Northern Rock - Very, very, very bad.

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Subject: Northern Rock - Very, very, very bad.
Armchair Private 9/17/2007 5:13:33 PM

Ok, so let me get this straight: The Government, (or BoE) has now guaranteed all deposits, at all UK banks.... Just like that, no discussion, no thinking through the implications? Bankers can now run their business with total abandon, safe in the knowledge they cannot possibly fail... but they're not actually nationalised... so, we the taxpayer see only risk, no possible benefit.... it's like something from a fascist junta. All I can say is they must have known something horrific about the banks (and Alliance and Leicester loosing near 40% of its value 30mins before the end of trading today tends to support that....) or they're insane. Basically to cover all this new debt they've underwritten they'd have to print (create electronically these days) hundreds of billions of pounds, the very spectre of this happening will cause the pound to drop, possibly plummit. Since a huge amount of our debt is in foreign currency, our debt will become very much more expensive to service, and as we print pounds to pay it off, the pound becomes yet more worthless. This is potentially weimar republic or zimbabwe hyper-inflation territory. I'd be honestly happy if someone can tell me where and why I'm wrong!

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Tale 9/17/2007 6:14:54 PM

Its only Northern Rock accounts that are being covered isnt it? And I can only imagine the guarentee has a time limit.The irony is of course that there was nothing wrong with Northern Rock as a business but the media decided to scaremonger and people reacted like panicky idiots instead of rational human beings. And if this manufactured crisis causes a crisis of confidence in the banking system as a whole then the economy tanks and Northern Rock really will be in trouble. Along with the rest of us. The exact scenario I imagine this gaurentee is trying to prevent.

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Armchair Private 9/17/2007 7:04:34 PM

No, it's all UK banks that "finds itself in similar circumstances" criteria being it must be 'solvent'. No mention of a time limit anywhere, this seems to be a fundamental change in the way banks operate in the UK, I'm not aware of this being done anywhere else in the western world.

Ever.

The problem with that is that solvency for a bank is a matter of opinion, it's 'assets' are the debts we owe it (mortgages, loans). A bank's liabilities are the saver's deposits. How much of the 'assets' will ever really be repaid when mortgage debt is now more than GDP? and house prices are a bubble? (Rightmove reports that house prices dropped 2.6% MoM...... gulp) real Public (Government) Debt is also in excess of GDP....

NR was stuffed before this, apparently they were trying to sell themselves to Lloyds, when they couldn't, they went cap in hand to the BoE. Reason being they funded their mortgages, (and the daily running costs like staff pay and rent) mainly on the short term money market, (loans from other banks) not from savings from depositors like most banks (which had the concurrent effect of making them relatively immune to the panic we've been seeing).

As the inter-bank loan rates have risen (on the back of the US sub-prime fook-up [none of the banks know what level of bad debts the other banks are holding]) NR's business model crumbled.

The problem is that it's not a manufactured crises, if you had more than £30k in NR (the amount the FSA guarantees) you'd be mad not to withdraw it. In fact if anything I'd accuse the media of underplaying the risks here (with the exception of the Daily Mail who having predicted apocalypse now since the dawn time may actually be right for once....)

But, a bank run would have cleared out all the bad practices and bad companies that have developed, possibly leading to a painful recession.

The Gov. is preventing recession today but risking full scale 1929 style depression tomorrow.

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Tale 9/17/2007 7:40:02 PM

Wasn't aware that they'd been hawking themselves round or that this guarantee is universal. That does sound a spectacularly bad idea. The reason I was thinking NR were solid was precisely because their business is mortgage based. Im assuming either interbank rates return to workable levels or NRs share price sinks so low they get taken over, either way savings should be safe. If other financial institutions avoid a takeover then that would indicate they consider there to be a substantial risk of default by a significant number of those mortgage holders, right? And Im taking it that that would be a bad sign for the economy full stop. But really what the hell do I know, most days Im just happy that I can remember my pin number.

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perfectgeneral 9/18/2007 5:16:56 AM

Regulators have been critical of the extreme nature of NR's business model, but it does hold a lot of mortgages that are still worth a lot. Lack of fluidity in interbank lending shouldn't send a bank to the wall. A culture of freezing out risk taking banks would render the market artificially risk adverse. This isn't a no questions asked underwrite of a struggling bank. Northern Rock has a strong bottom line, it was just short of credit in unusual circumstances. The government can be sure (to a reasonable degree) that NR will be good for their loans in the midterm. I think they should have charged them a little over base rate though.

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tigertony 9/18/2007 1:18:33 PM

Well now maybe they are just trying to do this?

"A One World Government and one-unit monetary system, under permanent non-elected hereditary oligarchists who self-select from among their numbers in the form of a feudal system as it was in the Middle Ages. In this One World entity, population will be limited by restrictions on the number of children per family, diseases, wars, famines, until 1 billion people who are useful to the ruling class, in areas which will be strictly and clearly defined, remain as the total world population.

There will be no middle class, only rulers and the servants. All laws will be uniform under a legal system of world courts practicing the same unified code of laws, backed up by a One World Government police force and a One World unified military to enforce laws in all former countries where no national boundaries shall exist. The system will be on the basis of a welfare state; those who are obedient and subservient to the One World Government will be rewarded with the means to live; those who are rebellious will simple be starved to death or be declared outlaws, thus a target for anyone who wishes to kill them. Privately owned firearms or weapons of any kind will be prohibited."

A man named Coleman said the above in 1922. But of course "Mankind would never do this!". And Bush 1 would never call for it?

tigertony

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Armchair Private 9/20/2007 5:19:45 PM

Regulators have been critical of the extreme nature of NR's business model, but it does hold a lot of mortgages that are still worth a lot.

Lloyds didn't think so.

Lack of fluidity in interbank lending shouldn't send a bank to the wall.

NR is vulnerable because of the "extreme nature" of it's business model.

A culture of freezing out risk taking banks would render the market artificially risk adverse.

People deposit (or invest) in banks as they assume they are as safe as it gets short of Government backed bonds, if they want more risk (and profit) they can look at buying shares.

This isn't a no questions asked underwrite of a struggling bank. Northern Rock has a strong bottom line, it was just short of credit in unusual circumstances.

Which may be the new norm.

The government can be sure (to a reasonable degree) that NR will be good for their loans in the midterm. I think they should have charged them a little over base rate though.

If this were true they wouldn't have any problem getting money from other banks, the thing is because of the way derivatives are structured no one knows who is safe or not (I may be reaching the ends of my understanding of the issue at this point)

The point here is that banking is based on trust, there isn't enough money (cash or electronic) in each bank to cover all the depositers money (in fact by law in the UK i think they have to keep 14% of cash, they lend out the rest as debt), so banks rely on the fact that not all people will withdraw all their funds at the same time. A loss of trust in banks is potentially very very bad.

What the Government has done is tied up trust in banks with trust in the currency. The pound is a fiat currency, it's only worth anything because the government declares under law (fiat) that it is, in the worse case scenario not only will people lose trust in banks, they will also realise that the pound is only worth how much they think it's worth.

The m4 rate of monetary growth has been running at 10% - 15% for the last 10 years now. That's your real rate of inflation.

The government's committing to potentially crank that up to over 100%.

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Armchair Private £40bn 11/8/2007 3:48:20 PM

You, me, and everyone else in the UK is now owed £40bn by NR, £730 each.

And counting.......

h*tp://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/11/rocks_wholesale_run.html

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glenponder 11/21/2007 8:04:58 AM

Has a anyone else read in the paper that there is no garentee that the bank of england will get its money back. (oh sorry i meant that we wont be getting our money back)

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Hugo AP 12/22/2007 2:19:17 PM

You're not, in my view, wrong Armchair Private. The problem that teh government in your country is trying to avoid is called, in economist speak, contagion. This has happened quite often in the past, particularly in the United States which has historically had a fragmented banking market. However, the UK, where 80% of retail banking is controlled by the top 4 banks, contagion isn't genuinely a problem - and besides, we are no longer in the early 20th century where bank customers are liable to panic.

So the result is actually that the government is promoting bad behvaviour by providing blank insurance to poor management. Ther reasons for doing so are purely political - NR customers would have scolded the central government. Long-term this will only exacerbate the problem but when were politicians ever interested in the long-term...