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I won't write much about Northern Rock; the fact that the FT had sold out in the newsagent's this morning (I had to go elsewhere to find a copy) shows that even the English equivalent of Mrs Watanabe has realized that the credit crunch is no longer a technical matter happening far away in a country of which we know nothing. People have woken up to the fact that this could spell a more rapid turnround in the housing market than anyone had anticipated. Although I wish to point out that in an e-mail to the owner of the flat downstairs, I said "the good times are over" way back in May or thereabouts.
But there were a couple of interesting quotes from the boss of Northern Rock (the ex-building society without depositors, without a business model), Adam Applegarth. The first re-emphasizes what I wrote a few weeks ago about there being limits on what Central Banks can do when setting base rates:
Just dwell on that for a second. In effect Applegarth has pointed out that it's the spread that matters now, not the base rate. If house prices start falling (which should get most people cheering, but won't because they have all foolishly extended their debt by remortgaging at the higher "value" rather than at the price they originally paid) then there is nothing that the BoE can do about it, because if risk aversion puts the credit spread at a far higher rate than it used to be, you can forget about 80% home-ownership, Mr Brown, because there just aren't enough good credit risks out there.
Applegarth's second statement might be called more contentious. Alternatively, it might be called a load of bollocks. Applegarth claims that Northern ROck was unlucky. He wrote that
John Gapper in this morning's FT (and I have no bias in his favour because of the fact that his sister used to edit the same august publication which I now have under my mgalomaniacal control) comprehensively demolishes this line, summing it up with the observation that
Quite.
A couple of interesting things have been "thrown up" as a result of this. One couple had a million quid (there "only" million quid) in Northern Rock. This level of concentration of assets is insane. Should the Bank of England, or other financial institutions, bail out such people? (They will be bailed out, because Northern Rock is going to be sold to HSBC or Lloyds TSB on the cheap, but that's by-the-by.)
And Stroud & Swindon started a year-long bond offering 7.05%. Stroud & Swindon probably has similar problems to Northern Rock, but that didn't stop me posting off a cheque for £10K pdq. And thus we enter the world of moral hazard. Because anything less than £35K is guaranteed. Tyvm Mr UK government. Of course, this wasn't the idea behind this guarantee, that opportunist gits such as myself could take advantage of a building society desparate for cash (Stroud only need £50m to tide it over) that we could get interest rates over 7% in what is now a falling interst rate environmyent. Hell, it's fucking Christmas. But there would be the risk that Stroud would go under. That should temper my investment decision. But, hold on, there's no risk! Bring it on...
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But there were a couple of interesting quotes from the boss of Northern Rock (the ex-building society without depositors, without a business model), Adam Applegarth. The first re-emphasizes what I wrote a few weeks ago about there being limits on what Central Banks can do when setting base rates:
"Whatever the bank base rate is, you are going to see higher mortgage interest rates".
Just dwell on that for a second. In effect Applegarth has pointed out that it's the spread that matters now, not the base rate. If house prices start falling (which should get most people cheering, but won't because they have all foolishly extended their debt by remortgaging at the higher "value" rather than at the price they originally paid) then there is nothing that the BoE can do about it, because if risk aversion puts the credit spread at a far higher rate than it used to be, you can forget about 80% home-ownership, Mr Brown, because there just aren't enough good credit risks out there.
Applegarth's second statement might be called more contentious. Alternatively, it might be called a load of bollocks. Applegarth claims that Northern ROck was unlucky. He wrote that
"Nobody could foresee the squeeze on global liquidity".
John Gapper in this morning's FT (and I have no bias in his favour because of the fact that his sister used to edit the same august publication which I now have under my mgalomaniacal control) comprehensively demolishes this line, summing it up with the observation that
"in fact, it made itself very vulnerable to a financial and property market upset, no matter where it emerged".
Quite.
A couple of interesting things have been "thrown up" as a result of this. One couple had a million quid (there "only" million quid) in Northern Rock. This level of concentration of assets is insane. Should the Bank of England, or other financial institutions, bail out such people? (They will be bailed out, because Northern Rock is going to be sold to HSBC or Lloyds TSB on the cheap, but that's by-the-by.)
And Stroud & Swindon started a year-long bond offering 7.05%. Stroud & Swindon probably has similar problems to Northern Rock, but that didn't stop me posting off a cheque for £10K pdq. And thus we enter the world of moral hazard. Because anything less than £35K is guaranteed. Tyvm Mr UK government. Of course, this wasn't the idea behind this guarantee, that opportunist gits such as myself could take advantage of a building society desparate for cash (Stroud only need £50m to tide it over) that we could get interest rates over 7% in what is now a falling interst rate environmyent. Hell, it's fucking Christmas. But there would be the risk that Stroud would go under. That should temper my investment decision. But, hold on, there's no risk! Bring it on...
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