Rock off

[peterbirks]

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:

"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...


______________

Comments

[(Anonymous)]

You are guaranteed 100% of the first £2,000 and 90% of the next £33,000 by the government. Of course if Northern Rock goes bankrupt (a major possibility) you'll be asking for your money back, along with millions of other savers. You won't see a penny for months (or possibly over a year) and will lose the interest you'd have gained if you'd transferred your money on Monday. The price you'll pay is maybe a few tenths of a percent in interest. What price is peace of mind?

[geoffchall.livejournal.com]

You say that Stroud & Swindon are desperate. Are you 'outing' the S&S?

The BoE did make reference to the fact that there 'lender of last resort' was available to Northern Rock and 'a number of other institutions'. I'm not quite sure why NR was used as such a public victim and why the other societies in the same boat weren't named and shamed. Is it possible that NR were named so as to let them act as a lightning conductor for public anxiety?

What they need now are a few planted stories that show how NR has actually made money on Friday's withdrawal of £1B. After all they deduct it from people's account balances today but won't have to find the money to meet the cheques for a number of days. For a lot of people, their first thought is to get a cheque payable to Joe Bloggs for £150K. Now they'll spend the weekend wondering what to do with it. Fools. NR is no more insolvent than you are.

My reasoning not to send money off to S&S (if I had it to spare) would be more prosaic. How do you know there won't be a 7.5% bond on offer before the week's out?

At least they've managed to find a way of making macro-economics interesting and relevant. When even the Daily Mail tries to explain 'credit crunch' to its readers it's seriously in the public domain.

Hell, no.

[real-aardvark.livejournal.com]

The idea of Northern Rock going bankrupt is absurd. The assets are fine; the problem is with immediate liquidity and with the basic gearing.

Since you're an (esteemed) accountant, Geoff, I would have assumed that you'd figured this one out.

Even without the BoE pumping money in whilst the share price is plummeting, I would have thought that anybody in their right mind would ignore "millionaire" ex-hoteliers in Cheltenham and, well, basically buy up as much of the stock as they can afford. (This doesn't include me. At the moment, I'm less than skint.)

My money's on HSBC. It could be anybody else with the necessary funds. Whoever it is will be given a gift -- a decent portfolio at a 50% discount.

That's what happens when a (credit/whatever) bubble bursts, and people go insane on the down-side.

I'd actually wait a couple of days while Northern Rock leaks a further 20% or so. I mean, this is a FTSE250 company. It's absurd.

Pick it up and wait for somebody to buy a massively undervalued stock with decent asset valuation and -- for no obvious reason -- government-backed insurance.

Jesus.

This is free money.

On a different note, macro-economics is not interesting, and its relevance can hardly be judged by Chicken Little ... I'm sorry, The Daily Mail.

Frankly, as a pauper, I find almost all of this hilarious. Apart from the fact that I still need to find a job in northern California next year, of course.

Re: Hell, no.

[(Anonymous)]

Northern Rock plc could easily go under. They lost 4-5% of their deposit base in one day and surely a fair chunk more will follow. This increases the leverage of their outstanding mortgages to asset base and once they hit the limit allowed by the regulators they have to start selling their mortgage book to stay in business. At this point they are basically dead in the water. Once the firesale begins then depositors will be OK but a large amount of goodwill and other intangibles will mysteriously vanish off the balance sheet and the shareholders will be left carrying the can. It's far more likely for them to accept a takeover bid before this actually happens but it's on the horizon.

As for the soon-to-be-ex CEO Adam Applegarth claiming noone could have forseen the liquidity squeeze and therefore he was unlucky ... well people who fuck up are always unlucky. LTCM went bust due to a "10 sigma event" happening within a couple of years of them starting trading. As Harry Hill might put it, "What are the chances of that happening?"

matt

Northern Rock

[ukastronomy.livejournal.com]

If mass action by people tip Northern Rock into liquidation then it will "prove" to others that such institutions are unsafe. A new target will be named and the herd mentality will click in and the next company will go down the pan ... and so on.

HMG will, I imagine, do almost anything to stop this happening by preventing the first of the dominos from toppling.

Millions of people losing a large chunk of their savings with the Government standing by doing nothing would be electoral suicide.

Re: Hell, no.

[geoffchall.livejournal.com]

Of course they can't go under. As I saw a chap from NR saying, the best way to deal with a run on your bank is to have the branches open when they should be and more and just pay everyone who asks for their money. Take away all of the depositors' funds and you'd have a business with a huge mortgage book, a debt of around two-thirds of that in money-market borrowing and a chunk to BoE.

Yes they wouldn't be able to continue trading in a going-forwards sense because of the rules on liquidity and such-like which (however esteemed I may be) I have long ago forgotten. But this does not constitute going under. They will have debts which they can service comfortably (possibly with BoE assistance, who are only charging 1% over base). Where's the problem?

Yes they will get swallowed up and I'd plump for Lloyds using Cheltenham & Gloucester as a feigned 'building society merger' that is nothing of the kind. I'm not convinced about it being a huge share-buying opportunity though. NR were very overvalued at £12 and I think they've now migrated to a value price. If they keep going down though....

bbc article

[(Anonymous)]

Good article Sunday morning on why a takeover by a big bank is unlikely:

http://www.bbc.co.uk/blogs/thereporters/robertpeston/

GeoffChall: is it really true that they could comfortably service the debt if paying the BoE 1% above market rate?

The Paper

[peterbirks.livejournal.com]

Well, the S&S did note that they were one of the "fastest-expanding" operations.

I don't know that there won't be a 7.5% bond on offer next week. I just don't think that there will be. And if there were, that wouldn't take away your problem, because then you might say "hmm, there might be an 8% offer the week after this". It's like taking a price about a horse. You don't just bet "for value". Because you might be getting more value later on. But eventually you have to step in.

But if an 8% offer appears, I think I could rustle up a bit of cash for that as well.

PJ

[peterbirks.livejournal.com]

Well, the price of peace of mind is 25% default risk. Simple.

If S&S has a more than 25% chance of defaulting on its debt over the next 12 months, my investment is wrong. But, hell, it's not as if I have put my life savings in there. When you've dealt with Neteller and the DoJ, you are used to your money being tied up for months... :-)


PJ

Re: Hell, no.

[peterbirks.livejournal.com]

I wish I were more of an expert on Solvency requirements here. Unfortunately Basel II sends me to sleep within seconds.

However, surely the BoE guarantee was what was meant to stop a forced sale of the mortgage book. All this stuff gets divided up into Tier 1 and Tier 2 capital (and beyond), and, as a bank, you have to maintain a certain percentage of your assets in each sector. So, a customer's fixed-term deposit that he couldn't touch for 10 years might be termed "Tier 1", while an instant access account might be termed Tier 2. But perhaps I've got all this wrong.

Anyhoo, I thought that the current solvency requirements didn't really give a shit where your money was coming from. So the withdrawal of depositors' money has no impact when you have a guaranteed back-up from the BoE.

The problem would be, as mentioned below, the higher rate of interest that Northern Rock would be paying the BoE compared with what it was paying its (ex) depositors. I'd have to do the maths on that, but I doubt that Northern Rock could run at a sustainable ROE, even if the BoE allowed it to borrow money long-term.

One thing seems for sure, the shareholders are fucked.

PJ

Re: bbc article

[peterbirks.livejournal.com]

Here's a bit of that article, because it is quite interesting:

The world’s biggest banks are finding it challenging even to fund their own assets in our malfunctioning financial markets. And if they didn’t want to absorb Northern Rock’s very substantial balance sheet just a few days ago, they are going to be even less keen now, after so much cash has been withdrawn by anxious Northern Rock customers from their branch, postal and online accounts.

As I said, it is the banking Catch 22 of our time: Northern Rock can’t be sold without a guarantee of funding from the Bank of England, but the Bank is refusing to provide such funding to facilitate a sale.

Maybe some kind of compromise, transitional arrangements can be agreed.

I think that the last sentence is the key. If Lloyds TSB (my personal favourite, mainly because HSBC is focusing in the Far East and only this week signed a $255m deal in Vietnam) were to buy Northern Rock, the BoE could swear blind that the guarantee was not being rolled over.

And what is clear is that the many of banks that are declining to lend money on the overnight or three-month markets, now have quite a lot of money that's earning nothing. If you aren't putting money to work, then you are costing yourself profit. One way to "put that money to work" would be to buy Northern Rock on the cheap and to work through the crisis. Remember, LTCM's deals all came good in the end ... the trouble was, LTCM wasn't around at the end to benefit.

And where is that £12bn that the Sunday Times tells me is going to be withdrawn from Northern Rock going to go? Under the mattress? I suspect not. So, some banks/building societies are going to benefit from some lumpy deposits.

PJ

Well, your'e still esteemed by me, sweetie

[real-aardvark.livejournal.com]

First, an admission. (An ovbious one.) I have no idea of the real, pre-June, valuation of Northern Rock, and frankly I don't give a shit, because I'm just talking in generalities.

Therefore I am prepared to admit that the stock may still be heavily over-valued. But (pace matt) leaving aside goodwill and the like, they've still managed to stock up on a huge amount of UK mortgage business (backed by morons who like the idea of living in penury as long as it's semi-detached).

There is a definite asset book here. And, outside of liquidity problems, the asset base is probably not at risk. (Although I have no idea how many NR mortgages are up for renewal over the next six months or so. This is a general comment, not a financial analysis.)

Since they're the BoE poster child, I don't see the slightest problem with a horde of timid maniacs withdrawing their money from the few high-street branches they've got. I may very well be wrong, but if you've got 320% gearing on 3-month paper, you can haemorrhage cash through savings deposits as much as you want -- as long as you've got the BoE behind you.

Of course, the BoE isn't going to be behind you very long unless you go for the fire sale.

Looks fairly secure to me. Won't be Lloyds, because they're an anally retentive bank. Won't be HBSC, because they're basically interested in "emerging markets." I look forward to their excuses over the inevitable collapse of the Shanghai index.

Me, I'm still going for HBOS. With a bit of government strong-arming.

I would also guess at Northern Rock shares plummeting at least another 33% over the course of next week. And then fluctuating wildly, depending upon various totally unfounded rumours.

And who's next?

There's at least one big boy out there who will follow Northern Rock into oblivion. There may well be a couple more.

As I said a couple of months ago, things are going to get very nasty, and very soon.

See you Friday!

$$$ Idiots presque Savants

[real-aardvark.livejournal.com]

OK, Birks, If we're so smart, why aren't we rich?

I really love your comment that there's "quite a lot of money that's earning nothing." (I've been reading financial journalism, just for a laugh, and I swear that not one of the idiots has mentioned this fairly obvious and important point.) And you've mentioned before that, under the right circumstances, there are definite arbitrage positions that earn a fortune. (But not now. Or, at least, not quite yet. I'm looking forwards to an ecomonic history treatise in 2020 or so that say with a straight face, "The credit crunch of 2007 was not nearly as bad as the 1929 disaster, because the arbitargeurs moved in and saved the day.")

Well, this is going to be fun on an intellectual level. Unfortunately, I'm still screwed on a personal level.

C'est la vie.

Particularly when you're dealing with greedy morons, over whom you have not the slightest smidgeon of control.