Just taking stock

StevieJ

mewbie wrote: »

Oh I see. Either it was Preston's irresponsible reporting or the US. Deffo not Applegarth at fault then.

They went bust because they couldn't borrow money to fund the business.
Apologies for introducing some facts


Northern Rock was the darling of the UK mortgage sector, but fuelled its rapid growth by borrowing in money markets and selling on its mortgage debts rather than customer deposits.
The eruption of the credit crunch in August 2007 as banks clamped down on risks shattered its business model and forced it to seek emergency aid from the Bank of England

http://money.uk.msn.com/investing/articles/morecommentary/article.aspx?cp-documentid=14245119

mrposhman

mewbie wrote: »

Oh I see. Either it was Preston's irresponsible reporting or the US. Deffo not Applegarth at fault then.

Just had a quick look at their 2007 accounts.

They reported an operating profitof over £400m but the decline in cashflow in the year was astronomical. It only looks okish because of the circa £28bn received from the government. If you have a look at the cash flow statement you will see a line called

Net (decrease)/increase in amounts due to customers.

In 2006 this showed positive cashflow of just over £3bn meaning that more deposits than withdrawals went into the bank. In 2007 this was over £15bn negative indicating more withdrawals than deposits.

They may well have overstretched their business model and hence the reason they are downsizing (too far imo) but the reason for the collpase was NOT DUE TO THE BUSINESS MODEL perse in terms of who they lent to but just how they funded the loans / mortgages.

Clearly there was something wrong in terms of funding but had a run not happened they would not have collapsed imo.

tomterm8

I'm sorry, but the reason that people were withdrawing their money was people thought the bank was well and trully rupt.

Lets not get into revisionist history, Preston wouldn't have libeled a healthy bank, and I remember the share price plumeting months before Preston mentioned it.

mrposhman

tomterm8 wrote: »

I'm sorry, but the reason that people were withdrawing their money was people thought the bank was well and trully rupt.

Lets not get into revisionist history, Preston wouldn't have libeled a healthy bank, and I remember the share price plumeting months before Preston mentioned it.

Read what I said, there was clearly something wrong with their cashflow management in terms of how they funded their mortgage lending but this was not what ensured the bank collapsed.

tomterm8

mrposhman wrote: »

Read what I said, there was clearly something wrong with their cashflow management in terms of how they funded their mortgage lending but this was not what ensured the bank collapsed.

I did read what you said. Then, i disagreed with it. The run was caused by their cashflow management. In essence, prior to preston, the wholesale market stopped funding Northern Rock. Without a run, they were still bankrupt...

It doesn't show up in the accounts for obvious reasons. By the time the accounts for the period were written, the government had stepped in with a guarantee for all northern Rock debt. The bank of england was funding Northern Rock's short term debt, and the wholesale market was open to them because they were a GSE not a bank. So the accounts look good... all you see is the fact that £15 billion of withdrawls say otherwise.

mrposhman

tomterm8 wrote: »

I did read what you said. Then, i disagreed with it. The run was caused by their cashflow management. In essence, prior to preston, the wholesale market stopped funding Northern Rock. Without a run, they were still bankrupt...

It doesn't show up in the accounts for obvious reasons. By the time the accounts for the period were written, the government had stepped in with a guarantee for all northern Rock debt. The bank of england was funding Northern Rock's short term debt, and the wholesale market was open to them because they were a GSE not a bank. So the accounts look good... all you see is the fact that £15 billion of withdrawls say otherwise.

Yes I understand that the decrease in wholesale market funding hurt them but they were being offered funding from the BOE. They may have been bankrupt but so have most western carmakers for years and the remainder of the UK banks had to capitalise in order to gain additional cashflow.

Their cashflow management was well and truly damaged but it was the wholesale removal of cash through the run on the bank that led to the collapse.

Both Lloyds and RBS went through the same issues but have not collapsed and that was mainly due to there being a lack of a run. Had their been a run then they probably would have followed.

I agree that they were badly wounded (maybe terminally) but we won't know whether or not they would have collapsed had the run not occurred.

They were damaged by the lack of liquidity but the fatal blow was that caused by the queues outside of NR branches in 2007.

I'm not saying that their management aren't liable for any of this as they were the ones that created unsustainable growth levels through their highly rapid growth.

StevieJ

tomterm8 wrote: »

I did read what you said. Then, i disagreed with it. The run was caused by their cashflow management. In essence, prior to preston, the wholesale market stopped funding Northern Rock. Without a run, they were still bankrupt...

.

As I said, the collapse of NR was nothing to do with UK sub-prime.

tomterm8

StevieJ wrote: »

As I said, the collapse of NR was nothing to do with UK sub-prime.

So, you think that highly professional market traders decided to just stop funding Northern Rock for no reason? Remember, they stoped funding Northern Rock before Preston even knew anything about it. It was the report on the BBC that NR had saught funding from the Bank of England that precipitated the run. Stock prices had been falling quite dramatically before that.

Northern Rock never had much exposure to US sub-prime.

Basically, lehman woke the market up, and made it reevaluate a lot of banks. But the reason for the shut down of Northern Rocks funding was that the wholesale markets didn't trust its loan book.

Was that distrust fair? Possibly not. But markets are supposed to be forward looking.

mrposhman wrote: »

Both Lloyds and RBS went through the same issues but have not collapsed and that was mainly due to there being a lack of a run. Had their been a run then they probably would have followed.
.

The survival of Lloyds and RBS comes down to a political decision: the government chose to recapitalise both. They chose to guarantee all deposits before a run could start, for the period when banks were in danger. They needed a scapegoat for the extraordinary measures, and Northern Rock was available.

And I must admit, I consider both RBS and Lloyds to be GSE rather than private banks... in many ways, they are being supported by implicit promises that the UK government will step in to repay any private debt.

StevieJ

I am not interested in what Preston said, the wholesale markets shrunk for all banks, it was just that the banks that were dependent on them most were the one hit worst as in Northern Rock. It was nothing to do with their loan book but everything to do with the way they financed it. The shrinking of the available finance on wholesale markets was obviously a by-product of the CDO mess and it's roots in the US sub-prime market.

mrposhman

StevieJ wrote: »

I am not interested in what Preston said, the wholesale markets shrunk for all banks, it was just that the banks that were dependent on them most were the one hit worst as in Northern Rock. It was nothing to do with their loan book but everything to do with the way they financed it. The shrinking of the available finance on wholesale markets was obviously a by-product of the CDO mess and it's roots in the US sub-prime market.

I would tend to agree. The NR business model could have worked had they ensured that they grew at a slower rate than they did and hoarded more capital instead of loaning more and more and getting by through the use of wholesale markets.