) there is nothing else to bite on. More detail please,RP?
#110, actually that is not correct. The split is that the government has lent 25bn odd to NR at base. There is a rollup of the spread to Libor which is payable over 5 years. This debt is junior subordinate which means it is the last debt to be paid off before shareholders. So not only has the government not got any risk premium for lending to a bank that others wouldn't touch with barge pole but it also is a far more junior creditor than someone who lent in the marketplace. This is almost certainly why it won't do the natural thing and let NR go to the wall - because that would crystalise a loss now. They'd rather lose money over five years because financially illiterate people like you think getting some interest is "profit". As for the quality of loan book, NR securitised those so the flows and assets belong to people owning those bonds and so are irrelevent to the government.
As for the balance transfer analogy, here is a more accurate one. It is like the government stepping in to lend to a complete bankrupt who no else will touch with a barge pole, who has nowhere near the assets to cover the debt and then charging him less than what someone with a perfect credit score gets. Is this clear enough to you?
How the Chinese Government may view the recent past and future.
A quiet private sale to Lloyds blocked by lack of Government support. The stated reasons, claims of unfair competition, government open to accusations of acting as shadow director and the importance of the βmoral hazardβ. This we can understand: Face.
The result:
The first major UK Bank run in 156 years. Ordinary people queuing to withdraw life savings. Major loss of face for UK banking and UK Government.
Direct government support of Β£26 billion. Further guarantees of Β£25 billion to prop up ailing Bank.
Paralysis in the money markets, loss of international standing in the regulatory tri-partite system of the UK. Nobody appearing to take decisive action. Conclusion - System failure. Chinese response would be: find out and punish the official(s) responsible for creating indecisive system. Check to see if UK government have correctly allocated blame. Use this as competence test.
Sale of a small part of the best of Northern Rockβs loan book to repay Government loan. Merely face saving exercise to appease masses.
Two major bidders for Northern Rock fail to raise funding. UK government forced to act as mono-line insurer issuing bonds to recoup money lent to Northern Rock. Government Guarantee makes these bonds βAAAβ, same as gilts. Major loss of face.
CEO of Northern Rock who created business model rewarded with six months severance pay. Whereβs moral hazard? Astonishing, Chinese way cheaper and better. He would be for the chop, literally.
Projected Future.
Major banks like Lloyds, Barclays interested in Northern Rock under Government bond issue as they seek to increase their capital base by buying a UK mortgage loan book. Successful purchasing bank subsequently announce increased exposure to US sub-prime losses. However, agreed terms on the purchase of Northern Rock have easily allowed bank to absorb these losses and comply with Basel II capital requirements at a knock down price.
Major loss of face for UK Government as it slowly dawns on masses political expediency (a general election within 18 months, Prime Minister appearing to be decisive by saving northern jobs for labour voters) is more important than obtaining economic return. Indeed ironic if Lloyds successful, their bid considerably less than last year with added advantage of the UK Government acting as mono-line insurer. No government official admits incompetence, blame put on previous Board of Directors. Failed competence test.
What of the official who designed tri-partite system that failed? Oh yes, he is the same one who tried to tell us we needed the financial expertise of UK government and financial institutions. He did have a strange smile. Major loss of Face.
Time for Nu Labour to go?
What makes you think "call me Dave" would be any different? Both the major parties just do what the City wants them to do.. I'll only give my vote to someone who is prepared to get the Square Mile back under some semblance of control.
"Other businesses are not propped up by the government, why should a bank be any different?"
Banks need to be protected from failure because they operate the payments system, and without trust in the payments system the economy cannot function. Deposits (which are obligations sold by banks to depositors to process their payments intructions) are the key components of the payments system and the limited statutory guarantees for deposits underwrite that trust.
Banks also operate in the lending business, which is economically useful, obscenely profitable and incidentally subsidises the operating costs of the payments system, but at the end of the day lending is just a business like any other, deserving of no special protection.
Banks lend as either intermediaries, using money made available for the purpose by others, or as originators, creating the money loaned simply by agreeing to process payment requests from the borrower. The money-creating consequence of bank-originated loans is the other unique and economically vital function (and a highly lucrative, undeclared, cost-free and untaxed asset) of the banks. Banks do not borrow money from depositors; depositors pay banks to issue them with deposit balances. Regulators refer to the level of deposits to set arbitrary limits on what constitutes prudent lending by banks as originators. Money created in originated loans is annihilated when the loan is repaid. Money paid in interest on such loans is recirculated back into the economy through payment of the bank's running costs and dividends, exactly as is money paid to any other business.
Northern Rock is primarily in the business of intermediating loans, borrowing money from the money markets to lend to homeowners and home buyers. As a payments processor it is very small fry indeed. I think that the regulatory authorities got themselves caught in the headlights of the status "Bank" and the largely Peston-inspired panic of the depositors, failed to notice that the institution actually consists of a major financing company bolted on to a runt of a bank, and set about trying to keep the lot afloat instead of concentrating on saving the runt from the wreckage, which is all they are required to do.
In September the books looked good, the authorities were confident that the revenue flow from the company's mortgage assets was assured, and they were happy therefore to guarantee all deposits believing that was all that was necessary to halt the run.
Things have changed.
The global financial system is careering towards meltdown, the UK economy is bound to be dragged down by America, the mortgage revenue, from which payments under the Government - guaranteed bonds are to be serviced, will dry up as the economy goes into free-fall and those guarantees will be enforced pretty much from day 1.
Gordon and Alistair have just done an Equitable Life with UK plc.
To be blunt, I have no interest in Northern Rock. My concern now (and has been since August) is the wider economy and the portents in the stock market. Northern Rock will feel like nothing compared to the impending tsunami about to break over us.
#111, how short out memories are. There was a global recession in 1990 to 1991. There were several stock market crashes from the States to Asia.
For some reason people seem to remember exiting the ERM as some sort of catastrophe but it was the saving of the British economy. You can see straight line growth from that day. The "incompetent" Tories handed to GB the strongest economy any incoming chancellor ever had - and if you remember rightly he simply followed their spending rules for the first 2 years.
And no what is happening today in the UK is the government's fault. NR was poorly regulated and saved for what can only be political reasons. The overtaxing of Britain is GB's fault. The growth of debt financing is GB's fault. The growth of off balance sheet financing for the public sector is GB's fault as is its massive growth. The man took the bows for what was for a long time a mixture of cruise control and luck but now it is going down the pan he wants to say it is nothing to do with him. Lucky for him, people like you exist....
"in the absence of government support shares would be worth close to zero" while this may be true it is also true that it is the presence of this peculiar uk gov support that has reduced share value to near zero if you look how europe and america operate in this liquidity crisis ie northern rock would not be in this mess if it were not for tri-party incompidance. should the government punish shareholders for its own inadequacies.
110 Adam and all the others in denial.
Real money has changed hands. It went from NR to the solicitors as they conveyanced the houses that got sold to NR's customers. Following so far?
Then because that money did not get immediately deposited into NR it had to be replaced with other money borrowed from wherever or whoever was cheapest. In NR's case that was the wholesale market.
As those loans came due they had to be replaced with other loans.
Still following?
With the credit crunch NR found that they could no longer borrow this cheap money and ended up borrowing expensively from the BoE. The BoE would have created this money at the press of a few keys on a keyboard but it would have found its way to the folk who NR was paying back.
The BoE does not like creating masses of money because it plays havoc with the economy. It is inflationary - just as in Zimbabwe.
Whether the money found its way to other banks or was used as loan collateral is immaterial. Creating it is inflationary. It is not good for the UK economy.
Albert is being too partisan in his comments. It actually wasn't that long before the Lamont years that we had a Labour government that gave us income tax rates as high as 98% (a higher rate of tax of 83% plus a tax of 15% on savings - comapared to a higher rate of 40% brought in under the Tories), the "British disease" of strikes and a Chancellor who had to go begging for cash from the International Monetary Fund. The present Chancellor has given our pension schemes the equivalent of a "Black Wednesday" every year since 1997, swiping more than Β£5billion a year from them. Even the Bank of England is "frit" to increase interest rates by a paltry quarter percent in case we're tipped into a recession. Public spending has increased to going on Β£600billion but independent reports indicate that output has not increased proportionately. Public spending has been financed by a consumer boom based on cheap credit, public sector investment based on "tick", a sale of public assets - including gold at giveaway prices - higher levels of Government borrowing and increased taxation by sneaky means - the so-called stealth taxes. Maybe the actions taken by the Government in relation to Northern Rock have been right - but it doesn't follow that they are any better than Lamont - at least in those days we hadn't heard of "Enron accounting" to describe how Gordon keeps the cost of PFI off the public balance sheet, the way housing costs have been kept out of the RPI calculations (so increases in mortgage costs and council tax do not show in official statistics) and the re-creation of the time period to ensure the so-called Golden Rule could be met. In point of fact, what has been shown is that many initiatives of the current Government in relation to taxation and spending, they have actually been incompetent, or - for example in relation to tuition fees - not entirely trustworthy.
"Shares can go up or down" let them go down, to zero, and Nationalise it now.
It's ridiculous that share holders, who are taking a risk by owning shares, should be compensated when a business becomes insolvent.
These idiots who claim they, the tax payer, have lost Β£2,000 each remind me of the numerous police who claimed compensation for depression and mental suffering after "Hillsborough". They are pathetic whingers or perhaps professional whingers.
To date nobody except NR shareholders has lost a penny and there is no reason why they should.
Currently the government is in profit from their actions. Sensible control of the Rock and support of the current board instead of continuous harping from the "Pest" and like minded liberal democrat "failures" would be the best solution for everyone.
As suggested this isn't a very clever solution and probably offers much too much both to any potential buyer as well as in fees to the 'advisor'.
What is interesting is that Brown was very keen to create a long-term fixed rate mortgage market in this country as there is in the USA but failed to do so. Now by default and through Brown's mismanagement of the economy the State is about to guarentee a MBO.
The Treasury having starved the long-end of the Treasury Bond market is about to issue in effect some tens of billions of medium/long term debt which may be very useful for pensions funds but will put a lot of pressure on the corporate bond market which will put Private Equity funds under more pressure.
What happens if another bank faces a run? Darling's already played all his Aces.
What is missing from this discussion is that the rise in property prices has been about the only thing available to GB & co to continue the illusion of prosperity.
They have done everything they can to keep house prices rising: shared ownership, CGT malfeasance, and now stepping in to keep the taps running at one of the larger mortgage shops.
This isn't in my opinion about a few MPs or faith in banking. It is about trying desperately to keep an over-inflated bubble alive for a little longer.
What is missing from this discussion is that the rise in property prices has been about the only thing available to GB & co to continue the illusion of prosperity.
They have done everything they can to keep house prices rising: shared ownership, CGT malfeasance, and now stepping in to keep the taps running at one of the larger mortgage shops.
This isn't in my opinion about a few MPs or faith in banking. It is about trying desperately to keep an over-inflated bubble alive for a little longer.
In answer to 112:
"When did the government consult me to use my money?"
Erm, well, they didn't, and why should they? How would they? A national referendum? A vote on dancing on ice using the red button?
Did they consult you personally when they decided to order the 2 new aircraft carriers, or about the current public sector pay rises, or pumping billions into the global money markets recently?
Of course not! The government is doing the job delegated to it via us voters at the general election. They don't have to consult you or me on every aspect of their work.
Based on some of the comments on this blog, I'm pretty pleased they don't, as some of the opinions border on criminally insane.
If the Government has done this for Northern Rock what happens when another Bank makes a call to Alistair Darling?
I assume that this state aid will be contrary to EU rules. (If it is not then those rules are ineffective and permit unfair competition).
That being the case the present proposals will have to be withdrawn and NR will either be nationalised or go into liquidation.
In either of these events Brown has egg on his face.
He will no doubt try a Macaverty on the basis of saying "its all the fault of those nasty people in Brussels" and then go onto say "oh and while your about it I am going to put even more of your freedom and sovereignty in the hands of those nasties in Brussels by forcing through the new EU constitution through parliament-so you can see how consistent I am being"
The plan is out and it is a disaster. The public will be saddled with a guarantee to a badly run bank and other banks are now by definition literally protected until sense returns.
This isn't even Socialism but marxist lunacy and the economy will suffer for yeas as a result of this demented attempt to support a poorly run company.
The biggest laugh yet is that those who shoudl know better appear to think that the Branson camp and the individual acting as the friendly face of support shoudl even be considered.
NR is worthless and we shoudl jjust accept it and do what happens to any other unfortunate company that gets itself into the same mess - Wind it up and move on.
The U.S is in recession now.. The U.K will be from about april time onwards !!!
Preston's experience and knowledge is evident in his reporting but his vocal delivery drives me up the wall! There's no need to swing around the musical scales to quite such extremes and please, even out the flow; sometimes you take a second for each word and then gabble along at an alarming pace. - even it all out - please!
Does anyone remember British Leyland or British Steel or British Coal. All received subsidies at one point or another, all were supported for political reasons and all did worse after subsidies. When the subsidies were withdrawn all but one failed. If a business is broken, it's broken with or without hard earned public money.
How can it be right to throw money at a private bank who employs a few thousand, when we let hundreds of thousands go when we refused support for our car, steel and coal industries.
If a bank is an business, treat it like one! Subsidies don't work ... ever!
People - incl. Mr Peston - need to stop milking this story.
A bank failed, it was rescued b/c allowing trust in the banking system to be undermined would have economic repurcussions that could echo for decades. Money was lost and careers were tainted, so the incentives are still in the right place. Alistair Darling looks out of his depth, but trying to pin this on him is stupid.
The comments above are stiking for their idiocy. People exclaim "nationalise it!" as though nationalisation were an exit strategy. People also exclaim "how dare they use my money in this way!" as if non-intervention was in the long-term interests of the country (financial services ~20% GDP). The ones that really make me laugh shout "how dare they use my money like this! Nationalise it!".
The media frenzy has diverted attention away from NR's reorganisation. Politicians, instead of seeking the optimal solution, are now compelled to find the solution which will most appease an angry/uninformed electorate.
Grow up, Peston.
To Rude Boy, post 113.
No, the BoE printing money isn't inflationary in this case as it is merely replacing liquidity that would
otherwise have(and, until the credit crunch, was) being supplied elsewhere. Nothing like Zimbabwe at all. Monetary policy used to be one of the main stays of government intervention in the economy (along with fiscal policy) until Gordon Brown made the BoE independent in order to reassure the City that labour could ever be trusted with the economy.
Robert Preston is in part to blame for the initial run on Northern Rock and subsequent losses that the bank has suffered.
I have watched him apply cold water to many a proposed solution to the banks problems. If the ΒιΆΉΤΌΕΔ employ 'experts' in other fields they usually offer solutions to matters they comment on, but not dear Robert. His brief appears to be 'talk down the economy and see how far it will go'.
Loyalty to the UK and its institutions have no room in this poor mans make-up
Dear Robert Peston
I so wish you would try to give some reasoned, intelligent, balanced analysis of events rather than the (usually) hysterical hype you write - not just on Northern Rock but other stories as well.
I'm sure the Daily Mail would employ you but I'm not sure why the ΒιΆΉΤΌΕΔ does. Your job gives you a privileged position and it matters that events are reported properly when peoples' savings and jobs are on the line. Perhaps you have lost sight of that......
142 Dorte
So the BoE replaces liquidity that would otherwise have been available. What happens when that liquidity becomes available again? Does the BoE unprint the money?
I don't think so. The cat is out of the bag.