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Posts Tagged ‘Northern Rock’

AIG vs. Lehman – did I speak too soon?

Posted by markharrison on September 18, 2008

Only two days ago, I wrote about the failure of Lehman Brothers, and was relatively positive about the way it was handled.

Yesterday, while I was out, the US Government announced a rescue package for AIG (the Mega-insurer who at the beginning of the year was the world’s 18th largest company, not bank, but company!)

I’m still not entirely comfortable with government bailouts, but compared to, say, the way the UK government handled Northern Rock, this wasn’t bad, and there are some differences between NR, AIG and Lehman.

  1. Lehman Brothers’ collapse didn’t shake the markets that much. OK, there was a tremor, but to a large extent the credit markets (if not the stock markets) had been expecting to to fail, and credit swaps were sort of already pricing in that information. By comparison, AIG is/was expected to survive.
  2. NR was a big deal for the UK – the largest securitisation base of any UK mortgage lender, but compared to the likes of HBOS (which, is also in trouble, to be fair – see the post I’m about to make!), it’s relatively small. AIG is enormous. AIG is like Bagpuss – when Bagpuss goes to sleep, all his friends go to sleep, and the failure of AIG of AIG really would hurt the world economy.
  3. AIG seems, at the moment, too big for anyone but a national government to prop up. It’s not like Lehman, Bear Stearns, or even HBOS – there is no raider coming in to buy it up for 10% of what it used to be worth.
  4. The “bailout” of AIG might actually be a good deal for the US taxpayer – OK, the Fed is taking on a big risk in making the loan – $85bn – but it’s getting 80% of the company in return. Unlike when the UK Government made a loan to NR, and, well, got a thank you letter from the shareholders.

It’s a pig though – on Saturday I’m meant to be giving a speech about the Credit Crunch, and what it means to UK investors, but the world is changing on a daily basis this week, and I’ve had to re-write some slides more than once 🙂


Posted in Economics, Property Investment | Tagged: , , | Leave a Comment »

Nothern Rock Nationalisation – and the winner is, well, no-one

Posted by markharrison on February 18, 2008

The Government is finally going to nationalise Northern Rock.

It’s “the right move at the right time for the right reasons”, according to Prime Minister Brown.

This might be a true statement, if you constrain yourself to looking at this morning’s decision in isolation.

Of course, the courts might yet decide that it was a really bad decision, and the Government have to pay a lot more than they’re assuming.

However, if you look at the overall way the crisis has been handled, it’s an object lesson in how to bungle government big-time, and back the country into a corner where  nationalisation is the only option.

Quick summary:

  • Northern Rock’s board embarked on a fast-growth strategy that used securitisation to help fuel a massive expansion.
  • The strategy misfired, and the bank had to run to first the Bank of England, and then the treasury for help.
  • The treasury came up with a clever plan where they promised to help the bank in a way that meant that you and I (the taxpayers) would carry the losses if the rescue failed, but that the shareholders would take the bulk of the gain if it worked.

In today’s announcement, the Government are basically saying that they’ve worked out the flaw in the plan 🙂

However, it may be too late. A general principle of UK law (and for that matter, European law) is that you can’t enter into a contract and then change your mind without penalty.

The current shareholders of NR (trading has been suspended) now have to wait for a public sector panel to “value” the shares… and the panel is going to value them as if the guarantees never existed.

The legal challenge that will, inevitably, be made is that the guarantees DID exist.

Very few people seem, to me, to have covered themselves in glory on this.

  • The Chancellor appears out of his depth [see below.]
  • The Prime Minister, who seems to refuse to accept that his government has done anything wrong, and consistently tries to spin the discussion into how a few jobs (in marginal constituencies) have been saved at the expense of enough money to employ 100 times as many people elsewhere.
  • The Conservatives appear to be trying to get the Chancellor out, rather than concentrating on anything that might benefit the country as a whole.
  •  The original board of NR who have, at least, in the main resigned.

So who has earned my respect:

  •  Ron Sandler, the man brought in as the new exec chairman to try to sort out the problem. He seems to be telling the truth, and refusing to make glowing spin, but instead concentrating on making things work again as quickly as possible.
  • The Liberal Democrats. Vince Cable, their treasury spokesman has been recommending nationalisation for a while, and signs are he might have done so immediately it was sensible, rather than creating the murky legal waters that Darling has done so.

I do admit, however, to feeling sorry for Mr. Darling – he is caught in a government that believes in managerialism – the idea that all problems can be solved if you work hard enough at them. Sadly, the right answer for a few labour MPs with low majorities isn’t the right answer for the good governance of the country.

Sadly, there’s enough evidence around to suggest that creating a level playing field, where sadly some companies DO fail, overall provides a better result for everyone – because new companies feel that the big incumbents aren’t given an unfair advantage, they are more likely to enter a market, creating more customer choice and more jobs!

Economies can cope with companies going under. They can’t cope so well with governments that tinker and U-turn, and put politics first.

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Northern Rock Nationalisation? My off-the-wall solution :-)

Posted by markharrison on January 8, 2008

Of all the reports about Northern Rock over the last six months, the one that has consistently impressed me most is Robert Peston, of the BBC.

In the latest twist, Robert reports that SRM, a Hedge Fund who currently own about 10% of Northern Rock have written to the Government, making it clear that if the Government try to Nationalise NR at less than a “fair price”, they will sue for damages.

The story then goes on to report how SRM have arrived at a “fair price”, and how difficult it is to value failing businesses.

I have a solution. I’ve no idea whether it would hold water legally, but it has a certain “business logic” and “natural justice to it.”

I wonder whether it could apply to all “companies on the verge of nationalisation”, not just NR…

Run an auction with a twist

  • Buyers would have to demonstrate (before entering the auction) that they had the funds in place
  • The government would have the RIGHT, but not the OBLIGATION (ie an option), for 24 hours after the auction closed, to buy, at a 10% premium over the “hammer price”
  • Of this 10%, half (5% of the highest bid) would be an uplift to the price the sellers of the business received
  • The other half (5% of the highest bid) would go to the highest bidder

Why have I suggested this?

  • The purpose of the first 5% is to demonstrate, clearly, that the government is paying “fair price”.
  • The purpose of the second 5% is to make sure that potential bidders are encouraged to bid up to their highest price – because for just making the offer, and putting down no cash, they MIGHT end up with a 5% profit straight away.
  • The purpose of making it an OPTION is to  make sure that no-one over-bids in the hope of that 5% profit – there would be a good chance that the Government would leave them swinging with their over-priced asset 🙂 And, of course, to make sure that the Government only bought if they REALLY felt it was in the national interest.

Would bidders play? Asia is awash with rich financial institutions at the moment!

Posted in Northern Rock | Tagged: , , , , | 4 Comments »

The UK Chancellor is planning to give more power to the FSA in the wake of the Northern Rock fiasco

Posted by markharrison on January 4, 2008

[This blog post is also available as a video – click here to watch.]

Alistair Darling, the UK Chancellor, is intending to give more power to the Financial Services Authority (FSA), to help prevent a repeat of the Northern Rock fiasco.

The plans aren’t finalised yet, because Mr. Darling has promised three months of consultation with the financial services industry, but the headlines seem likely to be that:

  • He will create an “emergency-response” committee that will form in the event of any NR-style problem.
  • The FSA will get the power to seize bank’s cash, and ring-fence it so that depositors have even more confidence that their savings are safe.
  • It’s possible that he’ll create new powers allowing the FSA to split up troubled banks into two sections, and give one of them the deposits and the “safe debts”, and the other the dodgy debts. (OK, that’s an oversimplifaction, and we’ll have to see what happens.)

The reason behind this is basically that the NR issue exposed the fact that a large bank could make lots of loans, and if some of them went pear-shaped, could ask the taxpayer to bail them out… BUT, and this is important, not give the taxpayer / government any rights to demand changes, but leave in place the Directors who got the bank into problems in the first place.

What Mr. Darling wants to do is set up a system whereby, if the taxpayers bail out a bank, the government (or its agency) can take control for a while, in exchange for stumping up the bailout cash.

So far, so good.

The BBC’s business editor, Robert Peston, raises some very good points:

1) What would constitute the kind of “emergency” that would put the Chancellor in the hot seat in this way?

2) How would the authorities distinguish between banks that run out of money due to their own ineptitude and banks that suffer in a general liquidity crisis?

3) Would shareholders in a troubled bank lose all rights when that bank is given emergency support?

I would hope that the answer to the first is as simple as “the bank needs government help”, but time will tell.

Posted in Economics | Tagged: , , , | 2 Comments »

And he’s off (Northern Rock Chief Exec goes…)

Posted by markharrison on December 13, 2007

Adam Applegarth, Chief Exec of Northern Rock, has left today.

The new Chief Exec is Andy Kuipers, who had left a few months ago, but has just been reappointed as a Director!

Virgin seems to be the only game in town left for rescuing the crippled bank, since talks with Olivant (the other bidder) seem to have fallen through.

The new chairman, Bryan Sanderson (who took over in October following the resignation of Matt Ridley), has made the normal positive noises about how Andy Kuipers is the right person for the job.

Northern Rock are being coy about the payoff, and have said the departing Mr Applegarth will be paid “substantially less than the amount which he would otherwise be due.” I suspect that the staff and shareholders who have been rioting in the streets had he been allowed to run the bank into the group and leave with a massive cash bonus (and rightly so – personally, I support big bonuses for people who do well, particularly Entrepreneurs :-), but have a REAL problem with people who expect big bonuses or payoffs for letting companies fail.)

You’ve got to wonder how long either Mr Sanderson or Mr Kuipers will last when the new owners come in? That, I suspect, is a question that only Mr. Branson can answer!

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More SubPrime worries – the Eastern banks are now propping up the Western ones

Posted by markharrison on December 10, 2007

The BBC’s Bob Preston has made some comments that have worried me more than a little.

Firstly, he noted that Swiss giant UBS has just announced FURTHER losses of £4.9 billion due to the subPrime crisis – these are on top of the £1.8 billion it announced in October.

UBS is still standing up OK though, although these losses mean that it will make an overall loss this year, it’s just managed to raise £4.8 billion – not from its own Government (Mr. Darling, take note), but from the Government of Singapore’s Investment Corporation.

To put things in perspective, that’s about 3 times as much money as it looks like Northern Rock is going to end up needing to patch its problems.

UBS’s borrowing is in the form of “convertible shares” – firstly the Singapore Government lends UBS the money – at 9% interest – for two years. Then, at the end of that, it can convert that loan into shares if it wants to. A nice little earner for a government sitting on a lot of cash.

On the other side of the Atlantic, Citigroup has just raised $7.5 Billion – and it is having to pay 11% interst – this time to the Abu Dhabi Investment Authority.

Now, if banks like Citigroup are having to pay 11% interest to borrow money, and even the normally-conservative UBS are paying 9%, it doesn’t bode well for UK borrowers.

Posted in Economics, Property Investment | Tagged: , , , , | 1 Comment »

UK Mortgage Arrangement fees have gone up 87% in the last two years

Posted by markharrison on November 28, 2007

According to a report by Moneyfacts, over the last two years, the average mortgage arrangement fee was:

  •  £441 in November 2005
  • £827 now

That’s an increase of over 87%, which is getting close to having doubled.

The trend behind this has been of lenders wanting to quote low headline rates, but make up their profits by charging such fees. About the worst culprit was Northern Rock,  who have been charging such fees as 3.5% on some mortgages.

In September 2006, I wrote an article on the impact of fees, which was beginning to grow then. You can

What I said at the time is still true. Iwrote:

The way that I decided to treat the fees was to treat them as short-term loans, that had to be paid off during the course of the mortgage.

The difference, of course, is that those fees have got much, much bigger in the interim.

The conclusion I came to last year is something I also still stand by:

You can probably guess the punchline – I STRONGLY recommend that you go and see an independant financial advisor to present you different mortgage options…

… but I also recommend that you sit down with him/her and ask them how they are treating fees when comparing different products.

Posted in Northern Rock, Property Investment | Tagged: , , , | Leave a Comment »