Question Time

pqrdef

CLAPTON wrote: »

So for example, in the case of Northern Rock it wasn't 125% lier loans that caused it to fail: it was the seizing up of credit in the whole inter banking system that caused it to fail

The seizing up of credit would only have caused a liquidity problem. And at first we were told that's all it was. Not bust, still solvent, sound balance sheet, just a cashflow problem.

But as Warren Buffett said, when the tide goes out you see who's swimming naked. Turned out they were bust after all. The mortgage book wasn't worth what it was booked at. The losses and expected losses on the lending business would have had to come out on the balance sheet eventually, with or without a credit crunch.

So now there's a good bank and a bad bank. The good bank is solvent enough to be sold, and the bad bank owes the government more money than it will ever be able to pay.

pqrdef

IronWolf wrote: »

Who would have had the balls to stand up in 2006 and say "right, we are making it law to have a 20% deposit on a mortgage and maximum loan 3x salary. We're also making it illegal for UK banks to have more than 100 derivative contracts"

Yes, no politician would have stopped the party.

But if you'd had to pick the sort of guy who just might have, you'd have had to go for a dour lugubrious joyless Scottish son of the manse with a thing about prudence.

Just goes to show that nobody is immune from corruption by the political process.

CLAPTON

Loughton_Monkey wrote: »

Maybe not.

Although it was probably the Fanny & Freddy lot in USA that were the prime culprits, it was well known which of the UK mortgage lenders was most likely to hand out a £250K mortgage on a £125K BTL to some some cleaner earning £9K plus benefits.... It was Northern Rock. They've always sailed too close to the wind.

Hence NR was singled out for queues of all the depositors wanting (literally) to 'see' the colour of their money. Due to fractional reserve banking, as we all know, no bank can do that for more than 10% of their customers.

Could have been Barclays. Or Santander. Or Natwest. They would all have struggled.

Still. Brother Brown saved the world. That's all history.

I'm not sure any regulation can really cover this in the future. Imagine "Angel Bank" [we are as good as gold...] who lends only on owner occupied brick & mortar properties. Max 60% LTV and max 2Xsalary.... Safe as houses!

But if Mr & Mrs Panic and all the other depositors want to withdraw, then it's the same problem, really. So it's back to handing your £25K lump sum to Barclays to put in their safe, and pay them for the priviledge!

you seem to be agreeing with me that the proposed 'solutions' (separate investmnet banking from retail banking) would have made absolutely NO difference to the collapse of Northern Rock

CLAPTON

pqrdef wrote: »

The seizing up of credit would only have caused a liquidity problem. And at first we were told that's all it was. Not bust, still solvent, sound balance sheet, just a cashflow problem.

But as Warren Buffett said, when the tide goes out you see who's swimming naked. Turned out they were bust after all. The mortgage book wasn't worth what it was booked at. The losses and expected losses on the lending business would have had to come out on the balance sheet eventually, with or without a credit crunch.

So now there's a good bank and a bad bank. The good bank is solvent enough to be sold, and the bad bank owes the government more money than it will ever be able to pay.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7923707/Northern-Rocks-bad-bank-makes-a-profit-good-bank-a-loss.html

quote
The "bad bank" - Northen Rock (Asset Management) - made a £349.7m profit in the six months to June 30, compared with a £724.2m loss in the same period last year.
This was because borrowers, helped by low interest rates, have been able to meet payments on 90pc of its mortgages.

Northern Rock plc, the "good bank", made a £142.6m first-half loss, which could hamper Government plans for a quick sale of the business to the private sector.

The 'good bank' has been hit because the income it receives from its £10bn of mortgages is not enough to cover interest it has to pay on £20bn of deposits.

It made £191.7m from mortgages payments but had to pay £240.1m to savers.


end quote





so it appears that the 'bad bank ' is in profit

and the 'good bank' is in loss

in any event separately 'investment' and 'retail' would have made no difference whatsoever.

HAMISH_MCTAVISH

pqrdef wrote: »

The seizing up of credit would only have caused a liquidity problem. And at first we were told that's all it was. Not bust, still solvent, sound balance sheet, just a cashflow problem.

But as Warren Buffett said, when the tide goes out you see who's swimming naked. Turned out they were bust after all. The mortgage book wasn't worth what it was booked at. The losses and expected losses on the lending business would have had to come out on the balance sheet eventually, with or without a credit crunch.

So now there's a good bank and a bad bank. The good bank is solvent enough to be sold, and the bad bank owes the government more money than it will ever be able to pay.

Absolute nonsense.

1. There is no such thing as "only" a liquidity problem. Thousands of profitable businesses go bankrupt every year because of cashflow problems. A liquidity problem will kill a business just as surely as a profitability problem. And is usually harder to fix.

2. As has been pointed out, Northern Rock is a classic example. Northern Rock would have weathered the storm just fine had it not suffered a liquidity crisis. Even the "bad bank" has now returned to profitability. The underlying loan book assets, even though they represent the worst of UK lending, are still profitable and will remain so.

3. NO bank can survive a bank run without being bailed out or backstopped by the government. The fractional reserve banking system guarantees that there are always more claims on money in existence than there is money to satisfy those claims. Northern Rock only proves that a liquidity crisis is fatal.... Even if NR had only loaned 75% LTV at 3 times income for the last decade, it would have suffered the same fate.

Graham_Devon

HAMISH_MCTAVISH wrote: »

2. As has been pointed out, Northern Rock is a classic example. Northern Rock would have weathered the storm just fine had it not suffered a liquidity crisis.

The fact that it couldn't weather the storm when other banks could, is the issue.

Your analogy is a bit like suggesting a car would have made the trip absolutely fine, if it had enough fuel. Doesn't help with the issue that you are now broken down awaiting recovery, and it doesn't help to suggest "but the car is mechanically sound, it just has no fuel, therefore theres no issue here. Someone just needs to give me some more fuel, it wasn't my responsibility to check the fuel guage. If I had fuel, I'd have made the trip".

Meanwhile, those that did make checks to fill up with fuel on the way, fly past and make their trip. They have taken steps to make sure they have enough liquitidy (fuel) to make the distance. Regardless of traffic jams or diversions.

Northen Rock suffered to the point of bust not because of the liquidity crisis, but because it's business broke down due to external factors, and the business had no way out. Other banks DID have a way out. Therefore, it was not just the liquity crisis which caused Northern Rock to fail. They failed themselves to allow for any issues.

The only reason the bad bank is now generating profit is due to a set of circumstances outside of the banks control. Funnily enough, it was a set of circumstances outside of it's control which also crippled it.

To ignore the external factors is plain stupid. As can be seen. It can destroy you.