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EmpiricalBear

Nr Might Not Exist In A Few Days

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On R4 this morning Robert Peston reported that collateral based on mortgages on NR's balance sheet are just about big enough to pay off the deposits currently held.

It seems to me that effectively this says that if depositors insist on removing their money, NR will effectively have zero capital base.

It will have evaporated.

Exactly what can NR shares be worth now?

I imagine that they have to find a buyer for NR by monday morning or it will effectively be gone.

Peston has written up the details on his blog

http://www.bbc.co.uk/blogs/thereporters/ro...9/15/index.html

Edited by 2MeterBear

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On R4 this morning Robert Peston reported that collateral based on mortgages on NR's balance sheet are just about big enough to pay off the deposits currently held.

It seems to me that effectively this says that if depositors insist on removing their money, NR will effectively have zero capital base.

It will have evaporated.

Exactly what can NR shares be worth now?

I imagine that they have to find a buyer for NR by monday morning or it will effectively be gone.

Peston has written up the details on his blog

http://www.bbc.co.uk/blogs/thereporters/ro...9/15/index.html

I don't see how they will survive. Indications are that house prices are now on the way down...NR will be hit hard as it is a subprime lender that has some of the most relaxed lending critieria. With increasing repos, NR will be hit hard. Also, now that NR is borrowing from BoE at 6.75% - how are they going to create new business with increasing repos at the same time? And along with the deterioration in the credit market now that UK house prices are heading down there will be no easing up in the rates NR has to pay to borrow money.

Plus, and this is a major factor, their brand name has taken a real hit. Who is going to put their savings in NR now? Everybody is hearing about this, it's front page on all the papers today, news etc.

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Well the script is that there will be one big bank that needs a favour or three from the FSA/BoE that will buy NR at perhaps a pound and take on the obligations and (mortgages).

The thing is would the shareholders wear it? There are fewer institutional investors in it than in Barings and I would guess that a large proportion of the holding is with people who came along with the demutualisation. Would they allow their nest egg to go up in smoke or will they insist that it keeps going until the receivers have to come in?

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Well the script is that there will be one big bank that needs a favour or three from the FSA/BoE that will buy NR at perhaps a pound and take on the obligations and (mortgages).

The thing is would the shareholders wear it? There are fewer institutional investors in it than in Barings and I would guess that a large proportion of the holding is with people who came along with the demutualisation. Would they allow their nest egg to go up in smoke or will they insist that it keeps going until the receivers have to come in?

Just one other thing: Northern Rock has 6000 employees, many of whom would find themselves looking for jobs in an industry which isn't exactly on a recruitment drive... :unsure:

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I can't understand why they keep claiming they are a sound business - their base argument seems to be that they are in trouble because no-one would lend them money - well, many a bankrupt business has said that in the past

fundamentally, they couldn't pay their debts

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Also just consider this...

If houses were to drop 50% in price, which is an extreme but entirely rational possibility (consistent with David Miles report, and Robert Shillers prognosis) then the assets of NR would be worth 50% of what they are now.

The BoE would have just taken on a huge liability.

Could there then be a potential conflict of interest between IR policy and their holdings of residential assets?

Its very important for us all that someone buys NR and quickly.

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Also just consider this...

If houses were to drop 50% in price, which is an extreme but entirely rational possibility (consistent with David Miles report, and Robert Shillers prognosis) then the assets of NR would be worth 50% of what they are now.

The BoE would have just taken on a huge liability.

Could there then be a potential conflict of interest between IR policy and their holdings of residential assets?

Its very important for us all that someone buys NR and quickly.

The mortgaged houses of NR's customers are not an "asset" of the bank as such, they belong to the customers.

If theywere an asset of NR they would have to be sold if the bank completely collapsed! Now that would cause a panic.

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I was reading some of the 'have your say' stuff on the BBC website about NR. Lots of older people were obviously very loyal to NR ('had my money with them for years'; 'the nice man at the desk said there was nothing to worry about' and so on). Whilst not wishing to knock them as people, it does strike me as astonishing that people seem to think that banks are somehow looking out for peoples interests or have some kind of obligation towards people.

They just dont seem to realise that banks are the cutting edge of capitalism that mandates a systemic predilection towards dog-eat-dog, out for the largest return short termism. When the cards are down NR would happily shti all over those savers if it meant a stabilisation of share price...in fact, we could quite possibly see this scenario come to pass.

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The mortgaged houses of NR's customers are not an "asset" of the bank as such, they belong to the customers.

If theywere an asset of NR they would have to be sold if the bank completely collapsed! Now that would cause a panic.

I could be wrong, but I believe it is possible (though somewhat unlikely) that NR could recall the loan (mortgage) on any property at any time. In the event of house prices falling it could definitely ask the mortgagees for more collateral

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Guest grumpy-old-man

did I hear right that NR account for 20% of the UK's mortgages ?

I didn't think they were that big, hence the Northern bit of their name.

& I wonder how much of that is sub-prime lie to buy :ph34r:

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It so pathetic that prudent savers have already been shafted (=they are at least very worried) and will be shafted again (=possible NR insolvency, etc) and debtors are laughing. In the worst case debtors will have a new master, in the best they will be forgotten in the turmoil.

Makes you think - how can you get wrong with a debt?!

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Just one other thing: Northern Rock has 6000 employees, many of whom would find themselves looking for jobs in an industry which isn't exactly on a recruitment drive... :unsure:

we need as many job losses in this country as possible to speed up HPC

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did I hear right that NR account for 20% of the UK's mortgages ?

I didn't think they were that big, hence the Northern bit of their name.

& I wonder how much of that is sub-prime lie to buy :ph34r:

NR were responsible for 18.9% of new mortgage business in the UK

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& I wonder how much of that is sub-prime lie to buy :ph34r:

This is the most bearishly exciting bit of the story... surely with NR being sliced up or bought it might be prudent to actually look hard into their mortgage book and work out what the quality really is...

How many 125% mortgages, self certs and lie to buy? Wouldn't a buyer of NR want to look hard at what they are selling?

The quality is predicated on high house prices. Its a vicious circle... once it turns it all collapses.

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The mortgaged houses of NR's customers are not an "asset" of the bank as such, they belong to the customers.

If theywere an asset of NR they would have to be sold if the bank completely collapsed! Now that would cause a panic.

I think this is called collateral and the BoE is now taking this collateral as a backing for the loan. 50% HPC = 50% of collateral value drop.

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Guest Charlie The Tramp
I can't understand why they keep claiming they are a sound business - their base argument seems to be that they are in trouble because no-one would lend them money - well, many a bankrupt business has said that in the past

fundamentally, they couldn't pay their debts

That part is correct, but they need to borrow so they can grant new mortgages to customers from whence comes more profit ( interest ) which keeps the shareholders smiling.

It applies to all Lenders who borrow from Investment Banks, these Banks are now holding back until they know who holds the mortgages which have gone bad.

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Guest grumpy-old-man
NR were responsible for 18.9% of new mortgage business in the UK

so, doesn't that mean that there is a good possibility that approx 19% of all UK mortgages recently submitted for Sept won't go through ?

oh dear.

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so, doesn't that mean that there is a good possibility that approx 19% of all UK mortgages recently submitted for Sept won't go through ?

oh dear.

Both NR, and the leaks from NR, were saying that they sharply cut back on mortgages in the last couple of months because of the funding crisis.

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so, doesn't that mean that there is a good possibility that approx 19% of all UK mortgages recently submitted for Sept won't go through ?

oh dear.

Well thats a good point. Where would NR get the money from to fund them? The capital markets are out of the question. Bank of England anyone? :blink:

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NR only gets a relatively small part of its funding from individual savers, but is a big issuer of notes and paper on the wholesale markets and in the swaps market. It is the later form of funding that is drying up and I cannot see anyone being prepared to lend them money at standard commercial rates in the next few weeks, so this can only get worse. NR is probably finished in its current form.

However, assuming that a large portion of the mortgages are sound, this will give a buyer a great chance to pick up a bargain. The shares may even be trading at a substantial discount to their true value. Only time will tell.

I once met some of the NR treasury team. Must be a pretty interesting place to work at the moment.

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...which keeps the shareholders smiling.

Does it apply to NR sh*tholders too? :lol:

NR have given a lot of shares away to account holders when going public in 90s so even though it is a paper asset loss, many people will face this loss personally.

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I can't understand why they keep claiming they are a sound business - their base argument seems to be that they are in trouble because no-one would lend them money - well, many a bankrupt business has said that in the past

It's the only spin they can put on it and as you imply we've heard it before: 'our business was profitable, it was cashflow and the banks that did for us...'

The bottom line is they borrowed short and lent long without apparently understanding the risks. Their mortgage book may be 'sound' but their business model wasn't based on having a sound mortgage book, it was based on a type of financial engineering that only works in times of mania (or irrational exuberance if you prefer).

The exuberance is now ended; in my book that means they are effectively bust.

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That part is correct, but they need to borrow so they can grant new mortgages to customers from whence comes more profit ( interest ) which keeps the shareholders smiling.

It goes deeper than that: they have borrowed short-term from the money markets in order to fund long-term mortgages. The short-term loans become due and have to be repaid, which means they need to take out new short-term loans to support their existing mortgage book. The price/availability of those short-term loans have gone against them.

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I can't understand why they keep claiming they are a sound business - their base argument seems to be that they are in trouble because no-one would lend them money - well, many a bankrupt business has said that in the past

fundamentally, they couldn't pay their debts

If you were buying a high mileage car would you would you expect the seller to tell you everything that he thinks is going to go wrong in the next 1000 miles?

Northern rock savers suspect a clocked mow-tah and are syphoning off their petrol before it gets sold to a lovely old lady who "just liked the look of Adam Applegarth, he seemed such a nice man!"

Would anyone else care to take this analogy to a more tenuous level?

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