Latest On Crock Crisis

December 18, 2007 5:05 PM


Darling's the one in the cap


Today, Chancellor Darling has extended the taxpayers' guarantee to virtually all Northern Rock's borrowings: retail deposits, wholesale deposits, unsecured borrowing, secured borrowing where the security actually turns out to be insufficient, collateralised and uncollaterised derivatives, onshore and offshore. The whole kit and caboodle.


Which totals c £100bn.


Or £4,000 for every household in Britain.


(Yes, the HMT press release excludes subordinated debt, but that's only a few billion; and yes, it theoretically excludes the £40-£50bn still borrowed through the offshore securitised Granite programme- but only so long as Granite can carry on rolling over its borrowings... which it will only do with that HMG guarantee).


So now we're formally guaranteeing a bank that remains fully owned by shareholders. It requires a breathtaking disregard for taxpayers' interests to even contemplate such a situation. Our bungling rulers are giving us the worst of both worlds- we bear all the downside but any upside goes elsewhere.


Since we last looked at Northern Rock a week ago, things have got worse for taxpayers on a number of fronts:


Bid progress... minimal


The two bids from Branson and Luqman Arnold are still out there, but are looking shakier by the day. Arnold has now been forced to promise more equity capital, but it's only £200m more- peanuts in the current situation. And his promised total equity injection is still less than Branson's. Against that, NR shareholders prefer Arnold, and reckon Branson's management team has been weighed and found wanting.


In terms of we taxpayers getting our money back, neither bid looks credible. A "City Expert" told the Sunday Times:


“The basic problem is that the banks don’t have a lot of money available, and both Branson and Arnold are finding it difficult to get support. The two bidders are pretty lightweight. Branson is the nearest thing in the business world to Princess Diana.”


The Treasury is so worried it's appointed Goldman Sachs to assemble a financing package that would be available to either bidder. Sounds like a long-shot, and taxpayers should also remember that super-smart Goldmans are not known for working on a charitable basis. Who will pay them, we wonder...


Finance... not available


With all major Western banks under the credit cosh, the chances of them stumping up even £10-15bn are diminishing. And for taxpayers, that's not enough anyway. We are in the hole for a loan now approaching £30bn.


Deposit and borrowing guarantee... boxed in


Even before today's announcement, taxpayers were on the hook for the Treasury's 100% NR deposit guarantee, and as we blogged previously, there's a real question over whether the Crock can survive without it- even after a sale. Last week we noted that Branson's presence had apparently stopped the haemorrhage of NR's retail deposit base, which was encouraging. But latest reports say that it's started again.


Make no mistake- the guarantee means taxpayers are exposed to the risk, just as much as with a continuing loan.


Mortgage assets... heading South


We were initially assured NR's £90bn mortgage loan book was of unimpeachable quality- as safe as houses. Now we know it's showing signs of "credit impairment" (eg see this blog), and the latest dire news on the housing market means it can only get worse. Much worse. Which of course is precisely why the commercial banks are wielding those 20 foot bargepoles so vigorously.


Non-mortgage assets... heading South


In September NR told us their £15bn of non-mortgage assets were all super-high quality:


"Northern Rock invests in high quality and well diversified assets... Northern Rock only has a £75 million direct exposure to the US sub-prime market which is all rated AAA, and a £200 million exposure to the US CDO market, within which there is indirect exposure to US sub-prime. Of the £275 million combined exposure, £193 million is rated AAA. We also have £325 million of investments in a number of Structured Investment Vehicles (SIVs)."


AAA huh? Just three months later we learn they've written down their SIVs by more than one-third (£118m) and their CDOs by two-thirds (£130m). Taxpayers- most of whose exposure is unsecured (see previous blogs)- should be alarmed.


Shareholders... demanding recompense from taxpayers


According to the Telegraph, the disappointed hedge funds that bought into the Crock in the hope of a quick killing, may now demand a direct payment from taxpayers:


"A nationalisation of the bank could force the Government to pay £1.7bn to Northern Rock's shareholders, including Rab Capital and SRM Global, the hedge funds that bought big stakes in the bank after its problems became apparent.


SRM's Jon Wood is understood to have received legal advice indicating that precedents across Europe suggest the Government would need to pay no less than £4.10 a share to nationalise the bank - equivalent to Northern Rock's book value."


Shark is as shark does. But who reckons we can depend on Darling and Brown to defend us?


Decisive action... forget it


When we first blogged the Crock three months ago, we said:


"Darling has emerged from his hole to assure us there's no need to worry... We taxpayers should be anything but calm. What if the collateral against which we're now lending to NR turns out to be worth less than NR claim? How confident can we be about the value of those highly geared mortgages in an environment of rising rates and (probably) falling house prices? What about their £15.4bn of other assets, including exposure to CDOs, SIVs, and SIV-lites (see this blog)- how secure are they? The answer is nobody knows- which is precisely why the money markets no longer want to lend to them.


Of course, there's no way NR can now maintain its independence... No doubt "the authorities" are right now frantically trying to strongarm someone into taking them over. And no doubt the possible buyers are saying they will need some form of government guarantee on that dodgy loan book. And maybe the authorities will offer some form of... what shall we say... douceur.


But there's one thing we must be absolutely insistent on. Before taxpayers are required to shell out a bean, the NR shareholders must lose everything. As we argued here, they've had the upside, and now they must pay the price."


We were wrong about only one thing: when we said "no doubt "the authorities" are right now frantically trying to strongarm someone into taking them over", we were being wildly optimistic. The "authorities" have been totally stymied by Brown's crisis of morale. They are incapable of making decisions about anything that matters.


And as for Darling's half-baked idea that henceforth decisions on banking crises should be made by a Cobra-style committee headed by ministers, it would be hilarious in any other circumstances. Can anyone seriously imagine that bunch of spineless incompetents making decisions about difficult and risky stuff like this? Photo ops and wasting our money, sure. But sorting out a banking crisis?


Personally, I'd rather trust details of my name, rank, and bank account to Her Majesty's Revenue and Customs.


Darling's the one in the cap


Today, Chancellor Darling has extended the taxpayers' guarantee to virtually all Northern Rock's borrowings: retail deposits, wholesale deposits, unsecured borrowing, secured borrowing where the security actually turns out to be insufficient, collateralised and uncollaterised derivatives, onshore and offshore. The whole kit and caboodle.


Which totals c £100bn.


Or £4,000 for every household in Britain.


(Yes, the HMT press release excludes subordinated debt, but that's only a few billion; and yes, it theoretically excludes the £40-£50bn still borrowed through the offshore securitised Granite programme- but only so long as Granite can carry on rolling over its borrowings... which it will only do with that HMG guarantee).


So now we're formally guaranteeing a bank that remains fully owned by shareholders. It requires a breathtaking disregard for taxpayers' interests to even contemplate such a situation. Our bungling rulers are giving us the worst of both worlds- we bear all the downside but any upside goes elsewhere.


Since we last looked at Northern Rock a week ago, things have got worse for taxpayers on a number of fronts:


Bid progress... minimal


The two bids from Branson and Luqman Arnold are still out there, but are looking shakier by the day. Arnold has now been forced to promise more equity capital, but it's only £200m more- peanuts in the current situation. And his promised total equity injection is still less than Branson's. Against that, NR shareholders prefer Arnold, and reckon Branson's management team has been weighed and found wanting.


In terms of we taxpayers getting our money back, neither bid looks credible. A "City Expert" told the Sunday Times:


“The basic problem is that the banks don’t have a lot of money available, and both Branson and Arnold are finding it difficult to get support. The two bidders are pretty lightweight. Branson is the nearest thing in the business world to Princess Diana.”


The Treasury is so worried it's appointed Goldman Sachs to assemble a financing package that would be available to either bidder. Sounds like a long-shot, and taxpayers should also remember that super-smart Goldmans are not known for working on a charitable basis. Who will pay them, we wonder...


Finance... not available


With all major Western banks under the credit cosh, the chances of them stumping up even £10-15bn are diminishing. And for taxpayers, that's not enough anyway. We are in the hole for a loan now approaching £30bn.


Deposit and borrowing guarantee... boxed in


Even before today's announcement, taxpayers were on the hook for the Treasury's 100% NR deposit guarantee, and as we blogged previously, there's a real question over whether the Crock can survive without it- even after a sale. Last week we noted that Branson's presence had apparently stopped the haemorrhage of NR's retail deposit base, which was encouraging. But latest reports say that it's started again.


Make no mistake- the guarantee means taxpayers are exposed to the risk, just as much as with a continuing loan.


Mortgage assets... heading South


We were initially assured NR's £90bn mortgage loan book was of unimpeachable quality- as safe as houses. Now we know it's showing signs of "credit impairment" (eg see this blog), and the latest dire news on the housing market means it can only get worse. Much worse. Which of course is precisely why the commercial banks are wielding those 20 foot bargepoles so vigorously.


Non-mortgage assets... heading South


In September NR told us their £15bn of non-mortgage assets were all super-high quality:


"Northern Rock invests in high quality and well diversified assets... Northern Rock only has a £75 million direct exposure to the US sub-prime market which is all rated AAA, and a £200 million exposure to the US CDO market, within which there is indirect exposure to US sub-prime. Of the £275 million combined exposure, £193 million is rated AAA. We also have £325 million of investments in a number of Structured Investment Vehicles (SIVs)."


AAA huh? Just three months later we learn they've written down their SIVs by more than one-third (£118m) and their CDOs by two-thirds (£130m). Taxpayers- most of whose exposure is unsecured (see previous blogs)- should be alarmed.


Shareholders... demanding recompense from taxpayers


According to the Telegraph, the disappointed hedge funds that bought into the Crock in the hope of a quick killing, may now demand a direct payment from taxpayers:


"A nationalisation of the bank could force the Government to pay £1.7bn to Northern Rock's shareholders, including Rab Capital and SRM Global, the hedge funds that bought big stakes in the bank after its problems became apparent.


SRM's Jon Wood is understood to have received legal advice indicating that precedents across Europe suggest the Government would need to pay no less than £4.10 a share to nationalise the bank - equivalent to Northern Rock's book value."


Shark is as shark does. But who reckons we can depend on Darling and Brown to defend us?


Decisive action... forget it


When we first blogged the Crock three months ago, we said:


"Darling has emerged from his hole to assure us there's no need to worry... We taxpayers should be anything but calm. What if the collateral against which we're now lending to NR turns out to be worth less than NR claim? How confident can we be about the value of those highly geared mortgages in an environment of rising rates and (probably) falling house prices? What about their £15.4bn of other assets, including exposure to CDOs, SIVs, and SIV-lites (see this blog)- how secure are they? The answer is nobody knows- which is precisely why the money markets no longer want to lend to them.


Of course, there's no way NR can now maintain its independence... No doubt "the authorities" are right now frantically trying to strongarm someone into taking them over. And no doubt the possible buyers are saying they will need some form of government guarantee on that dodgy loan book. And maybe the authorities will offer some form of... what shall we say... douceur.


But there's one thing we must be absolutely insistent on. Before taxpayers are required to shell out a bean, the NR shareholders must lose everything. As we argued here, they've had the upside, and now they must pay the price."


We were wrong about only one thing: when we said "no doubt "the authorities" are right now frantically trying to strongarm someone into taking them over", we were being wildly optimistic. The "authorities" have been totally stymied by Brown's crisis of morale. They are incapable of making decisions about anything that matters.


And as for Darling's half-baked idea that henceforth decisions on banking crises should be made by a Cobra-style committee headed by ministers, it would be hilarious in any other circumstances. Can anyone seriously imagine that bunch of spineless incompetents making decisions about difficult and risky stuff like this? Photo ops and wasting our money, sure. But sorting out a banking crisis?


Personally, I'd rather trust details of my name, rank, and bank account to Her Majesty's Revenue and Customs.

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