northern rocks £14 billion

chewmylegoff

northern rock has been nationalised. the government has three options:

i) put it back into private ownership at some point in the future
ii) keep it as a public bank forever
iii) liquidate it

the government is not in the business of running banks, and liquidation is not exactly a preferable option, as it would probably result in serious loss of public money.

hence the government must ensure that northern rock is a viable business. in order for northern rock to function as a bank, it must make new lending.

Cleaver

chewmylegoff wrote: »

northern rock has been nationalised. the government has three options:

i) put it back into private ownership at some point in the future
ii) keep it as a public bank forever
iii) liquidate it

the government is not in the business of running banks, and liquidation is not exactly a preferable option, as it would probably result in serious loss of public money.

hence the government must ensure that northern rock is a viable business. in order for northern rock to function as a bank, it must make new lending.

I think that summed up nicely in a few words what I've been trying to say for 187 posts. I must learn that skill.

beingjdc

Cleaver wrote: »

I ask this as you speak sense on this and I'm interested, rather than to start an argument. From a very simplistic point of view then, how come they have brought in so much cash in such a short space of time? The defaults have been very small in relative terms.

They made a huge number of loans, and then stopped lending. Their borrowing costs fell as they were borrowing at government rates rather than private sector rates. So if you imagine for the sake of simplicity that in 2007 until the borrowing crisis they had £1bn of debt costing them 0.5% a month, and £1bn of mortgages repaying at 0.6% a month interest, and 0.6% a month capital, and were using that latter 0.6% a month to lever up and lend more, then their cashflow would have been £12mn-£11mn - positive by £1mn.

Now imagine they start borrowing at the Government rate, about .3% a month, and they stop writing new mortgages. Their cashflow is now £12mn-£3mn - positive by £9mn. The fact of nationalisation and going into run-off has improved their cashflow by 800%. Now write off 6% for the borrowers who are going to default. Under nationalisation, that wipes out half a year's cashflow. Under private ownership, even assuming their borrowing costs hadn't spiked, it wipes out their profits for five years - and I've assumed there are no running costs.

chewmylegoff

i was under the impression that the way they have repaid the govt loan so quickly is by setting an extremely uncompetitive SVR and offering no alternatives other than the SVR to people coming to the end of fixed rate deals. hence all the people coming to the end of their discounted 2 year northern rock mortgages are forced to remortgage with other banks - the result being a large cash inflow for northern rock.

thelawnet

avantra wrote: »

Will it make a dent? just about.

Is it smoke and mirrors ? decide for yourself.

14000000000 / 150000 (average house) = 9333 borrowers.

Less than 10,000 , how many repo? = about 40000

You need to be more careful with your zeros.

Just eyeballing the following shows you are wrong
14 billion / 150 thousand
is
14 * 10^9 / 150 * 10^3
or
roughly speaking 15,000 * 10^6 / 150 * 10^3
= approx 100 * 10 ^ 3 i.e. 100,000 borrowers

You could also do it with a calculator, which shows 93,333, not 9,333.

ad9898_3

Looks like the print button has finally been pressed.
Money from.....

1. Deposits 1%
2. Repayments on existing loans 1%
3. Government QE 98%

baileysbattlebus

Northern Rock was able to repay a large amount of it's debt to HMG by "encouraging" a lot of it's borrowers to remortgage elswhere.

From 3rd quarter 2008

The initial priority of the Plan is repayment of the Government loan and Northern Rock is repaying the loan well ahead of target. At 30 September 2008, the net balance outstanding on the loan stood at £11.5 billion (31 December 2007: £26.9 billion; 30 June 2008: £17.5 billion), a reduction of £15.4 billion since the start of the year. The net loan amount is stated after the deduction of Northern Rock’s liquidity deposits held with the Bank of England of £7.1 billion at 30 September 2008 (30 June 2008: £3.5 billion).

http://companyinfo.northernrock.co.uk/investorRelations/results/q3Trade141008.asp


From a Treasury statement 19/01/09

The Government will also consider further ways of addressing the loss of mortgage lending capacity in markets. As a first step, the Government can confirm that Northern Rock is no longer actively pursuing a policy of rapidly reducing its existing mortgage book. Northern Rock is releasing a separate statement on this.

Personally I think it has to be a good thing and 90% mortgages aren't the end of the world, I would imagine a lot mortgage holders started off with a 90 or 95% mortgage, most people don't default even in a recession with 2million and rising unemployed -

I could see mortgage indemnity insurance becoming complusory if you don't have a huge deposit, which would reduce the risk to the lender.

Rochdale_Pioneers

Just to put things in context, Northern Rock's default rate on mortgages was last reported as being 0.4%.

That means that of this £14bn almost all of it goes as proper investments. Which means we as taxpayers make a profit.

avantra

chewmylegoff wrote: »

northern rock has been nationalised. the government has three options:

i) put it back into private ownership at some point in the future
ii) keep it as a public bank forever
iii) liquidate it

the government is not in the business of running banks, and liquidation is not exactly a preferable option, as it would probably result in serious loss of public money.

hence the government must ensure that northern rock is a viable business. in order for northern rock to function as a bank, it must make new lending.

Ding dong ! we have a winner!
And the 2nd option is to sell the debt to someone else:

http://www.guardian.co.uk/business/2009/feb/22/northern-rock

So that is what they were heading to, a proper gov bank - lending.

Graham_Devon

Cleaver wrote: »

How is it 'down the drain'? Did you not understand the story?

Easy. Look at all the other banks. Not lending. If that doesn't tell you that something is wrong, then what does?

A government owned bank lending because all other business's are not does not make it a good thing. It makes it a massive risk to the taxpayer.....the very reason banks got in this situation, and something Northern Rock has already been through once, and is about to do it again.

However, they won't go down this time. They will just keep creaming from the taxpayer.