Who is Really to Blame for Northern Rock?
Robert Peston's reporting for the BBC of the whole Northern Rock saga has had a "blame Mervyn" undertone to it. Today he basically peddles one of the two Treasury favoured spin lines;
- The Treasury's primary spin-line is that it is all because of the sub-prime crisis in America and that no one could predict it coming.
- The second line of spin is that it is the Bank of England's fault for not flooding the market with liquidity when trouble came.
The first point is easy to deal with, Mervyn saw it coming as did half the City, that is why Northern Rock shares halved long before the headlines. The blame really lies first and foremost with the board and management of Northern Rock. They failed to foresee the problems and they alone bear responsibility for the dash for growth and profits through securitisation which has unravelled. The LibDem's Vince Cable was spot-on when he blamed the Northern Rock management for their own undoing. So should Mervyn King discourage or encourage bankers to make mistakes?
King thought not on September 12, yet under pressure from Alastair Darling, the very next day he supported the bail-out of the Northern Rock management. There was no systemic risk to the financial system which could justify such a move. Now with the Treasury promising to guarantee all bank deposits, the British banking industry has become Moral Hazard central. The news that King has been forced to effectively reverse a sound policy means all risks have been transferred to the taxpayer. So if today an RBS trader "did a Leeson" the Treasury would end up picking up the tab.
The second line of Treasury spin is that the Bank of England should have flooded the markets with liquidity. That is never generally a good idea for an institution obliged to fight inflation. Market participants were in any event able to borrow from the bank window at penalty rates (and some did). Northern Rock could not do it because they did not have the necessary collateral.
The blame lies not with Mervyn King but squarely with Northern Rock's management. The Northern Rock board took the risk in their dash for profit growth, a risk that should have been spotted at board level by their risk management committee chaired by Sir Derek Wanless.
Wanless should resign immediately and be stripped of any bonuses and performance related payments.
King thought not on September 12, yet under pressure from Alastair Darling, the very next day he supported the bail-out of the Northern Rock management. There was no systemic risk to the financial system which could justify such a move. Now with the Treasury promising to guarantee all bank deposits, the British banking industry has become Moral Hazard central. The news that King has been forced to effectively reverse a sound policy means all risks have been transferred to the taxpayer. So if today an RBS trader "did a Leeson" the Treasury would end up picking up the tab.
The second line of Treasury spin is that the Bank of England should have flooded the markets with liquidity. That is never generally a good idea for an institution obliged to fight inflation. Market participants were in any event able to borrow from the bank window at penalty rates (and some did). Northern Rock could not do it because they did not have the necessary collateral.
The blame lies not with Mervyn King but squarely with Northern Rock's management. The Northern Rock board took the risk in their dash for profit growth, a risk that should have been spotted at board level by their risk management committee chaired by Sir Derek Wanless. Wanless should resign immediately and be stripped of any bonuses and performance related payments.
64 comments:
The bank's being propped out by the taxpayer but outrageously it's going ahead with juicy dividend payments next week.
Next week is the "ex-div" date, so the bank can still cancel the interim dividend, a sensible thing to do.
But instead of keeping its cash to help shore up its finances, management plan to pay out hundreds of millions to shareholders.
You are missing the point Guido. The BoE is bailing the banks out because they are ALL in deep shit. They are all desperate for cash.
We are staring at a 1929 style banking disaster. The BoE is trying to keep a lid on it. With the new arrangements the banks that are in trouble will be able to go to the BoE in secret so no-one will know which banks are out of cash. But we do know it isn't just Northern Crock. Basically any bank with unusually high interest rates on deposits has to be under suspicion, especially on on-line accounts that can easily be taken off-line if the bank needs to curtail a run on its funds.
I'm scratching my head wondering what the best strategy would be. Buying gold sovereigns may be the best option. I can't see sterling holding out much longer.
I must say guido you have understood the whole thing very well considering that a lot of the traders don't even understand whats actually going on.
The key thing is that the BoE provided money so that NR could finance new loans, financing they couldn't get on the interbank market to roll them over before their next securitisation issuance. Given they have been experiencing tight credit for over a month now they should not have been issuing loans, or else issuing them at higher interest rates. The BoE (under what ever pressure they found themselves) have bailed out NR's risky decision to go ahead an issue new loans at rates below the interbank market. The BoE should have instead insited that NR stop issuing loans if they can't finance them and then assure the market that they are otherwise solvent. Financial stability does not come into it if a bank just decides not to issue new loans, or only at a higher rate.
There was no systemic risk to the financial system which could justify such a move.
Yes, because history shows us that when one bank goes most people just say "aww, shucks" and ignore it.
Desperate stuff.
"The key thing is that the BoE provided money so that NR could finance new loans"
Not true. Northern Rock has effectively withdrawn from lending out new money by setting its interest rates more than 1% higher than its competitors. You would have to be crazy to take a loan out with NR.
NR needs the cash because it borrows short to lend long - 25 year mortgage at 6% interest rate financed with 1 year bonds at 5%etc. It needs to roll over this short term debt regularly or be forced to hand over its own collateral to its creditors. Thus it has nothing to do with making NEw loans. NR needs the money to service their own debt or go bust, potentially taking depositors cash with them.
From Moneynet.com: "dismal predictions that at least 8.6 million Britons will be routinely refused credit by mainstream lenders by 2011 have emerged from a report by analysts Datamonitor"
They will just ask you if you have ever voted Labour and then tell you to fuck off if you have.
Some of you may remember Mr Wankless's time at NatWest, and his involvement in the ill famed Legal & General take over.
So he is not exactly a virgin to financial feck ups.
Quite frankly if Mervyn King was an hounourable man he would resign now in protest at the BoE becoming so politicized.
Gay Gordon & Alistair Dimwitt are just using him as a goofer to cover up for GG's reputation.
I would like to know who is running the bank today? surely the government cannot allow the cretins who over extended the bank to a level that requires a govt gtee to avoid a systemic problem to remainin charge. adam appletwat, a bloke who has only ever worked for northern crook, is the man responsible for the situation and must be removed immediately. as a taxpayer i am essentially the gtor of this shitshow and i want someone sensible put in charge. i am prepared to do it myself, for free, to ensure the problem is resolved.
what a shambolic bellend brown is. not happy with ruining our international reputation with iraq, torture flights and lebanon he now ruins the only industry we had left in this country, the city.
10 years of nuLiebour and we resemble a pathetic third world banana republic. wankers
I see a NuLab "ERM moment" comming on? It looks like the BoE isnt as indepentent as Gordon(grofaz)Brown likes to pretend!
How many Billions will Brown & Darling piss away to the money sharks before they cave into the inevitable?
To all you thick NuLab rats out there, imagine a bucket with a hole in the bottom, now this crisis is like trying to fix the bucket by pouring more and more water into the bucket rather than letting it empty and then fix the hole or get a new bucket with NO hole in the bottom! Its as simple as that and if you thick leftist twats get confused by my ultra simple analogy then God help you when the shit storm hits!
Gordon(grofaz)Brown is like Hitler in his bunker in 1945, out of his mind on drugs and pretending to be in control of events rather than being rained on by them!
To say I am fucked off with my taxes being used to underwrite this bunch of mugs is a colossal understatement.
Watch the wall of money & talent exiting the UK - those left behind will be drinking dog piss out of rusty hubcaps.
Gordon Brown, not flash, just a complete and utter c*nt.
An almighty run on the pound is not far away. Brown has debauched the currency and we will be paying for it with vastly lower living standards for years to come.
Absolutely true. I'd bet Merv is absolutely fucking furious with the Northern Rocking Horse Rider.
Bank of England no longer independent? Being run from Whitehall? FT 19th Sept.
Number crunching:
Cost of the Black Wednesday debacle in 1992 : £3.3Bn
Cost of injecting liquidity to bring the Libor down today : £10Bn
Total liabilities from promising to guarantee all bank deposits in the UK : Unknown, but given total deposits are about £1 Trillion, will be big!
The word's spreading about the level of coruption revealed here. What's Her Majesty's Official Opposition going to do about it?
Come on Cameron.
anticitizenone
The "Northern Rocking Horse Rider".
Very good. I hope that catches on... I shall do my bit.
"The word's spreading about the level of coruption revealed here. What's Her Majesty's Official Opposition going to do about it?
Come on Cameron."
He's going to do the smart thing and stay well out of it. Let the newspapers, the Liberal Party and the harsh realities do the dirty work. Cameron will wait until the shit well and truly hits the fan and then deliver a carefully honed speech where he promises to lead the nation out of this wretched mess, in which the word "INTEGRITY" will feature highly.
Poor Mervyn King will have to take the only decent way out and resign over this. He wasn't happy at the split of responsibilities between the BoE and the FSA when "independence" was given and he's been made to look a total tool in recent days thanks to the economic illiterates who govern this country (yes that does include you, Gordon. We've all known for years that you have the economic competence of a ten year old with sudden, unfettered access to their father's wallet).
On the plus side for him, once things pick up again I'm sure he can earn multiples of his current salary as an economist with a major bank (although there may be fewer of them by then).
The opposition could also do with him as a spokesman to just permanently appear in all media outlets to state what a total snafu this is and point the finger squarely at the "man" respsonsible...the singularly repulsive G Brown, First (Gay)Lord of the Treasury.
Robert Peston is the son of a Labour peer. I wonder how many sons of Tory peers work at the Beeb?
Lets sell the Beeb to Rupert Murdoch and use the money to bail out the economy.
Northern Crock ends the day 16% down. Sorry Wankless, but even the BoE can't save you now.
Wanless the Div.......leave him alone with his well earned dosh.
So we have a credit crunch leading to an unprecedented and growing banking crisis then Brown comes along and promises banks a bottomless pit of taxpayers money and, according to the BBC, that's it, crisis over, nothing to see here.
Brown waved his magic wand and all the troubles went away.
Believe that and you're thick as pigshit.
The problems engendered by 6 years of living beyond your means haven't been magicked away, they're right here, right now. The cycles turned, the cheap, easy money has gone, the chickens are coming home to roost.
In brief, the shit's going to hit the fan.
If there is no crisis why is the B of E stumping up so much cash to prop up the 3 month money market rate.
Still the dollar has fallen over the year, and Broon encouraged purchase of US bonds. What timing, what decision making, what a cnut.
So a bank based in Newcastle in an area with all those Labour ministers gets bailed out! Bet they wouldn't have done it had it been based in the middle of Tory Bucks!
Look at what has happened to the pound today if you want to know what the markets make of all of this. It's even down over half a percent against the US dollar despite the Fed's 0.5% cut in interest rates yesterday.
Chris Paul - the pound is however up 0.18% against the Norwegian Kroner so you can use that in your next "all's well under Gordo" post if you like.
anonymous 4:22pm
Love your subtle imagery and innuendo.
How about:
Gordon Brown - not flash, not flush, just slush.
"the pound is however up 0.18% against the Norwegian Kroner"
Norway must be really fucked then....
I think I shall buy it.
Sir Derek is also one of the founding fathers of the NHS National Programme for IT (NPfIT) - another colossal and entirely predictable waste of billions of tax payer pounds.
It seems that you do indeed get promoted to your level of incompetence.
I'm looking at some analysis from an investment bank on the sub prime saga.
The market was dominated by adjustable rate mortgages (ARM's). The common structure had a fixed rate for two years after which it rose to LIBOR + 5 or 6% for the remaining 28 years (a 2/28 ARM). OK if the house price rises and you flog it or you can refinance, not an option now.
So what's the prognosis?
$25 billion a month is going to reset between now and the end of 2008.
The sub prime market total from 2001 - 2007 ytd is approx. $2.5 trillion.
Gulp.
How it will all end is open to debate.
Well I for one don't balme GB. It's obvious that the BOE is running around like a headless chicken changing direction.
Question? Why did the US and EC flood the markets with liquidity and the UK did not?
Answer: the UK were wrong.. and just realised it.
First rule of finance: avoid a panic run on the banks.
Second rule: the public do not trust any politicians with their money. Rightly so.. See Black Wednesday.
Third rule: Speak softly and carry a big stick. Don't cut off your options.
The BOE got almost everything wrong this time...
hi, as someone who works in interest rate markets - you guys got it wrong, this time the Govt' actually is pretty blameless. The blame lies in Northern Rock management for that specific failure, but that it was the BoE who let the interbank liquidity dry up and drive the spreads to levels where NOBODY could get any finance.
Worst of all, BoE has made a complete mess of the creditability issue : first , “we do not care where the money markets trade” despite the charter stating the o/n should trade near the base level. So they come in and offer o/n to bring it down near base rates, but they state they couldn’t care less about 3m. Then Merv the Swerve goes and states how it is irresponsible lending and you reap what you sow, BoE is NOT going to bail you out. Ooosp – couple of days later, they’re offering unlimited credit to Northern Rock. Add to insult : Gov’t discards the depo guarantee and states they will bail ALL out all deposits.
The final cockup: today BoE suddenly announces they will offer 10bn at 3M now… despite all the fighting talk how the spreads are driven by market and central bank bailout would result to moral hazard!
Recently, we were told that the UK had borrowings of 1.3 trillion, just greater than our total GDP.
If that's true, surely we will eventually get to the point when credit just dries up. When there simply isn't any money left to dole out.
Can somebody enlighten me? Surely we have hit the buffers and the only way to release more cash is to lower rates.
King was right not to bankroll NR but since then he has been sidelined completely and Bank of England business is now under Brown's control. Brown's message is the party goes on, keep on borrowing and spending, I have a bottomless pit of taxpayers money to bale you out with.
King will either go or be pushed soon and Brown's stooge Lomax, or someone of similiar bent, will step into his shoes.
They will soon discover that even that bottomless pit of taxpayers money is nowhere near enough to counteract the credit crunch and stave off another banking crisis for long.
There's a tsunami of shit heading this way.
tradebot
but surely nobody would lend to NR cos they knew, or had a good inkling, that it was bust. presumably theer is a price that better banks can borrow in the markets?
anon 6.51
"lower rates, release more cash,"... take on more debt so when the inevitable happens it's going to be even worse than it would be if rates were maintained or raised.
We should have took the pain back in 2005 but in August of that year 5 Brown plants on the MPC outvoted King and 3 others to reduce rates and get the debt-fuelled spending spree started again.
It's unsustainable and it won't work again this time because the credit's dried up.
It's time to swallow the nasty medicine I'm afraid even if it means your house gets repossessed and the merc goes back.
Tough shit. Try living within your means next time.
With the Federal Reserve dropping interest rates in the face of inflationary pressures in the USA we see the abandonment of the interst rate method of controlling inflation - an important shift of policy.
Funny, I don't see Brown on the Box talking about this - where is MacCavity, is it still not safe for him to come out of hiding? Perhaps he is still getting his instructions from the Germans and the French about how he is not to allow the British Electorate to sabotage their Imperial pretensions with the EU constitution.
It's all the Iranians' fault - let's go help the US kick the living crap out of them.
And Mugabe's got a lot to answer for too - why don't we invade Zimbabwe and then employ our unparrallelled British financial acumen to sort out their disastrous economy. Just imagine how grateful they'd be?
Save Mervyn !! Check out the comments on Peston's blog - most agree that he has been royally shafted by Alistair 'Call Me' Darling.
"Now with the Treasury promising to guarantee all bank deposits, the British banking industry has become Moral Hazard central." Come along, now Guido, we know you are talking bollocks - they are not saying this - you know that, I know that - so stop trying to make mischief...
Although I think you can be forgiven if you check out the head of the FSA on last night's Newsnight 'clarifying' the position - after that lesson in opacity it is a bloody wonder anyone knows what the fuck is going on...
And although I have disagreed with some of your points, you are BANG ON THE MONEY about the shiftless Wankless Wonder - turf him out NOW!
Look on the bright side - if Mervyn is shafted he may end up doing a canary before he is Soprano'd....
If a bank cocks up it should be allowed to go under. It's time the BOE was shut down, it's just another form of government-backede central planning albeit by capitalists rather than socialists.
Actually, this whole debacle has handed a wonderful political weapon to the people.
If we don't like the political elite fucking us about, all we have to do is go down to our bank and withdraw our cash. Any bank - it doesn't matter which.
If only 10 per cent of us did it next week the government would be completely destroyed.
Ah, yes, but how would we agree WHICH bank to target in any given week ??
I know, Guido could do one of those cunning 'polls' on a Friday afternoon instead of a caption contest
Everyone knows that N Rock is the 'Banker' for the North East and there are too many votes and seats for Labour at stake here. It is a scandal that Brown has had to lean on Darling to protect this fiefdom.......bet he would have ignored any problems with The Bristol & West !
But this is all peanuts when compared with Brown's sell off OUR Gold Reserves for 'a song'.
UK PLC is now totally in debt. Not just within the the personal sector with mortgages and cards but externally too. Brown signed the cheques and it is time to 'REFER TO DRAWER'.
If you think this debacle is bad, just wait till climate change really starts to motor. I know most of the commenters on here are rabidly anti-Green, but pause to consider this: if the planet really is doing what science says it is, then the regions in the northern hemisphere which currently provide the carbohydrates (mainly wheat & rice) upon which the human population now depends for sustenance will become unsuitable for growing those foods. The "Wheat Belt" will move north ... into regions which are geologically unsuitable for growing wheat and rice. Net result: famine, mass migration, civil unrest, of which the collapse of the banking system worldwide will be only a minor byproduct.
Oh and by the way, the latest news is that past predictions of temperature rise have been much too conservative.
dennis said...
We're all doomed, DOOMED I tell you!
Enjoying your thoughts on the unfolding story. Thanks, it's helped me with todays cartoon at:
http://www.iimage.co.uk/blog/
I'll be reading with interest to see how things progress.
Luckily the climate "models" predictions are nonsense, and can be nothing but nonsense(imperfect data+imperfect model^ recursion=JUNK).
I hope everyone still remembers that the Gaiantists predicted a record hot summer this year. Only 180 degrees wrong eh?
anon "Everyone knows that N Rock is the 'Banker' for the North East and there are too many votes and seats for Labour at stake here."
Yes, they are so delighted up there about Darling's ton of cash hand-out, they might just name a town after him....
Anonymous 6.30PM said...
"So a bank based in Newcastle in an area with all those Labour ministers gets bailed out! Bet they wouldn't have done it had it been based in the middle of Tory Bucks!"
Hush child - your bust The Chesham
............
and now Jose Mourinho has started a run (from) The Chelsea.
They may have done for the fuel protesters with the Civil Contingencies Act, but this ones a bit more difficult to criminalise. Although I am sure Gordon's got an evil authoritarian plan not to long in the showing.
Is it possible that the middle classes have discovered a secret weapon that could destroy Master Plan, before his aristocratic reptilian balls have fully dropped?
Voting with your feet now becomes voting with your feet and savings accounts.
Grasping at straws perhaps. However hope is such a basic human need that old habits do die hard sometimes.
The BoE has created this situation. Time to start spread-betting on the number of days Mervyn King has left in office.
The key point is the difference between risk (as for loans) and liquidity. Rock has not gone under because it was lending too riskily, but because there was no new money to borrow as its existing own loans matured. If the Rock didn't exist, the same thing would be happening to the next most vulnerable bank - A&L or B&B. It seems Mervyn "The Daddy" King needed a major bank to fail before he realised the Old Lady's naughty children had had enough "punishment".
I understand that Rock was following the rules on capital adequacy - the FSA said it was "solvent". In return, therefore, the BoE should therefore have kept its side of the bargain and ensured the capital markets were functioning.
The Rock is also arguably a victim of unfair competition. Had it been able to access Fed or ECB short-term funds as many of its international competitors could, it would have been far less vulnerable. The BoE has really screwed up by not staying in line with the other central banks. Maybe Rock shareholders should be compensated.
It's also bad for competition and hence the consumer for banks to fail unnecessarily. It's now going to be that much more difficult and/or expensive to get a mortgage, or, more to the point, roll one over at the end of its fixed rate period. Blame AA and DW if you like, but it doesn't look like they're going to be able to help you out now.
Btw, the BoE is not spending £10Bn of taxpayers' money, as quite a few people seem to believe. It's loaning it for interest and will require collateral.
and the collateral is what , a bunch of 4 year old mortgages that will be devalued by 40% if the housing bubble bursts and most go to auction.
sounds to me like a risky venture of tax payers money especially being as housing could blow.
merv said no and he was right to all this has done is improve takeover chances.
the rock is not a victim of circumstance , its a victim of nu labour ecnomic policies , BOE get very detailed information on building societies and banks i think every week , do you seriously think the chancellor doesnt get weekly summaries that highlight areas of concern.
the question is was when did gordo and alistair know about the liabilities of certain banks , this has beeen going on for a while , theres no way they didnt know the risks to the banks that have been named .
the other question is how come so much nulab involvement and links in northern rock, perhaps someones got a currency hedge fund going and they are going to cash in on the disater .
thanks
pig farmer
Said collateral being, quite possibly, not worth the paper its written on, Tim. That's the point. NR's balance sheet doesn't support the level of borrowing that the BoE has underwritten (or rather Darling and Brown have committed it to underwriting).
As for Climate Change, Dennis, give it a break. It's absolute crap, it's not caused by human activity and we're trying to change the wrong things if we blame CO2 emissions. The market will adjust when the perfectly natural changes in the environment occur as a result of changes in solar radiation as the market always does...by changing, moving, redesigning business models as required and that includes food production.
As for how it impacts us as people, well, we'll have to wait and see and move as necessary. There's nothing else we can do.
Dennis
Apart from being very sexy to a blind bulldog, is there any amount of common sense that you can lay claim to?
If what some climate change so called scientists say is true about the coming whether, then the best thing to do is buy some stronger sun cream.
No really believe me and take back full control of your reasoning. Because it really is the ONLY practical thing you or me or anyone else can do.
Lay back, enjoy the sunshine and cope with the practical effects as they arise.
However as MMGW is sky is falling down Fascist propaganda of the most obvious to an ameoba type, on this issue I sleep very well indeed.
Id
It seems we had a coming together of minds there. Lets try not to repeat the experience its bad for our libertarian credentials.
id & atlas
I have no particular fondness for green fascism, or the opportunism of politicians in using worries about the ecosystem as a means of raising tax. By nature I am a libertarian, but by training a biologist. It is true that no one knows exactly what is going to happen long-term. That something is beginning to happen is beyond dispute -- except for heads-in-the-sand loonies who deny the value of the scientific tradition and indeed the Enlightenment.
If you choose to believe it's all a conspiracy by doom-mongers, go ahead. Nature don't give a shit about your opinions, or anyone's opinions, or indeed about our welfare.
Of course King is at least partly to blame he's been printing fiat currency and dishing it out to certain groups; and so the great inflation goes on; because we don't have a true free market but socialism for finance capital.
NR share price was moving southwards today, no bidders in the offing.
How much lower will it go? Shares had become less than 183p not long ago. Could be fun watching the price when King starts his little chat with Treasury Select Commitee.
Was surprised to see that man Peston suddenly appear on Al Beeb's 6 O'Clock News to slate King, especially when there had been no headlines on NR or the Bank of England five mins earlier. I'm still puzzled by this.
BBC think the price of milk and a will he/won't he meeting with Mugabe in December is more important than the ongoing financial crisis.
Cnuts
The orchestrated attempt by Gordon Brown to scapegoat Mervyn King over Northern Rock is disgraceful.
If anyone should be in the dock it's:
1. Hector Santi at the FSA who allowed NR to lower their lending standards last year,
2. The NR executives who caried out this reckless business model,
3 Gordon Brown, who's hand is behind everything.
King, quite rightly, didn't want to bale out a corrupt and failing bank with a blank cheque of taxpayers money but he was over-ruled by Brown who is now trying to destroy him.
Vince Cable of the LibDms has today spoken out in King's defence. Are we going to hear from George Osborne or has he gone back to sleep?
Robert Preston - I dont think I've ever heard anyone on radio/TV with such an idiotic way of speaking - is he on drugs?
"By nature I am a libertarian, but by training a biologist."
Ah - an expert in computational geophysical fluid dynamics, then.
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