Friday, Sep 28, 2007
Good money after bad
FT: Northern Rock in crisis
New revelations that Northern Rock has been dipping in the cookie jar again to the tune of £5bn, and what it means for the beleaguered lender. As it becomes clear that they are now borrowing the equivalent of more than a third of their own retail deposits, questions are being raised everywhere (apart from at the Bank of England it seems) about the viability of their business model.
Posted by paul @ 10:49 AM (893 views) Add Comment
15 Comments
- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
- Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
- Please adhere to the Guidelines
1. tyrellcorporation said...
Question is, if they go teets up as looks likely will the BoE see any of that money back? Are the mangement filling their boots before the inevitable? Crazy situation! they should just let it go to the wall IMHO.
2. paul said...
When Northern Rock goes under, the chances of an extension of Mervyn's tenure will be all but destroyed, after all he will have blown the bank's money on a bad horse.
The NR management knows that the fat lady is singing and I think they are filling their boots, but the Bank of England has its head firmly in the sand.
I quite strongly believe the media have been gagged on this new loan too.
3. mrmickey said...
Is it possible for a bank to go bust twice?
4. lvmreader said...
The Nordic banking crises of the early 1990s were the first systemic crises in industrialized countries since the 1930s, if the banking problems directly related to the devastation of the second world war are excluded. They had been preceded by the widely studied U.S. Savings and Loan (S&L) crisis, but that crisis was not really a systemic one. Rather, the S&L crisis affected a subsector within an otherwise functioning large financial market. The Nordic banking crises were therefore eye-openers. How could such problems occur in otherwise well organized and managed economies and financial systems? The Nordic countries also showed how to effectively deal with such crisis.
5. su said...
Would anyone care to explain what the difference is between a preference share and an ordinary share?
6. holding out said...
If they can't meet their financial obligations they should raise their variable mortgage rates. This would either cause more money to come in or force lenders to go elsewhere which means they would pay their mortage back thus allowing NR to pay the BoE back. More people chasing fewer mortgages (from other lenders) would then set mortgage rates at a more realistic rate.
7. Rick62 said...
A preference share is effectively loan capital. ie it carries a fixed rate of interest (eg 6% payable annually on a set date) with a fixed redemption date (usually set several years away). It has preferance over ordinary shares but rates below ordinary loans. It may have rights to convert to Ordinary shares, or come packaged with options for ordinary shares.
They were legally obliged to pay this (given they had not given 3 weeks notice) in the same way as they have to pay interest on other loans.
8. Happyrenter said...
I overheard three Northern Rock mortgage sales folk on the train earlier this week, bragging about who had been able to agree the highest multiple (9x salary the winner)
but all were surpised that their lending criteria and rates still hadn't yet been changed - no point rearranging the deckchairs ?
9. Andy said...
Preference Shares - Are shares issued with a guarantee of getting a fixed dividend, but no voting rights, if a company goes bankrupt - the company is obliged to repay the share back at par value (that its after its honoured the banks and creditors).
Ordinary Shares - Are based on recieving a varable dividend, but you get voting rights - and if the company goes under your at the back of the queue.
10. whiteknight said...
I will just paste this in here aswell as it might be relevant:
For sure. Here is something worth considering.
Banks have things called prop. desks or proprietary trading desks.
Compared to market making operations which are supposedly flat and making money on "spread" (or commission per trade) these desks take positions.
A cynical person might observe that the very best prop. traders over a period of 10 years might be "flat". ie. have made no average profit or loss for the bank. These are the best. The worst may have lost.
For themselves however, they will make big bonuses if they "make big" in the mean time. The downside: they lose their job (and maybe only for a while).
This looks like a free call option to me.
With their massive recent bonuses , a lot of bank executives would appear to have similar positions.
Is this what governs the banks behaviour and why punishment of shareholders doesnt necessarily rectify the problems that exist? Maybe there should be a lag to any larger payments? Maybe given the regular boom and bust cycles - this is a fairly easy time period to predict? Maybe some managers should be reminded that there is a tomorrow one way or another?
Maybe they should have to take onboard an instrument based on the default rate of loans made on their watch?
Hard to implement? Any thoughts?
11. lvmreader said...
The causes of the Nordic banking crises
Painting with a very broad brush, let me start by saying that the Nordic banking crises had all the ingredients and show the full range of causes that we have observed in banking crises elsewhere around the world. Each banking crisis shows a somewhat different combination of causes but most of the main ingredients are always there, as they were in the Nordic countries in different forms: (i) bad banking, (ii) inadequate market discipline, (iii) weak banking regulation and supervision, and (iv) inadequate macro policies, including having to deal with financial liberalization. Let me mention each of them briefly:
1. Bad banking: poor lending practices, excessive risk taking, poor governance, poor risk management, lack of internal controls, focus on market share rather than profitability, currency and maturity mismatches in the banks themselves, or in their borrowers, etc. Add to this distorted incentives for bank owners, who may not have enough capital at stake, and for bank managers, who carry little personal responsibility for the excessive risks they are taking.
12. monty said...
Northern Rock was just the beginning. Japan going down too... :-)
September 2007 NEW YORK (Reuters) –
Japanese Banking crisis continues on back of US Sub Prime collapse.
The knock on from the US subprime market in Japan shows no signs of letting up.
In the last 7 days :-
Origami Bank has folded
Sumo Bank has gone belly up
Bonsai Bank plans to cut back some of its branches.
Yesterday it was announced that Karaoke Bank is up for sale and more than likely will go for a song.
Today shares in Kamikaze Bank were suspended after they nose-dived
500 back-office staff at Karate Bank also got the chop.
Analysts report that there is something fishy going on at Sushi Bank and staff fear they may get a raw deal.
13. su said...
Thanks very much, Rick & Andy.
14. Meow said...
lvmreader - please start a thread on the main forum and expand what you're saying here, I would like to hear more and I'm sure others would if it runs a paralell, which it sounds like it may...
15. Moonglum101 said...
Monty! A bit tongue in cheek there, anyone else notice :)