Into The Valley Of Stones
Nov. 20th, 2007 08:41 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksI would have written about Northern Rock yesterday, but the cock-up at Swiss Re was rather more entertaining. You often get "interesting" releases at 7am on Monday morning.
So, the Rock says that all of the offers it had received expressing an interest in the company had been significantly below the market price (about 130p a share before yesterday's sell-off). Well, as we might say, Duh, there's a surprise.
The movement in the "market price" of Northern Rock has been a matter of some bemusement for a couple of months or so. I think I put a tentative value on Northern Rock of about 60p a share a couple of months back, but it wouldn't surprise me if the gist of the four offers was zero pence per share. The buyers of the stock in the market are at the moment either functioning on the "greater fool" theory or have fallen victims to blind optimism that the Chancellor will see the shareholders alright.
Now, there are a number of interested parties that the Chancellor can't afford not to protect. The 6,000 workers in the north-east are probably weighing heavily on his mind. This is the area, remember, that had more than its fair share of Farepak savers. Throwing away 6,000 jobs would condemn seats that have been Labour since the turn of the century to move over to the Liberal Democrats.
After that come the depositors. I remain a bit puzzled here. People with more than thirty grand to invest should know what the guarantee system is. If they choose to risk more than that amount with a single institution, then they have only themselves to blame if it goes wrong. If anything, the worst mistake made by the government was not the lending of money to Northern Rock; it was the issue of a guarantee that no-one would lose a penny. A guarantee that all deposits up to £30,000 would be fully guaranteed should have had the required effect of getting rid of the long queues, without costing too much in guarantees and, crucially, without making it look as if the government was too scared to let a high-profile bank fail or for depositors' money ever to be at risk.
Shareholders? Well, they come rather low down in the scheme of things -- even though many employees are probably members of the bank's SAYE scheme, and there are still quite a few holders of shares from the days of demutualisation. That makes the matter a little bit more "of the people", but not enough.
It seems as if Northern Rock is having difficulty getting past stage one of the five stages of death. It's still in denial. I wonder; had the Northern Rock shares been suspended, would the board have dismissed the four expressions of interest so glibly? At the moment it seems to be confusing a false market in the shares with an underlying reality. How much is the underlying reality? well, as with all "run-off" situations, this is a difficult call. Clive Cowdery at Resolution showed that there can be money in financial scrap. The glib talk of the Rock being "worthless" strikes me as over-icing on the cake. I'm sure that there is some run-off value, although how much depends on whether the Bank of England demands 100p in the pound on interest payments.
More problematic is the job situation. The fact is, the government doesn't want to nationalize (although that is the current de facto situation) but it doesn't want lots of jobs to be lost. In other words, it wants market forces to do what is politically good for the government, without the government spending taxpayers' money. Life just isn't like that, and I think that the current uncomfortable squirming in government is a result of this being realized.
As it is at the moment, Northern Rock quite simply doesn't have a business model. If you don't have a business model, you don't have a business. That makes these jobs in the north-east look very vulnerable indeed. And as for 'goodwill'. Oh, c'mon, the brand name is now worthless. But just because a company doesn't have a future business model, that does not mean it doesn't have value. It seems that the "bidders" for the compay all felt that about 15 months of governmental backing was needed to get Northern Rock back on its feet as a potentially profitable operation. Whether that would contravene EU laws about supporting lame ducks is a matter, probably, for the next commissioners' meeting. But the UK government doesn't even want to back the Rock for 15 months. It wants the private sector to do governmental dirty work at no cost to the government.
Eventually a fudge will be found and "Northern Rock 2007 plc" will emerge, with a bit of financial jiggery-pokery that will in effect be a taxpayer bail-out, but will be dressed up not to look like one. Jobs will be kept until they go through natural wastage. The brand itself will shrink back to a north-eastern core, where there is probably still some brand loyalty.
It's probably possible that the whole affair could have been handled worse, but I can't at the moment see how.
So, the Rock says that all of the offers it had received expressing an interest in the company had been significantly below the market price (about 130p a share before yesterday's sell-off). Well, as we might say, Duh, there's a surprise.
The movement in the "market price" of Northern Rock has been a matter of some bemusement for a couple of months or so. I think I put a tentative value on Northern Rock of about 60p a share a couple of months back, but it wouldn't surprise me if the gist of the four offers was zero pence per share. The buyers of the stock in the market are at the moment either functioning on the "greater fool" theory or have fallen victims to blind optimism that the Chancellor will see the shareholders alright.
Now, there are a number of interested parties that the Chancellor can't afford not to protect. The 6,000 workers in the north-east are probably weighing heavily on his mind. This is the area, remember, that had more than its fair share of Farepak savers. Throwing away 6,000 jobs would condemn seats that have been Labour since the turn of the century to move over to the Liberal Democrats.
After that come the depositors. I remain a bit puzzled here. People with more than thirty grand to invest should know what the guarantee system is. If they choose to risk more than that amount with a single institution, then they have only themselves to blame if it goes wrong. If anything, the worst mistake made by the government was not the lending of money to Northern Rock; it was the issue of a guarantee that no-one would lose a penny. A guarantee that all deposits up to £30,000 would be fully guaranteed should have had the required effect of getting rid of the long queues, without costing too much in guarantees and, crucially, without making it look as if the government was too scared to let a high-profile bank fail or for depositors' money ever to be at risk.
Shareholders? Well, they come rather low down in the scheme of things -- even though many employees are probably members of the bank's SAYE scheme, and there are still quite a few holders of shares from the days of demutualisation. That makes the matter a little bit more "of the people", but not enough.
It seems as if Northern Rock is having difficulty getting past stage one of the five stages of death. It's still in denial. I wonder; had the Northern Rock shares been suspended, would the board have dismissed the four expressions of interest so glibly? At the moment it seems to be confusing a false market in the shares with an underlying reality. How much is the underlying reality? well, as with all "run-off" situations, this is a difficult call. Clive Cowdery at Resolution showed that there can be money in financial scrap. The glib talk of the Rock being "worthless" strikes me as over-icing on the cake. I'm sure that there is some run-off value, although how much depends on whether the Bank of England demands 100p in the pound on interest payments.
More problematic is the job situation. The fact is, the government doesn't want to nationalize (although that is the current de facto situation) but it doesn't want lots of jobs to be lost. In other words, it wants market forces to do what is politically good for the government, without the government spending taxpayers' money. Life just isn't like that, and I think that the current uncomfortable squirming in government is a result of this being realized.
As it is at the moment, Northern Rock quite simply doesn't have a business model. If you don't have a business model, you don't have a business. That makes these jobs in the north-east look very vulnerable indeed. And as for 'goodwill'. Oh, c'mon, the brand name is now worthless. But just because a company doesn't have a future business model, that does not mean it doesn't have value. It seems that the "bidders" for the compay all felt that about 15 months of governmental backing was needed to get Northern Rock back on its feet as a potentially profitable operation. Whether that would contravene EU laws about supporting lame ducks is a matter, probably, for the next commissioners' meeting. But the UK government doesn't even want to back the Rock for 15 months. It wants the private sector to do governmental dirty work at no cost to the government.
Eventually a fudge will be found and "Northern Rock 2007 plc" will emerge, with a bit of financial jiggery-pokery that will in effect be a taxpayer bail-out, but will be dressed up not to look like one. Jobs will be kept until they go through natural wastage. The brand itself will shrink back to a north-eastern core, where there is probably still some brand loyalty.
It's probably possible that the whole affair could have been handled worse, but I can't at the moment see how.
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
Date: 2007-11-20 09:55 am (UTC)Firstly, I'm afraid the shareholders have done their bollocks - that's part and parcel of the risk one takes when chasing the excess returns offered on average by equities. Anyone with, say, 10% of their net worth in NR prior to the mess has already lost 9% of their net worth anyway. The hedge funds who lumped in cheap and are now shouting can, quite frankly, naff off: they more than anyone knew what they were getting into.
So yes, nationalise. The securitised book can be left running - the bulk of the risk associated with that has already been moved on. What has to be done is to run down the load book, either by natural wastage (defaults, repayments and maturities, with further sales or securitisation if the climate improves) until it's more appropriately sized to deposits and then exit once the taxpayers' funds have been repaid. They could leave it as a kind of mutual thing. Call it a "building society" or some such, as opposed to a colossal exchange-listed curve trade.
And I bet the spin doctors could work out how to tell us all that it was thus a triumph of financial prudence.
no subject
Date: 2007-11-20 10:38 pm (UTC)If so then you must concede there was little in the way of government warnings of the TREMENDOUS risks depositors were taking if they had more than £30K in one place. Does someone with £300K really have to open 10 different savings accounts in BirksWorld just to diversify that risk. There must be a better way surely.
matt
no subject
Date: 2007-11-20 11:25 pm (UTC)I think that my point was that anyone with more than £30K (although I accept that the number selected is somewhat arbitrary - in the US the limit is $100K) to save has some obligation to be aware of the risks involved in depositing money all in one place. I wouldn't mind the "guaranteed" number being £100K (or, say, 90% thereof from £10K to £100K) , but I do object to a carte blanche "all your money is safe" system. Is it such a nanny world that we have to be told by a government that depositing your money with a financial institution is not risk-free?
I mean, what number would you like? £100K is okay by me, but any more than that does strike me as a temptation to financial institutions to offer rather too much in the way of interest rates to depositors on the grounds that nearly all of them will be backed by pooled funds if it all goes wrong.
To turn your question around slightly, are you suggesting that Bill Gates should be able to put all of his money into a single account, safe in the knowledge that, if the financial institution went wrong, he would be bailed out? Or is he under soime obligation to diversify his assets in order to diversify his risk?
With liquid assets comes the opportunity to invest your money prudently (in very safe accounts) or slightly more riskily (slightly higher rate, slightly higher risk) or very riskily (high return, high risk). You can't just bung it all into one (relatively high-interest) place and then go crying to the government when it goes wrong "because no-one warned me that it wasn't 100% safe".
Do people with more than £30k in liquid assets really need to be protected from their own stupidity? I mean, the money sections in the popular tabloids, Which? Money, and just about every consumer title you care to name will mention with tedious frequency the levels of deposits that are guaranteed (and to what extent). I really don't think that it's the job of government to warn people that "money in the bank" is not 100% safe. Does society have an obligation to protect people from their own financial naivety? Or should people be responsible for their own financial decisions, for good or ill?
PJ
no subject
Date: 2007-11-20 11:31 pm (UTC)Under the rules of a few years ago, the entire book could have been quietly parcelled over to Lloyds TSB in June for a knockdown price. Deposits would have been moved to Lloyds TSB and the situation would have been solved. Unfortunately the new rules on transparency made that illegal.
Now, surely everyone is aware that, no matter what the government says about guarantee levels, it is in fact too scared to let a bank fail, so the £30K "limit" is a paper tiger. You can be as stupid as you like and invest at the highest available rate in any reasonably sized institution, because you will be bailed out (eventually) if it goes wrong.
PJ
no subject
Date: 2007-11-20 11:33 pm (UTC)I'm not even sure that Birks would accept a £30,000 safety-net as a given. I damn well wouldn't. The government has better things to do with its money (not that it ever does them), and if you want that sort of guarantee, then I believe there's a little coffee shop down Tower Street that has been helping sad incompetents such as that since, ooh, I'm not sure, but I'd place it officially at June 1688, given six months either way. Some people take a long time to learn.
In fact, one of the more pleasurable aspects of all this is to be able to watch "shareholder pressure groups" (whatever the fuck they might be. Paper cuts for naughty ministers of state?) droning on about how this is a betrayal of Thatcherite principles and the almost certain disillusionment of the confident, thrusting, small share-holder. The sooner these people are mince-meat, the better; taking either a right-wing or a left-wing position, this sort of drivel makes no sense at all.
The point of the £30K limit is nothing at all to do with the worthiness of the stock/share/bond/account holders. The point is to avoid a run on the bank, and/or severe political embarrassment. Financially, on its own, it makes no sense whatsoever. Multiply it through ten different accounts, and you're just re-inforcing this obvious fact.
Risk diversification is a fact of life. If I were lucky enough to possess a spare £300K or so for pure investment purposes, I'd spend it on Californian blondes and high-grade cocaine ... but that's just me. More realistically, anybody with that sort of dosh is either able to cope with the deal or is, happily, fucked in a very Darwinian sense.
The thing about Northern Rock, to me, is that the government charged in without much thought and with little or no foresight, and determined on a strategy that had no possible plausible endgame. Meanwhile, the usual bunch of incompetent Treasury tossers were running around like headless chickens behind the scenes to try to make this work on a tactical level. Civil servants, god bless their little silk socks, are not good at making instant tactical decisions.
The results are fairly predictable.
Me, I'd nationalise it (recognising the de facto reality) and pay somebody like Luq Arnold to parachute in at a ridiculous wage (say £340,000, which matches Mr Applegarth's goodbye and thanks for all the stinking fish present), plus the biggest little package of share options in the world, and let a professional handle the mess. No Civil Service (eek), no administrators (double eek), and at last, somebody else to blame.
I'd also confiscate all the shares in private possession. Fuck these people. They clearly have no sense at all, and are fit only for rendering into garden mulch.
I am rather looking forward to Northumberland turning solid Lib-Dem at the next (sadly, delayed) election, though. That will be very, very funny indeed.
no subject
Date: 2007-11-23 11:18 am (UTC)Mind you, I should have known something was up; 500 shares had become 666 when the music stopped.
Niall L
You're Welcome
Date: 2007-11-25 11:53 pm (UTC)This being Birks' blog, I don't think my feeble attempt at an HST-ism is entirely amiss.
I don't understand "pepping," and I'm not quite sure how re-investing dividends gains karma, and although I applaud your conscientious, if occasional, review of the share price for over a decade, you have yet to convince me that I am wrong in stating that you (and, I think we can both agree, I was not thinking of you, personally) have "no sense at all."
I'll agree, the garden mulch bit was a little extreme. I'd pick slugs for that. Slugs don't whine when their investments turn tits-up. They do make an interesting sound when you pour salt over them, though.
I'd love too feel sympathy, but in fact I can only muster pity.
Isn't Thatcher's "share-holding democracy" a wonderful thing?
Re: You're Welcome
Date: 2007-11-26 02:32 pm (UTC)I never asked for sympathy, merely stated facts. You wrote 'Fuck these people' and that they were garden mulch for being so stupid as to be shareholders in a FTSE 100 bank and that they should have their shares confiscated. However elegantly written, it's a Glen Hoddle-style opinion.