Northern Rock.

[Onlyforfun]

People queuing up to withdraw their money from a struggling bank? But I thought our glorious leaders said there was no problem?

When the lender of last resort starts lending there is a problem by definition. The sub-prime mess is not a surprise (maybe to politicians and CNBC), some of us have been arguing for a long time that it is a symbol that the credit bubble, created by rampant oversupply of money, is about to pop, when the only people left to lend to are those who can't pay you back, that is / was a good indicator.

Inflation is rampant and the West think they can fix it by massaging the CPI downwards, cutting rates and increasing teh money supply further. Absolute madness.

The later you hit the brakes, the bigger the accident.

[vegyjones]

Isn't all the people withdrawing their money only adding to the problem?

[Onlyforfun]

Yes indeed, but you don't want to be the last person in line to withdraw your money in case there is none left.

[Win2Win]

Thankfully the Betfair bank is sound, and my hidden account in Zimbabwe

[Littlegaz]

There is a lot of the panic element and herd mentality to it - like the panic stripping of bread from the supermarket shelves after the first hint of a shortage.

That said, I'd probably do the same if I had money in Northern Rock. Doesn't seem to have hit the stock market particularly hard - at least not after the initial falls in July - but that may still be to come. I understand that the inter-bank loans fall for settlement quarterly, and with the current liquidity shortage there could well be some other major names in trouble at the end of this month.

[Win2Win]

They haven't even needed any money yet, they've only 'arranged' it just in case, same as we arrange an overdraft and may never use it.

[vegyjones]

They'll need it now?

But how likely is it that orthern Rock will fold?

And is there a danger that any other big banking names could follow?

i.e. Is it time to hide the money under the mattress like my nan used to

[Win2Win]

If they were in trouble, they'd just be bought out by one of the big boys, it's only cash flow, they'll still show a £74645345 Billion profit :(

[Littlegaz]

And if the big boys are in trouble?

Rumours about Barclays, in particular, are rife and there were long queues this morning outside both Northern Rock and Barclays in my local town centre.

Keith's right, though - this is a cash flow issue, not a profit issue. The initial reports on NR suggested profits are expected to "plummet by £147million." Read on to the smaller print and it transpires that this was from an initial forecast of £647m, leaving the poor souls a measly half billion. However, that's been revised given the publicity since Thursday and there's now speculation that NR will disappear "as a brand name" within the next few months.

TBH, I really can't see any of the big boys (Barclays, RBS/Natwest et al) being allowed to struggle - too much money and too many people involved, so the BoE will bail them out as it has with NR. But if your money's in the Locksbottom Bank plc then yes Vegy, take it out and stick it under the mattress.

[bigcumba]

It would be nice if Nr did disappear completely and left me mortgage free! I can dream can't I?

[vegyjones]

That was something I had been thinking about?

Surely if NR went bust, they're creditors would be able to claim your property?

Or are you protected against that?

[Littlegaz]

Pretty sure you're not protected, but I stand to be corrected. A distribution in liquidation to creditors is achieved by turning whatever assets are available into cash, so in the case of a "bust" mortgage provider the liquidator would preusmably have the power to call in the mortgage lending. If the borrowers can't pay, then call in the security (ie repossess their houses and sell 'em ).

Big C - if you ask Vegy nicely perhaps he'll let you go and live with him

Joking aside, it won't get to that stage (the repossessions, not Big C and Vegy co-habiting.) There'd be riots on the streets.

[Onlyforfun]

The asset the bank owns is the loan to you, unless you default, the collateral, i.e., your house, is yours, They can only sell on the loan but the T&C would be protected. Of course, you could get hit if you have a variable rate period after any fixed interest / discount deal and the new owners of your debt have a base rate + 2% policy.

Keith's right, though - this is a cash flow issue, not a profit issue.

Not really, the cost of their raw material (money) has increased while they have lent the money at a fixed rate.

Northern Rock borrowed money to make mortgages. They effectively borrow at base rate + say 0.12% as an AAA rated borrower and lend it on as a mortgage at base rate +1% or more. However, the rate they are being charged has jumped in the last month if they can find someone to borrow from at all given nobody wants mortgages as collateral. The more trouble they are in the worse their credit rating gets and the more it costs them to borrow.

Banking crises are easily caused by the very fact that no bank ever holds as much on deposit as it lends as mortagages. It is very hard for a bank to realise short term cash from a mortgage (you can't summarily call it in and if you could how many homeowners could raise the cash anyway), but of course, a depositor can walk in to the branch and demand his / her money now. In the current financial system that in itself shouldn't be too much problem as there is so much money floating around (M3 increasing between 12-15% per annum in most developed economies, estimated to be as much as 50% now in the USA, putting it on a par with Russia and China) that there is always someone to lend to a bank, but, now nobody wants mortgages as collateral and the interbank rate is so high that NR will have to borrow at 7%+ to fund mortgages typically yielding around 5-6%, so a 2% loss on their mortgage book will be their minimum financial penalty, and when you have the biggest mortgage book in the country and the smallest savings book, that could send it under.

Of course the Fed, ECB and Bank of England will print money to try to solve the problem (by making short term "emergency" loans etc) but that is what is causing the problems in the first place.

[Win2Win]

That's what I said, but in a way the forum would understand

[Onlyforfun]

I hate to be pedantic () but it is more of a credit flow problem than a cash flow problem.:D

[Win2Win]

They both begin with 'C' and for that reason it is simplied ...besides, you have no credit....because you have no cash...:)

[Onlyforfun]

...besides, you have no credit....because you have no cash...:)

No need to get personal...:D

[Merlin]

Nice explanation Off....seems to me they are victims of their own strategy…..and their directors must take some of the blame…for the current crisis…

If I understand it correctly…they have placed all their eggs in one basket (as it were)….by ¨writing¨ lots of mortgages and not attracting enough savers…

Besides , I am sure I recall them doing something dodgy a few years ago…regarding switching savers accounts on to another scheme without informing them….

[Onlyforfun]

I get more and more annoyed by this story. The FSA and Bank of England both say Northern Rock is financially secure and solvent because the BoE, approved by the government have offered them unlimited funds that belong to the taxpayer.

Capitalism only works if companies that make poor decisions are allowed to fail. NR might not even fail without the loan as someone will lend at some price, but the Govt is effectively subsidising them, a poor risk / reward for public funds.

Not content with the world's worst ever gold trade, now this. If Brown and his crew worked for an investment bank they'd have been binned after 5 minutes.

[Merlin]

I think it Looks nearly certain they will be taken over....particularly if the run on withdrawals/account closing continue into next week…

They wont be able to function – will they…without intervention – which will effectively be a subsidy…albeit at a cost…

[Onlyforfun]

Absolutely.

As Gaz said, most of the money they raise resets every 3 months. Something like half the short term paper that has matured since this all started has not been rolled, i.e., the borrower has taken the cash back, and that includes top-grade, non-mortgage backed paper.

So as their short term debt rolls, without the BoE stepping in, they would have to pay back their creditors by selling their assets, or with the money in deposit accounts / bonds etc. Obviously, now everyone knows they are in trouble the other banks won't lend knowing they can then pick apart the carcass to buy the loan book on the cheap.

Yet another example of official denial being close to confirmation these days, Mervyn King was criticising the other central banks for intervening and said as recently as Thursday that the BoE wouldn't follow suit....:splapme

[Littlegaz]

Pretty sure you're not protected, but I stand to be corrected....If the borrowers can't pay, then call in the security (ie repossess their houses and sell 'em ).

Corrected I stand. This is what happens:

Obviously, now everyone knows they are in trouble the other banks won't lend knowing they can then pick apart the carcass to buy the loan book on the cheap.

[Littlegaz]

I hate to be pedantic () but it is more of a credit flow problem than a cash flow problem.:D

Now, that is pedantic

Credit flow/cash flow ........ chicken/egg?

[presto]

just out of interest - would now be a 'great' time to buy northern rock shares? as with all this overreaction and plummeting share price, you could buy the shares now 'reletively cheap' and when (if) a take over comes in then the shares would rise, which would surely increase the share price.

or is that an over simplyfied explanation from someone who knows bugger all about shares?

[Onlyforfun]

I wouldn't, as you run the risk of them becoming essentially worthless. Shareholders are the last people to be paid when a business liquidates.

They won't be able to sell the loans at anything like face value and after the creditors (soon to be the taxpayer) and depositors have had their money refunded there is unlikely to be any money left.

[piggy]

just out of interest - would now be a 'great' time to buy northern rock shares? as with all this overreaction and plummeting share price, you could buy the shares now 'reletively cheap' and when (if) a take over comes in then the shares would rise, which would surely increase the share price.

or is that an over simplyfied explanation from someone who knows bugger all about shares?

just the question i was going to ask as the shares have dropped like a stone today,
OFF posted

"I wouldn't, as you run the risk of them becoming essentially worthless. Shareholders are the last people to be paid when a business liquidates.

They won't be able to sell the loans at anything like face value and after the creditors (soon to be the taxpayer) and depositors have had their money refunded there is unlikely to be any money left."

takeovers by HBSC and lloyds tsb are allready being talked about and the governments open chequebook stance will surely make sure they never go under, so is there any real risk in buying NR shares or could a quick buck be earned? from what iv'e heard today NR is now vastly undervalued on the stock exchange, i'm no expert but i could be tempted into a little dabble if the share price drops any further.

[Onlyforfun]

I called the office today and our analyst reckons it's worth £1.80 ish. Basically, it cannot survive as an independent entity (the queues outside my local branch were mad today), and it is a buyers market. It has no forward PE to base a valuation on as it has no future without being bought out.

BUt

[piggy]

OFF help me out here as iv'e probably over simplified , NR are owed 6 times as much as they owe so even if they borrow £1billion to pay out to investors they are still owed £7billion so even if they have to pay 2% higher interest their income will still vastly outweigh their outgoings even taking into account defaulters, so even at worst case scenario they must be worth £4billion

[gogga]

Thankfully the Betfair bank is sound, and my hidden account in Zimbabwe

Ha...ha... Keith....... GSOH as usual!!!!

[Onlyforfun]

OFF help me out here as iv'e probably over simplified , NR are owed 6 times as much as they owe so even if they borrow £1billion to pay out to investors they are still owed £7billion so even if they have to pay 2% higher interest their income will still vastly outweigh their outgoings even taking into account defaulters, so even at worst case scenario they must be worth £4billion

They are owed 7 times what they owe, but they also borrowed that in the 1st place on 3-6 month terms, and they have lent most of it in the form of mortages over 25 years. So teh savings they hold can be withdrawn with zero notice, the loans they have taken out can be withdrawn in 3-6 months but tehy can't get all the cash tehy have lent back for 25 years.