Northern Rock

Mr Griffiths later report does seem quite so dramatic. Maybe someone told him (or his editor) the facts.

Revenue streams made liquid
Ian Griffiths The Guardian Friday November 23 2007
Securitisation is the process used by a company to convert illiquid non-tradeable assets into financial instruments that can be easily bought and sold. The process has been at the heart of Northern Rock's funding strategy for many years. It has raised more than £70bn to finance its operations through securitisation of its mortgage portfolio.

Securitisation can be used with either assets or income streams. Mortgages are regarded as ideal securitisation material because they are backed by the property assets and produce a steady income derived from the repayment programme.

First, Northern Rock packages together a pool of appropriate mortgages. These are then sold to a special purpose vehicle established simply to hold the mortgages. Northern Rock uses an offshore trust to hold the mortgages.

The trust then uses separate subsidiary companies to organise and market a series of issues of financial instruments such as bonds and loan notes. These instruments are underpinned by the portfolio of mortgages.

International investors are invited to purchase these securities, which offer a set monthly income generated from the repayments made by homeowners on their mortgages. The securities can be traded in financial markets and will be bought back at some fixed point in the future.

The benefit for Northern Rock is that it can raise significant funds but retain a relationship with its customers. Although it does not own the mortgages, it acts as a collection and administration agent, performing those tasks in return for a fee. The complex structure it uses also allows the company to retain the mortgages as assets on its balance sheet.
 
That's OK, then TS. Thanks for taking the time to go and investigate how the first journalist got it so wrong.

I assume then that HMG's (I mean our) money is as safe as houses then.
 
Ah, I wonder if he got rollocked then by the government for publishing the first piece (isn't The Guardian a Labour paper?) and was asked to do a quick backtrack in his second article. :suspect: Just a thought! :)
 
TS, has The BoE first call on all of NR's assets or are there other lenders involved too that will be looking for repayment of their loans? There appears to be some assets that are clearly held offshore. Do BoE have a call on these assets too ?
 
Treasury draws up Rock contingency plan
By Chris Giles and Jane Croft

Published: December 3 2007 23:02 | Last updated: December 3 2007 23:02

Treasury and Bank of England officials are drawing up contingency plans to pay Northern Rock’s depositors their money if the stricken lender has to be put into administration.

The plan would see the central bank buying Northern Rock’s deposits and swiftly paying the balances back to customers.

In depth: Northern Rock - Sep-17Lombard: Let's hope the Rock’s looking glass auction stays intact - Dec-03Darling asks Rock to consider rival bids - Dec-02JC Flowers makes new ‘flexible’ Rock bid - Nov-30Contrasting characters battle on Rock face - Nov-30Lex: Valuing Northern Rock - Nov-30If Northern Rock’s shareholders or bidders make demands on taxpayers’ money that the authorities regard as unreasonable, preparations are being finalised to withdraw the government’s financing of the bank and take control of savers’ deposits.

The Treasury and Bank stress that they want a successful acquisition of Northern Rock, but are aware they need a credible backstop in case negotiations over a sale fall through.

Northern Rock is thought to have drawn up plans if the bid process comes unstuck although a person familiar with the situation said the bank was concentrating its efforts on the bid process. One of the prerequisites of allowing the bank to fall into administration or nationalising it would be to pay depositors their money back as soon as possible.

The Treasury gave a 100 per cent guarantee on all retail and wholesale deposits in September to stop the run on Northern Rock. But it had always been unclear how that guarantee would work in practice.

Now the authorities think they are close to having a workable system. Even though an independent administrator would oversee any insolvency process, the authorities believe that he or she would accept the offer of cash in return for the deposits since it would leave the bank’s creditors in the same position as holding frozen savers’ deposits.

The Treasury and the Bank know they cannot be certain that the Virgin bid, or those by Cerberus or JC Flowers, the private equity groups, will succeed.

Although Virgin has been named as preferred bidder, Northern Rock has been meeting other bidders. On Monday night, its advisers met JC Flowers to discuss a revised proposal. Cerberus has also made a fresh proposal and Olivant, the private equity group led by Luqman Arnold, is due to submit a proposal as early as Tuesday.

Meanwhile, it has emerged that Virgin Money is seeking a new advertising agency after RKCR Y&R stepped aside because it also has Lloyds TSB as a client.
Copyright The Financial Times Limited 2007
 
According to The Evening Standard

Warning over Rock rescue toll on taxpayer
Hugo Duncan, Evening Standard
17.12.07 Related Articles
The nationalisation of Northern Rock could plunge the public finances into disarray and destroy Gordon Brown's reputation on the economy.

Experts today warned that if the stricken Newcastle bank is saved by the Government rather than a private bidder, the £25 billion loan from the Bank of England would end up being left on the Treasury's books.

That could send public-sector net debt rocketing and push it above 40% of gross domestic product - breaking one of Brown's key fiscal rules, the sustainable investment rule, which dictates debt should be kept at "a low and sustainable level".

It would be a major embarrassment for the Prime Minister, whose reputation for economic competence, built up while he was Chancellor, is in danger of collapsing.

Carl Emmerson, deputy director at the Institute for Fiscal Studies, said the nationalisation of Northern Rock would put enormous strain on the public finances.

"Northern Rock may turn out to do well but it may turn out to do badly," he said. "At the moment, that risk is held by private-sector shareholders. It would be held by the taxpayer instead."

The Government was today under growing pressure to reveal how much the rescue of Northern Rock will cost the taxpayer.

As well as underwriting the loan from the Bank of England, the Government has guaranteed savers' deposits of as much as £24 billion.

The Treasury has also hired investment bank Goldman Sachs and law firm Slaughter and May as advisers, with fees likely to be millions. A nationalisation could also force the Government to pay as much as £1.7 billion - 410p a share, equivalent to Northern Rock's book value - to shareholders.

The Treasury today insisted a private rescue of the bank was still its preferred option. If a private sale goes ahead, the successful bidder is likely to pick up the fees charged by the Treasury's advisers and repay the Bank of England loan.

However, there are serious doubts over the proposals put forward by Olivant, the consortium led by former Abbey boss Luqman Arnold, and Sir Richard Branson's Virgin Money.

Even if Arnold or Branson is successful, both have proposed only to pay back about half the Bank loan immediately - leaving the taxpayer liable for the rest for at least two or three years.

It is still unclear how the Treasury plans to treat any money it uses to save Northern Rock in the public accounts.

Conservative MP Michael Fallon, a senior member of the Treasury Select Committee, has written to Sir John Bourn, head of the National Audit Office, to rule on how the liabilities should be treated in the public accounts.

He has also tabled a question to Chancellor Alistair Darling, asking what fees have been paid to date to Goldman Sachs and Slaughter and May. The Treasury declined to comment.
 
<< The nationalisation of Northern Rock could plunge the public finances into disarray and destroy Gordon Brown's reputation on the economy. >>

That's really funny. What reputation? - the country's finances have been 'in disarray' for years
Chickens coming home to roost now, amazed it's taken so long
 
Originally posted by Bar the Bull@Jan 20 2008, 10:18 AM
In what way are the government's finances in disarray?
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Last year government spending was 44.7 percent of GDP. On top of that there was a budget deficit of 3pc of GDP and a current account deficit nearing 5.7pc of GDP in the last quarter. Both sets of figures are now the worst of any major OECD economy.

This year our ever increasingly bloated public sector will grow larger than Germany's for the first time since before Thatcher came to power.

The tax and spend policies of this Chancellor/PM have seen Britain slip out of the ranks of fully "free" countries in this year's Heritage Index of Economic Freedom.

I don't know that the finances are in "disarray", but to my eyes they are not good numbers.

Sources: Office of National Statistics, the Telegraph and the Heritage Index of Economic Freedom.
 
the Heritage Index of Economic Freedom.
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A US conservative think-thank?

WWRD_hp_earmarks.jpg
 
Yes - but its scoring method is interesting nonetheless.

The reason I quoted it as a source was to avoid be "outed" later. The same as the Telegraph really!!!
 
Only 1% of GDP is borrowed by the UK at present. If anything, I think that this is too low, given that borrowings have been available on the cheap for the past few years.

Looking at one figure in isolation makes very little sense. Budgeting is done over a fiscal cycle. The government expects to meet the golden fiscal rule– that the current budget be at least in balance – over the next cycle, just as it has done over the last one. The current budget is forecast to go into a surplus of 0.2 per cent of GDP in 2008-09, from a deficit of 0.7 per cent of GDP this year and remain in surplus thereafter. Equally, public sector net debt is expected to remain just below 39 per cent of gross domestic product throughout the forecast period.

What is wrong with having a large public sector?

I know nothing of this free index. I doubt many people care, to be honest.

Britain is the second richest G8 country. As Chancellor, Brown presided over a stable period of economic growth. He has done a lot better a job of distributing money to the less fortunate of society than any of his predecessors. And this at a time when the divergence in income levels in the UK is massive.
 
Originally posted by Bar the Bull+Jan 20 2008, 02:16 PM--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td>QUOTE (Bar the Bull @ Jan 20 2008, 02:16 PM)</td></tr><tr><td id='QUOTE'>What is wrong with having a large public sector?[/b]
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On a macro level it is hardly conducive to a dynamic economy. On a personal level I would rather spend my own money. The inefficencies and lack of innovation of government-controlled services and industries are proved through history. But you understand this better than me.

<!--QuoteBegin-Bar the Bull@Jan 20 2008, 02:16 PM
The government expects to meet the golden fiscal rule[/quote]
Really? I would suggest that self-preservation and the determination to hold on to power (as is seen cyclically by either colour of administration as it approaches the natural conclusion of its occupancy) would see this expectation sacrificed. At the end of the day, five more years of power depends not on them expecting to meet something, rather the public perception that they expect to meet it.
 
Originally posted by Bar the Bull@Jan 20 2008, 10:18 AM
I have just seen Headstrong's post from the 18th now.
In what way are the government's finances in disarray?
There is a long way to go, but the Northern Rock situation seems to be getting sorted.
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I think we are living on different planets :nuts:

Was amused to read this in the Telegraph Business section, written a few days ago by their chief business editor/commentator:

Rock shambles is a tragedy of serial delusions By Jeff Randall:

www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/16/ccrandall116.xml


And please don't tell me I don't understand banking. Some people who undeniably do, agree with me.
From the article:

<< I was never a fan and became a serious doubter when reading research notes from Jonathan Pierce, the banking analyst at CSFB, who has long been forecasting death on the Rock. As far back as December 2004, Pierce warned: "Northern Rock's problem is that it has a more aggressive approach to recognising revenue than most of the sector."
All last year, CSFB was urging clients to sell the Rock's shares. As the price went down and down, Pierce simply reiterated his negative stance. He is one of only a few to emerge from this fiasco with an enhanced rating. >>
 
I still fail to understand why Northern Rock was rescued by the government. They failed and the market would have killed them which is exactly what was supposed to happen, now other companies will expect the same treatment. Dolcis and Ponden Mill have gone into administration in the last fortnight, where is the help for them?
 
I know next to nothing about the ins and out of the Northern Rock case however it seems pretty obvious to me that the answer to your question OB is that Northern Rock going under would financially ruin a large chunk of the British public who have invested in them and have mortgages/savings et al with them - running into the hundreds of thousands of people, possibly. I'm sure it's no great loss that they could no longer buy their shoes in Dolcis however and it certainly wouldn't bankrupt large chunks of the population.
 
But in a free market it shouldn't matter whether a company is big or small, they exist in the private sector so they must have the same rules, Northern Rock being bailed out by the Government is wrong. The 2 companies I named have over 400 stores between them, that is approx 2500 people without jobs if they go under. Will they have any help from the government? Of course not because they are failing businesses and are paying the price for it. There can't be an exception, all businesses must play by the same rules.
 
You have missed my point entirely. I said nothing whatsoever about the size of the company.

However, in Northern Rock's case, yes, you have the same example as Dolcis, with the staff out of work - but with the added liability of the hundreds of thousands of people in the UK who have mortgages/investments etc in or with Northern Rock. So it goes under - how many thousands of people lose their homes, life savings, pensions et al in such an instance, on top of the amount of staff who have lost their jobs? How many thousands, if not hundreds of thousands of people will face bankruptcy if they lose all their financial assets? This is, IMO, the prime reason that the government have stepped in to help NR - it's a bank with far wider economical implications than a shoe shop closing its doors. Someone can explain this better than me I'm sure but it seems obvious to a blind man to me.
 
They lived by the sword and they should die by the sword, they had a flawed busiess plan and deserve to go bust. If people invested without researching the company they don't deserve any sympathy if the bank goes bust. The fact that many people chose to reflects their own stupidity, how many people who invested in BCCI got their money guaranteed by the governmet?
 
Originally posted by Colin Phillips@Jan 20 2008, 08:32 AM
What's the latest view on the Northern Rock situation, Kathy?
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It's headline news now, Colin so best I leave people to make up their own minds. :)
 
The people who had mortgages with NR don't deserve to go bankrupt. You don't demand to see business plans before you take out a mortgage with a bank. Don't talk such utter shite, Ovverbruv.

The NR situation has far wider implications on the economics of this country than a sodding shoe shop going bust and to say otherwise is laughable and ridiculous.
 
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