Rock Can't Be Sold

[Wad]

Stunning piece of financial investigative reporting from Robert Peston on teh BBC website.

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

But, as Northern Rock found out when looking for a buyer this summer, no bank has the confidence to buy Northern Rock and attempt to refinance its balance sheet on the money markets in the normal way.

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substantial balance sheet just a few days ago, they are going to be even less keen now, after so much cash has been withdrawn by anxious Northern Rock customers from their branch, postal and online accounts.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.

If ths analysis is correct there are literally no willing buyers for Northern Rock. However, if anyone can get the cash together it may therefore be possible to buy the Northern Rock equity and all its bonds for an outstandingly low price and wait for credit markets to recover before refinancing. Such a buyer would have to act alone but the rewards could be immense. Step forward Warren Buffet?

[Luminist]

I think that NR could be a candidate for a takeover from a sovereign investment fund such as the new one set up by China (State Administration of Foreign Exchange or SAFE). The Chinese have over $1.3tn in foreign reserves, some of which they have earmarked for overseas investment for the first time this year. I am sure that they are itching to get their hands on some real assets with all that fiat cash that they have.

This is how HSBC came in the UK, when they bought the troubles Midland Bank Group. After about five years, they gradually rebranded the Midland Branches to the HSBC brand name. Maybe we will have branches of the People's Bank of China in Newcastle in five years time?

Best,

L

[Converted Lurker]

Stunning piece of financial investigative reporting from Robert Peston on teh BBC website.

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

But, as Northern Rock found out when looking for a buyer this summer, no bank has the confidence to buy Northern Rock and attempt to refinance its balance sheet on the money markets in the normal way.

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.

If ths analysis is correct there are literally no willing buyers for Northern Rock. However, if anyone can get the cash together it may therefore be possible to buy the Northern Rock equity and all its bonds for an outstandingly low price and wait for credit markets to recover before refinancing. Such a buyer would have to act alone but the rewards could be immense. Step forward Warren Buffet?

The mortgage book will be bought and the spin will be that NR has been re-structured, bought out, taken over.. politically the words "bust" will be avoided by the media at all costs IMHO. The collection of the payments will be entirely dealt by a virtual organisation, such as HML, which could easily absorb NR capacity. Sad part is the head office in N-castle is toast, 5,500 jobs to go. Applecart earnt 3mil last year...

Edited September 16, 2007 by Converted Lurker

[Converted Lurker]

Northern Rock is not just illiquid, it is insolvent as its assets are unmarketable right now.

Only a politically motivated entity could wish to take it over.

I would suugest as we speak the main focus is on brushing this under the carpet and spinning it furiously.

[R K]

I think that NR could be a candidate for a takeover from a sovereign investment fund such as the new one set up by China (State Administration of Foreign Exchange or SAFE). The Chinese have over $1.3tn in foreign reserves, some of which they have earmarked for overseas investment for the first time this year. I am sure that they are itching to get their hands on some real assets with all that fiat cash that they have.

This is how HSBC came in the UK, when they bought the troubles Midland Bank Group. After about five years, they gradually rebranded the Midland Branches to the HSBC brand name. Maybe we will have branches of the People's Bank of China in Newcastle in five years time?

Best,

L

I used to work for Midland Bank in another life. If you remember, they got themselves into difficulties because their board wanted to increase returns by getting exposure to the booming US house lending market in the early 80's. So they bought a californian bank called Crocker International. It turned out to be Crock o Shite, the housing market collapsed, the loans turned out to be sub-prime, Midland's UK profits from its core UK retail banking were wiped out and they ended up being taken over by Hong Kong and Shanghai.

So, nothing much changes. Banks make money out of housing booms, give money out to people who they know are bad risks but who cares they make short-term profits out of it, then sell the assets on to a greater fool, and when it all goes t*ts up someone else comes along and snaps up the assets at a discount....and the world carries on turning.....

I agree, a Chinese bank looks like a reasonable punt. Afterall, they've just poured cash into Barclays, maybe that was not as innocent as it seems. Was the capital raised by Barclays to avoid getting help from the BoE I wonder? It is mooted NR have been trying to find a buyer but been unsuccessful. Only when they couldn't find one did they go to the BoE.

Interesting.

[thecrashingisles]

Interesting comment from someone on the BBC blog:

If the problem is size, then maybe the answer is the piecemeal breakup of the loan book. That would have been against the wishes of the board, as it will wipe out shareholders and any unsecured bond holders. But it would enable the bank of England loan to be repaid. It would probably have a knock on effect on the mortgage market as the loans would not be sold at face value. The sale of over £100 billion of assets at a discount would devalue the rest of the mortgage backed bond market.

[FreeTrader]

I'd say it's highly likely that the BoE will be doing all it can to ensure that Northern Rock shareholders lose all their money.

King knows that his reputation is on the line here, especially after his comments regarding moral hazard. He'll be keen to demonstrate, as will his colleagues, that what the BoE has done is protect the orderly functioning of the UK banking system and safeguard the interests of ordinary depositors who had every faith in the integrity of that system. At the same time he'll want to be able to point a finger at NR investors who have lost all of their investment in the company, issuing a warning that it is not the job of banking regulators to protect such individuals from malinvestment in lending institutions whose business model is based on aggressive and potentially unsound banking principles.

The wider issue facing the authorities is how to react if the last couple of days' events lead to depositors withdrawing funds en masse from other banks over the next few weeks. It doesn't need to be a stampede, just a steady drip, drip of withdrawals from commercial banks and building societies into National Savings, gilts etc. This will put even more pressure on the system, with the inherent risk of a snowball effect that merely serves to feed the sense of panic. Perhaps the best way to stem this tide would to be to announce that the FSCS limit will be raised to 50K, with a 100% guarantee of funds. It's okay the FSA and BBA advocating that people calm down, but there's no getting away from the fact that leaving one's funds in place at present carries a 10% risk premium for any substantial deposit.

Depositors are acting totally logically at present if they withdraw funds from commercial institutions and seek a safe haven in gilt-edged securities or bonds.

[R K]

The shareholders should be having some say in all of this.

It is absolutely correct that they shoulder the risk burden, but they have been well and truly stuffed by Adam ApplePie and Darling/BoE.

If I was a shareholder in NR I would be wanting an extraordinary mtg as of yesterday. This isn't a private company it is a public company and the shareholders have been sacrificed to keep the myth of a sound banking system intact.

If the BoE/Darling are lining up a buyer then why haven't the shares been suspended?

[lordofcolchester]

I used to work for Midland Bank in another life. If you remember, they got themselves into difficulties because their board wanted to increase returns by getting exposure to the booming US house lending market in the early 80's. So they bought a californian bank called Crocker International. It turned out to be Crock o Shite, the housing market collapsed, the loans turned out to be sub-prime, Midland's UK profits from its core UK retail banking were wiped out and they ended up being taken over by Hong Kong and Shanghai.

So, nothing much changes. Banks make money out of housing booms, give money out to people who they know are bad risks but who cares they make short-term profits out of it, then sell the assets on to a greater fool, and when it all goes t*ts up someone else comes along and snaps up the assets at a discount....and the world carries on turning.....

I agree, a Chinese bank looks like a reasonable punt. Afterall, they've just poured cash into Barclays, maybe that was not as innocent as it seems. Was the capital raised by Barclays to avoid getting help from the BoE I wonder? It is mooted NR have been trying to find a buyer but been unsuccessful. Only when they couldn't find one did they go to the BoE.

Interesting.

Barclays cash from China is conditional (I believe) on the ABN take over.

As I have noted on another thread with the current credit crunch banks are not going to want to drop a significant amount of cash buying NR. My bet is on a hedge fund / investment bank buying the loan book at a knock down price. Staff will be made redundant and NR will be wound up with BoE suffering the losses.

[Luminist]

Barclays cash from China is conditional (I believe) on the ABN take over.

As I have noted on another thread with the current credit crunch banks are not going to want to drop a significant amount of cash buying NR. My bet is on a hedge fund / investment bank buying the loan book at a knock down price. Staff will be made redundant and NR will be wound up with BoE suffering the losses.

China has already bought a 3.1% stake (Eur 2.2bn) in Barclays and says that it is ready to increase this to Eur9.8bn if the ABN Amro deal is successful (link).

Also, I think that given the choice, the government and the BoE would prefer a buyer for NR who would want the business as a going concern rather than to asset strip it. The latter would not be inducive for calming the fears about the overall stability of the banking system

Best,

L

[lordofcolchester]

China has already bought a 3.1% stake (Eur 2.2bn) in Barclays and says that it is ready to increase this to Eur9.8bn if the ABN Amro deal is successful (link).

Also, I think that given the choice, the government and the BoE would prefer a buyer for NR who would want the business as a going concern rather than to asset strip it. The latter would not be inducive for calming the fears about the overall stability of the banking system

Best,

L

L

I think you are correct in thinking that the Government will want a buying to take over the whole business. The trouble is I can't see a bank doing that. Banks are hoarding cash at the moment plus a lot of them will either have to take their own mortgages back (which they have put in conduits) or lend cash to the conduits. This will put a strain on their capital ratios as it is. Plus there will be the hassles of branch closures, redundancies to deal with etc.

Some funds have been actively storing cash in the last couple of weeks to buy distressed debt and it will be going very cheap!

Cheers

[Catch22]

I posted this on another thread, when it appears this is the thread I should have posted it to.

To be honest I don't think The BOE or the Government will let NR collapse. I'm not saying NR will survive in its pre this week state. OK as a going concern it is holed fatally below the water line, it will not attract savers or mortgage buyers, so its business will be "absorbed" buy a bigger fish. This fish will be given the where for all to do this by the BOE.

King and Darling have drawn a line in the sand, if they fail to hold that line, all faith in the UK banking industry and the government will collapse. Panic will spread from one lending institution to another, no where will be deemed safe by Joe Public, followed by an economic Armageddon. Come on, there are two major props to the UK economy, the housing market and the financial services sector [The City]

You do not need a degree in rocket science to work out that the cost of saving the Northern Rock is peanuts in regard to considering the costs that will be incurred not to do so. They will print money like no tomorrow , where it will hit everybody in the UK via a devaluing pound.

I believe what I have said above is not at odds with my belief that the housing market will correct. I cannot be arsed to explain in full why because it is obvious. Suffice to say mortgage rates will rise, deposit will need to be bigger, high risk borrowers will be priced out of the market. Sentiment is changing, lower demand bla bla bla, in short what you are seeing is the cycle turning to the negative side.

[Uriah Heap]

What happens to Northen Rock is interesting only in a soap opera what happens next sort of way. We have all learned a bit about it lately and have become curious about its fate.

The bigger picture is that there used to be an organisation pumping billions into the UK housing market on easy terms to anyone who could fog a glass. As of last week this has ended.

The UK housing market is a different place now, whether or not NR happen to survive as an organisation.

[kagiso]

The shareholders should be having some say in all of this.

It is absolutely correct that they shoulder the risk burden, but they have been well and truly stuffed by Adam ApplePie and Darling/BoE.

If I was a shareholder in NR I would be wanting an extraordinary mtg as of yesterday. This isn't a private company it is a public company and the shareholders have been sacrificed to keep the myth of a sound banking system intact.

If the BoE/Darling are lining up a buyer then why haven't the shares been suspended?

The board and so effectively the CEO were appointed by the shareholders. The shareholders were happy with the business model when it was pulling in customers. The shareholders deserve to lose every penny. The conditions of the BoE loan mean this will effectively be the case. Either NR will be bought for a song by another bank (and like others in this thread I think Chinese or other Asian seems highly likely) or they will effectively be nationalised when they become bankrupt. The BoE will then take the hit on guaranteeing the deposits after all other assets have been sold off.

[MarkG]

The board and so effectively the CEO were appointed by the shareholders. The shareholders were happy with the business model when it was pulling in customers. The shareholders deserve to lose every penny.

Indeed. They were happy with the returns when the company was raking in money, why should they be bailed out when the very policies they supported drive the company into bankruptcy?

[Minos]

Depositors are acting totally logically at present if they withdraw funds from commercial institutions and seek a safe haven in gilt-edged securities or bonds.

Indeed they are. All that extra cash flowing to the government may mean a surplus of funds. Maybe resulting in a lowering of interest rates ?

[R K]

Indeed. They were happy with the returns when the company was raking in money, why should they be bailed out when the very policies they supported drive the company into bankruptcy?

That was exactly my point. There has been consistent use of the term "bail out". This is a misnoma imo. It isn't what has happened. What has happened is the Bank has given depositors the opportunity to withdraw their cash up to 100% in a reasonably quick and orderly fashion. Any depositor that doesn't take their cash out of NR imo has to be barking.

The Bank has been perfectly happy through disclosure of its intervention (without actually doing much yet other than promising to be guarantor, which it is obliged to do anyway) to allow the shares to be trashed. I have made this point on another thread, but I doubt the shareholders feel they have been "bailed out". Adam Applepie certainly won't feel like he has been bailed out, more like hung out (rightly) and so to the board.

I am of the opinion that Mervyn will have been fully aware of the likely outcome from announcing the support package. This has not created a moral hazard. The shareholders/board have rightly been stuffed, depositors have righlty got their life savings out and at some point the £113bn in assets will be used to repay the £30bn of BoE support if required.

[Ducardo]

NR is toast, th eloan book will get sold on, perhaps in parcels,