Negotiation, Negotiation, Negotiation

UK Property Investment news and comments from Mark Harrison of

Northern Rock – leaked memo?

Posted by markharrison on November 22, 2007

I was sent what claims to be a “leaked memo” about Northern Rock. A bit of research now reveals that the memo was a copyright document, so I’ve deleted it. However, I do feel OK in reporting what other websites have said.

The  memo, known as “project wing”, is allegedly written by a bunch of financial institutions, including Citi, and Merryl Lynch (both of whom have ousted their chief execs in the last few months), and relates to a  plan to sell off many of the assets of Northern Rock.

One of the scenarios in the memo was that the core mortgage business might remain strong, and that NR represented a good business going forward, which would continue to grow. To be fair the memo also posed another scenario in which it wouldn’t – so, which is more likely?

Or, to put the question another way, “would  you take out a mortgage with Northern Rock today, or would you ask to find another lender?”

Personally, I’ve had an NR buy to let mortgage in the past, but moved away from them many years ago to another lender who my broker felt was better for my circumstances. Today, if my broker recommended them, I’d have a bunch of questions.

Now, to a certain extent, this is the point. Even if my broker could come up with good answers to those questions, he’d know that recommending NR would involve a lot more time and effort, since I suspect that everyone would have such questions…

Crikey, the more time I spend thinking about the whole NR situation with my “property investor” hat on, the more I think the future is grim for them.

It’s a shame – they seem well run from a customer perspective, the staff in the local branch were friendly, polite and professional on the few times I actually dealt with them, and they had low costs for the volume of business they were doing.

The trouble is, their whole business model seems to have been underpinned by a set of  MASSIVE assumptions about  how they would, in turn, finance those mortgages. They didn’t have anything like enough money from depositors to do so, but assumed that they’d be able to borrow it from other institutions on an ongoing basis. Sadly, with the crash in the US sub-prime market, many of those other institutions got cold feet, and weren’t prepared to make the money available any more.


[By the way, I’m planning to do a post about “securitisation” which is  another buzz-word to do with how these mortgages work, in a few day.]

To quote Tom Peters (again):

“… [Warren] Buffett long ago gave us fair warning when he said that all the higher-mathematical models in the world can’t overcome problems with the value in the original transactions..”

That’s not quite what happened here. The original transactions were quite good – but the higher-mathematical models that some of the other parties in the deals had been using backfired, and when the knock-on effects finally hit NR, they were huge.

If you’ve not already done so, now would be a good time to read “Fooled by Randomness”, by Nassim Taleb – he saw it coming, many years ago.


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