Rock: the leak is staunched
At last some goodish news for the Rock.
For the first time since it went cap in hand to the Bank of England in September, it has stopped leaking retail deposits.
In the past week or so it has actually added between £100m and £150m of new deposits.
Some savers, at least, now seem persuaded Northern Rock has a future.
However this recovery is a bit of a double-edged sword.
Although it provides a more benign background for the complicated auction being run by the Treasury to choose a rescuer for Northern Rock, it will put the Rock’s competitors on amber alert.
They are already concerned at the Government’s promise to provide five-years of financial support to the troubled bank by guaranteeing up to £40bn of bonds to be issued by it.
These competitor banks will now be doubly keen to scrutinise whatever rescue package is eventually agreed, to verify that it does not include what they would see as unfair state aid – and they’ve told me they would have no hesitation complaining to the European Commission if they felt disadvantaged by the terms of the Government’s long-term financial support for the Rock.
On today’s D-Day for rescue plans to be submitted to the Treasury, three will be put forward.
There will be a rehabilitation proposal from a consortium led by Sir Richard Branson’s , one from , the financial group, and one from a management team at Northern Rock itself.
These will then be evaluated by the Treasury, the Financial Services Authority, the Bank of England and the non-executive directors of the troubled bank itself.
It is impossible to be certain which if any of these will emerge victorious. Not even the Treasury has sufficient information to make that judgement – although some of the bank’s shareholders believe and hope that Olivant has a slight edge over the others.
The final decision on whether to accept any of the proposals, or whether to opt instead for nationalisation, will be made by the Chancellor.
Alistair Darling has wrested control of the decision process from the company’s board because he has provided £55bn of financial support to the Rock in the form of direct loans and guarantees to other lenders.
So more than anything else, Alistair Darling will be assessing the proposals to determine which offers the greatest certainty that taxpayers can be repaid in full and without excessive delay.
In order to do that, he needs to be confident of the robustness of the respective groups’ plans to run the bank.
He too needs to be confident that none of the proposals will fall foul of European Union prohibitions on the provision of state aid.
That means each of the potential rescuers will need to be seen to be paying a commercial price for the financial help the Government will continue to provide to the Rock for years to come.
Negotiations with the potential rescuers are likely to be complex and long.
According to officials, they will continue for a good couple of weeks, perhaps till the end of February.
The Treasury has already announced that up to £40bn of taxpayers’ support for the Rock will be converted into bonds backed by the Rock’s mortgages, whose ultimate repayment will be guaranteed by the Government.
This is the equivalent of the Government providing a five year loan to the Rock.
The Chancellor is likely to look favourably on proposals to reduce the extent of the bond guarantee as quickly as possible.
It is understood that Virgin will offer to dispense with the guarantee after three years.
In the Treasury’s eyes, that may give it an edge over the other two possible rescuers.
However they are offering more to shareholders – and shareholders would be furious with the Chancellor if he opted for a plan that offered them least.
Virgin is also offering to put more new equity into the group than the other rescuers, which would provide a greater cushion for taxpayers in the event that the Rock suffered big losses in the future.
Sir Richard Branson’s group would inject around £1bn in cash of new equity, compared to about £800m from Olivant, and between £500m and £750m from the management group.
The management group, led by the former Merrill Lynch MD , has yet to raise all of its equity, but thinks it would be able to do so.
All three plans are predicated on shrinking the business. The proposal from the management group would lead to the most draconian cuts, with the Rock’s assets being reduced from £100bn to between £50bn and £60bn – partly by transferring mortgages to a so-called special purpose vehicle created to hold the assets that will back the Government-insured bonds.
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Robert,
Why is it that you favour RB's bid over the restucturing plans proposed by the other two candidates? On the face of it, RB does not do any more than the other two besides licencing his Virgin brand to NR. RB won't necessarily be the best candidate to shrink NR loan book and or reduce staffing. He's not in NR shareholders' good book either for wanting to rip them off with his plan.
NR should either be nationalised or helped to shrink as quickly as possible, RB is clearly the least suitable candidate.
Now we can see the predictable repercussions of the government's intervention. This morning NR is offering a guaranteed 6.5% on a one-year deposit, 1% above base rate. This rate is government-guaranteed under Darling's promise to underwrite all NR deposits, and so risk-free (as long as you believe in the government's ability to pay). This rate puts not only all other banks at a competitive disadvantage, but why on earth would anyone invest in a National Savings certificate, premium bond, or a gilt? All of these offer yields over 2% below the NR rate. So by supporting a failed bank the government is cannibalising the rest of the savings market and shooting itself in the foot. This is a classic example of why state intervention doesn't work.
some of new payments = interest payments to yearly savings account holders by the bank itself made in January?
As an innocent at large in the financial jungle, can Mr Peston please explain why a mangement buy out would work in the case of Northern Rock when they appear to be the people whe created the problem?
Also, I note that the Bonds Mr Darling propose are linked to the Company`s mortgage portfolio which is in itself suspect.
You know why they have the best deposit accounts in the market 6.9%
Even if you take money out from the fixed you do not loose interest.
With 100% of 35000 guaranteed its the best return in the market.
be interesting if such info. will be available post a deal with such as Branson.
NR has become part of public mockery, which is not good for businesses , it seems Brown and Darling have to stop dragging this any further – no good for politics and no good for economy
If Paul Thompson is involved in the management bid, then this will have to be taken seriously - he turned Britannic around. Cannot see Branson having the capability or experience to do this. Any chance that Thompson and Olivant could finish up working together?
It now looks likely that there will be substantial rationalisation; pity that this was not started 6 months ago as the chances of success would have been much higher if it had been.
> It is understood that Virgin will offer to dispense with the guarantee after three years.
> In the Treasury’s eyes, that may give it an edge over the other two possible rescuers.
> However they are offering more to shareholders – and shareholders would be furious with the Chancellor if he opted for a plan that offered them least.
Uh... don't you mean "they are offering LESS to shareholders"?
Is it just me who thinks that there is something not right about accepting an offer from the existing management team? Aren't they the ones who got Northern Rock into this predicament in the first place? Who's to believe that they will make a better job of it second time around. Not me that's for sure.
Although Richard Branston's offer might, on paper anyway, be the most attractive deal, I strongly suspect that Alistair Darling will eventually decide to Nationalise Northern Rock.
I'm afraid that if he chooses any of the other options on offer then his efforts going forward will become dissipated by protracted infighting between the various interested parties (the taxpayer, the shareholders and private enterprise)
In the final analysis it is the taxpayer who stands to lose the most.
For George Cooper - no 4.
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A management buy-out could, on paper, work as it's a completely different board to those who caused the problems.
Also, I fail to see what is suspect about NRs mortgage book, the BoE garauntee was only put in place because of how clean the book was (less than half the average arrears, no sub-prime, etc.)
If the quality of Northern Rock's mortgage books was so good, why did Lloyds and J C Flower walk away so quickly?
Does it look like a bank with a heavy exposure to the sub prime elements of the UK market or not?
Perhaps a greater degree of openess is needed given the size of he guarantees or subsidies which are promised to this bank.
@1 Peston does not favour Virgin's bid over the others but that he thinks the treasury favours Virgin's bid over the rest.
And why shouldn't the treasury favour Virgin's bid?
Treasury's main goal is a healthy NR as quickly as possible.
Virgin's going to inject more cash into the business immediately and promises to dispense with the government guarantee after 3 yrs. So it may achieve the main goal faster than either olivant or NR management from the treasury's point of view.
And yes, treasury and by extension the entire british public is now the largest stakeholder in NR. The NR board, management and shareholders are minor bit players in this drama now. The major shareholders know this and that's the reason they are threatening to sue the government if any future deal disadvantages them.
I see that, despite having been the main contributor to the Nothern Rock crisis with your emotive language and selective reporting of the issues at that time, you are still trying to put the boot in. What do you have against them?
This surely cannot be correct, I thought the Government guarantee only applied to deposits made before a certain date and certainly not those made from now onwards.
Could the shareholders torpedo the Treasury deal?
They must sense that Labour aren't prepared to let the abnk go into receivership and are struggling to prevent a forced natioanlisation.
Would this be 'Brownmail' with apologises to all experts in 'Greenmail'.
One leak may have been staunched but the bigger one, that of taxpayers money, is still flowing.
No wonder depositors are returning. NR are effectively giving away money. Our money!
Other banks should complain to the OFT in the first instance and then Neelie Kroes.
Not that it will do them any good since the North East economy is dependent upon grants and handouts anyway.
If ever NR is run on commercial terms again then the first thing to change will be their interest rates.
In you blog you say:
However they are offering more to shareholders – and shareholders would be furious with the Chancellor if he opted for a plan that offered them least
Shum mishtake shurely
Branson/Virgin is very much the worst offering, which is why in a straw poll it attracted 0% support (c.f. Olivant 70%, Inhouse 30%)
Bottom line is shareholders consent not just needed for a deal, but also to put in extra money (most of Branson's so called equity is our money plus over priced Virgin Money business)
If we were just in it for the money we'd have bailed at the high of £10, or at £5 when the run on the bank started.
With govt guarantees, NR can borrow at the best rates on the wholesale markets - which is where the trouble started in the first place.
I would be interested to know which banks are worried about the govenments support for NR. Had NR gone down there is every chance that there would have been a run on the entire banking system. Surely this is something that other banks would not have wanted to see happen.
Perhaps RP should stop taking a purely business focussed view and highlight the overall economic reasons for the support.
With regard to post 2, i am not convinced that the govt is guaranteeing the rate - i thought it was simply the deposit amount with perhaps a nominal interest return
Mr. Peston,
Two comments of relevance to your "deposits leak staunched" piece today.
1. NRK is currently paying a 1/2% interest bonus for Jan & Feb on all deposits, providing an artificial incentive to depositors.
2.I will keep my ISA deposits at NRK only so long as the Treasury guarantee is in place, and not a day longer. Many other depositors may think similarly.
You may find that the "leak staunched" viewpoint is merely a short-term illusion therefore.
The biggest deciding factor in Darling's mind now isn't the survival of Northern Rock or saving peoples jobs (except his own).
No, the biggest deciding factor now is who is most likeley to get back all the tax-payers money within a politically acceptable time-frame. 5 years might be acceptable to bankers, it isn't to voting taxpayers. We want all of it back in 1-2 years at most, or we want Darling's head on a platter and delivered by Gordon or we will vote him out.
Seems more like the title of this blog should have been "the leak is stenched." You call a $100 billion dollar loss (or whatever it turns out to be) a leak? What was Noah's flood, a puddle? By this terminology, the failure of the levees in New Orleans after hurricaine Katrina was also a leak. No wonder it took 650,00 Polish plumbers to fix Britain's pipes. I know you Brits have a reputation for understatement but you can't paint over a disaster of this magnitude with words and make it look like anything else than a disaster. So what happens when its competitors who find themselves in similar trouble demand the same kind of bail out. Someone has to pay for the incompetence of those bankers. And who do you suppose it will be? Right, the British taxpayer.
Having pulled the plug out of the plughole is young Peston trying to put it back in? What ever happens to NR young Peston will be able to say, "I told you so!"
With huge Goverment protection and 7% for those of us who refused to join the queues of the panicing, ~ you've done a great job Robert.
In answer to Neil (Post 10), the current NR management team consists of a new Chairman, a temporary in house CEO who would be replaced by a totally new one if their bid succeeded, a Finance Director who has only been in post a short time, new Non-Exec directors, and a new Treasury Executive.
The main decision makers from the old regime are all gone.
So, no Olivant, only 2 bids.
Of these the management buy-out is a non-starter (how are they going to raise the cash?)
So Branson can dictate exactly how much taxpayer money he wants for the task of taking this dead parrot off Darling's hands.
Robin Ashby N Rock Small Shareholders Group: not only is your spelling very poor but you seem to have a distinct failure to grasp the reality of the situation - right now the shareholders have no say at all and threats to sue the Government are laughable.
Please enlighten me how you think you can sue the Government? The management of NR borrowed money from the Government. Remember what it says in all banks literature 'overdrafts are repayable on demand' - well the Government can do the same and I'm hoping it will. What all you whining shareholders seem to forget is that its my money propping up your failing company and I'd rather it used to do something purposeful not help keep shareholders in profits.
So my message to Darling and co. is pull the plug now and let them go through the insolvency route and see how it feels! Shareholders will get nearly nothing!
re David C 6.48pm
The question is really can the Government force through an increase in the share capital of the company without sufficient shareholder support, however that extra capital is configured. The shareholders might be in a fairly strong position because the State would find it difficult to wrest control from them save by letting the Bank go into liquidation (which it seeks to avert) or buying it- either with a straight offer or through an Act of Parliament for Nationalisation.
take note david c.
The money that northern rock has had from the BOE IS A LOAN
and NR ARE PAYING BACK AN INTREST RATE
WELL ABOVE the bank of england rate for the Privilege of using the tax payers money. Also note RB will charge nr 200 million just to use the vergin name, rb values vergin money at all most 5 times more than it is worth is he the best person to take northern rock. I DO NOT THINK SO.
I can't see how NR's rapidly grown loan book can have other than a highish proportion of dodgy loans.
One wonders how many properties with grossly overstated valuations (as reported on "Panorama" tonight) are mortgaged with NR.
It's a poisoned chalice.
How can the management of Rock put forward any sort of a plan to recover from the disaster that they caused? I know minus a negative is a positive but Rock isn't about under age arithmatic - or is it?
Do any of you guys really believe for one minute that Brown/Darling and all the other labour cronies give two hoots about jobs, tax payers money. Bottom line is they are have to act fast to save face.
I tell you which bid will succeed - the recipe with the least egg to wipe off the government's faces.
I cannot see nationalisation happening it would be far too damning. Virgin's bid will be the one they will go for. It's got all the boxes ticked and Mr Branson's winning smile.
Just wait until RB's got his hands on the Rock. You can almost see the cartoonist in the papers with Brown and Darling stood closing leaning to each other and the speech bubbles with something like; "he never told me he was going to do this, what about you?", "no boss, I aint gotta clue".
YOU DON'T BECOME SUCCESSFULLY WEALTHY BEING A NICE GUY!!!
IF YOU'RE A POLITICIAN YOU LOOK TO SAVE YOUR OWN BACON BEFORE CARING FOR ANYONE/ANYTHING ELSE!!!
I’m sure it’s not true! If it was, nothing lake that would have been posted! It sounds so weird! I doubt that anyone would ever believe it!