Saturday, August 22, 2009

State guarantee but zero payment

Northern Rock Defers Payments

NR aka Bank of Nulab defaulted on subordinated debt. Aside from calling the government guarantee into question, it also makes me wonder to what extent the savings of the population are being honoured anyway. Financial institutions hold these bonds and ultimately financial institutions are the collective savings of the UK population. So if for example as a saver with money in the bank and -also- a pension fund, annuity or whatever, the government says well your 50K is safe but simultaneously pops 50K off the value of an investment vehicle. Net effect is still money gone. It isn't a guarantee really. I mean, are people happy to have money in the bank safeguarded at the cost of torching pension funds?

Posted by stillthinking @ 03:43 PM (2608 views)
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8 thoughts on “State guarantee but zero payment

  • Now we know why Mervyn King wanted more Quantitative Easing.

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  • mark wadsworth says:

    Well hurray!

    This is yet another example of a debt-for-equity swap. And no, the money does not suddenly disappear, those bonds on which NR ha suspended interest payments have not suddenly become worthless, they were probably only trading at 10 pence in the £ before this, and they’ll now be trading at 9 pence.

    There is also a huge moral/political difference between the government guaranteeing deposits (which it has always explicitly done, whether up to £30k or £50k – the clue being the fact that there is an upper limit) and guaranteeing ALLl bonds (the people who invest in these ought to be a bit more circumspect, especially i they are investing large amounts). Because if they are going to guarantee bonds of banks, why not guarantee bonds issued by all companies? And if they are guaranteeing bonds, why not guarantee shares as well? Or rig the system so that house prices can only go up?

    The “pensions funds might lose money” argument doesn’t wash with me. Pension funds are probably the worst bail out junkies of all time, and I have never invested a penny in one and never will.

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  • tenyearstogetmymoneyback says:

    mark wadworth @ 1 wrote

    “Pension funds are probably the worst bail out junkies of all time, and I have never invested a penny in one and never will.”

    On interest how do you intend funding your old age ? Lots of people without a pension qualify it by saying they have invested
    in property instead. I’m genuinely interested if there is some huge investment opportunity that the rest of us haven’t spotted.

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  • That sounds like the money hasn’t disappeared because it was nearly all gone anyway. I don’t like pension funds either because they are locked up government investment vehicles, but I don’t see that savings in a bank are different from pension funds. More likely the losses can take place against pension funds because their shortage of funds will only become apparent in a decade or so.
    The injustice is that we have a situation where a 50K+ individual deposit is being safeguarded with precedence over some poor workers pathetically small pension fund. If they had honoured the original 50K limit guarantee perhaps it would be possible to take a different view. This is certainly unfair because the pension funds affected only exist in the private sector, the funding mechanism for state workers pensions being from current taxation and unfunded.
    There was -no- guarantee above 50K per institution, so I don’t see the justification for the losses to fall against pension funds. Private sector pension funds have always been a sitting target for government, this just continues the trend. It is hardly surprising there is so little enthusiasm for them. Imagine you are some oldie who thought might be nice to live out your days in sunny Spain, first you have 25% off the value of your pension, then a political decision to specifically make your fund take banking losses in order to support a guarantee that didn’t even exist when you were working. What a scam !

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  • mark wadsworth says:

    @ Tenyears, “pension funds” are nothing special, they just buy shares and bonds and commercial property, usually via some other mutual funds and so on.

    I can do that myself if I want (right now I prefer cash), I don’t need several layers of people creaming of most of the income in fees and charges.

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  • “On interest how do you intend funding your old age ? Lots of people without a pension qualify it by saying they have invested
    in property instead. I’m genuinely interested if there is some huge investment opportunity that the rest of us haven’t spotted.”

    The numbers have not stacked for residential lets for some time.

    My own strategy was to buy (in 1993) three acres of derelict industrial land, which I own in my own name, but have let to one of my own companies. That company has since invested heavily in the upgrading and developing of the site for its own needs.

    Ultimately I will dissolve the company, and re-possess the site. As I will not sell the site, there will be no capital gains to pay.

    Although commercial rents have dropped from their dizzy highs, I should still be able to hand the management of the site to a commercial letting agent and nett in excess of £100k p.a. The original purchase price I paid for the site was just £28k..

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  • @4 MW
    “I prefer cash at the moment”, I am pleased to hear that, I prefer to hold cash ie. invested at say 4% with resonably easy access with some lost of interest. What are your opinions of inflation that may be caused by QE or is the QE just replacing the losses sustained by the financial sector. Therefore, the threat to inflation is not a problem in the short term ie. say 3 years. Your comments on this would be appreciated.
    Also, I heard recently that you could borrow up to £50k as top up to your existing mortgage at the rate of 0.75% over base ie. at 1.25%. Has anybody on this site heard of it.

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  • tenyearstogetmymoneyback says:

    Thanks for answering Mark

    I suppose a lot depends on who you work for.
    I suspect that where I work lots of people only stay there
    for the pension scheme. First there is tax relief. Then company
    actually puts in more than we do. Finally (although it is of no benefit
    to me there are things like three years salary and a refund of all
    contributions should you die in service.

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