Northern Rock: let it roll
Posted on Monday 17 September, 2007
Filed Under Business
If you or I exceed our overdraft limit, we get hit with a shirty letter and a £25 penalty charge. When Northern Rock effectively does the same thing, chief executive Adam Applegarth taps the Bank of England for an emergency lending facility instead.
The ‘mortgage bank’ – as demutualised building societies like to be known – raised three-quarters of its funds from the money markets rather than savers, and lent it out as aggressively as possible. Loan-to-value ratios of up to 125% were freely available.
Now interbank lending is drying up, and NR cannot refinance its maturing positions. Step forward Mervyn King, doorstep loans merchant to the sink estates of the banking community.
So far this isn’t actually costing the taxpayer anything. The BoE is acting as a lender, not a donor, and expects to get the money back. The question is, are NR’s assets good as collateral for the cash? That’s a judgement call, and I’ve no inside information either way.
But there is no doubt that NR management was wilfully reckless in both borrowing and lending practices. So there are few good reasons why the state should ensure the company’s survival; indeed, there’s one over-riding reason why it shouldn’t.
Of course savers should be compensated. But that’s a job for the Financial Services Authority and its Financial Services Compensation Scheme.
And yes, some 6,000 jobs are at stake. Many of the workforce are members of the company’s share scheme, and will have lost out badly as a result of NR’s plummeting equity price. But workers with financial services skills shouldn’t have too hard a time finding alternative employers.
But ultimately, there is no way of getting round the question of moral hazard. If bankers believe that they will always be saved from the consequences of their own folly, they will continue to act with doltish ineptitude, unable to see further than the trough in which their snouts are so firmly buried.
Applegarth’s wedge last year was something like £1.3m. So much for the mantra that telephone number salaries are justified by the need for British companies to ‘recruit and retain world class management talent’.
If, as expected, NR now gets sold on, the new owners will doubtless see him alright with a suitable golden goodbye. A year later, a brief item in the newspaper appointment columns will inform the world that he has found a new corporate gig on similar remuneration.
While Applegarth’s macroeconomy-of-one will continue to prosper whatever happens, the overall outlook is visibly deteriorating. In an interview with the Financial Times today, former Federal Reserve chief Alan Greenspan predicts a potential double digit fall in US house prices.
That makes recession in the US more likely than not. The real questions are, how bad will it be, and how far will it spread?
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Comments
16 Responses to “Northern Rock: let it roll”
The latest post to the SPGB blog, Socialism Or Your Money Back, has covered the same subject:
Northern Clay
Dave
It’s a bit glib of you to say “workers with financial services skills shouldn’t have too hard a time finding alternative employers”.
5,500 of NR’s 6,000 staff are based in the North East. There are not exactly heaps of white collar jobs up there and job losses will be a real shock to the regional economy, let alone the individuals – who incidentally are mainly members of my union, Amicus.
Dave, you’re just a bankophobia.
Sorry, I meant ‘bankophobe’.
Why exactly are Northern Rock so different to any other former building society that’s become a publicly traded bank?
Are their directors uniquely greedy or imcompetent, or did they just offer better rates on loans than their competitors?
It’s been possible for them to make big profits in the international financial markets for over a decade, so weren’t they just playing by the rules of capitalism more succesfully than their rivals?
Or do you think that Alliance and Leicester, Bradford and Bingley and others will be immune from the credit crunch?
Even Barclays was forced to apply to the Bank of England for an “overdraft facility” last week.
This is no mere re-run of the Equitable Life fiasco.
What’s going on now is a lot more than just a case of managerial greed and incompetence in one bank, it’s an international phenomenon.
Notice how the private equity take-over frenzy is grinding to a halt too.
The credit crunch is a sure sign that capital assets and homes have become overvalued in the preceding boom period.
The much predicted “correction” is upon us and the real question is whether the central banks and state exchequers are capable of buying their way out of a recession.
If not, it may rival 1929 in its depth and repercussions.
The Chancellor, Alistair Darling has just said that the Govt and the BOE will underwrite all the savings of all N/R clientele! and according to ITV News effectively all other banks.Surely this is unprecedented and will be seen in the future as Nu/Labours ERM moment( when sterling crashed out of the Exchange e Rate Mechanism and damaged their ‘reputation’ for fiscal efficiency for a generation.
Oh, what was that about socialism for the rich?
A comment on Scotland Today this evening seems to indicate that NR may be targetted by RBS for takeover.
surely it’s obvious that the Govt and BoE won’t allow ANY single Bank to collapse, under these circumstances?
such a move could lead to a domino effect on other Banks, so they’ll try and stem it at source, pumping in billions if necessary
the Govt, BoE, etc are worried that it could potentially precipitate a major lack of confidence in Banking and bring about a slump
so they will do all that they can, and the billions spent are chicken feed for them when taken against the cost of the consequences of a major slump
I’ve got my fingers crossed for a massive drop in house prices. Do you think it’s likely?
I did too, until I went and bloody bought one at the start of this year (well a flat anyway). But then that’s what this mad property frenzy does – it pits the economic hopes of people often in broadly similar situations against each other. There’s gotta be a better way.
Tom,
well, think about it, it could be worst ?
instead of the the chattering classes bemoaning the cost of a house, now they can complain about the size of their mortgage and how much equity has been lost! dinner parties will never be the same (until the slump)
It is impossible to contain a US recession. If the US goes down, the world economy goes with them and the UK will suffer to some degree.
Consumer confidence is incredibly fragile at the moment and it won’t take much to push our economy onto a downward slope.
‘There’s got to be a better way’. Isn’t that the NatWest advertising slogan?
Dave,
You have great faith in the Financial Services Authority and its Financial Services Compensation Scheme and their ability to compensate savers. Somewhat naive, I think.
For my personal take on this see: http://www.workersliberty.org/node/9197
Bruce
Silly panic the lot of it.
News reports today said there were no queues in the North.
Regional stereotypes seem to prevail even when in panic mode.
Bruce
Now I’ve read the small print re the compensation scheme, which only protects deposits up to £30,000 or so … yes, you’re right. My bad.