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.
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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.