Northern Rock run could have been avoided, says FSA chief

abaxas

What a load of crap.

It could not have been avoided as NR's management chose to run their business incorrectly. Any other outcome would have meant lying or withholding information.

pqrdef

CLAPTON wrote: »

the reason they went bust was that their lending was funded not by boring old UK depositors but by interbank lending; so when that dried up (due to the US problems) they couldn't repay their debts.

That would only have been a liquidity problem. It wouldn't have made them insolvent.

Credit dried up because lenders started to realise that AAA ratings couldn't be relied on - a bank could own a pile of junk and the ratings agencies might not have noticed.

The BoE wouldn't lend any more to NR for the same reason - it wasn't sure the bank was solvent.

Whether it actually was solvent or not will remain a moot point, because nobody can say definitively what its mortgage book was really worth.

Subsequent events don't help much. We know the value of a betting slip after the race, but that doesn't tell us what it was worth before the race.

Same with many other companies. The asset values on their balance sheets are hypothetical. You can take an optimistic view, or a sceptical view, depending on mood. So who knows if they're solvent or not? Our whole economy is built on gambles on the future, and nobody knows what the betting slips are worth.

pqrdef

michaels wrote: »

So if it hadn't been for the crisis of confidence caused by the queues at NR HBOS and RBS would have been entirely sound

No, but who is? Are they entirely sound now? People don't care whether a bank is sound, so long as they believe the government won't allow it to fail. If they start to suspect that the government might, the government will then have to prove it's not bluffing, and that will be expensive. Better to keep people believing.

oldvicar

As others have pointed out N.Rock's problem was mostly one of liquidity, not solvency. BoE could have prevented its [STRIKE]collapse[/STRIKE] forced nationalisation by providing liquidity. Its directors did ask, but were refused.

If similar circumstances arose now I think the BoE would provide liquidity, and shareholders would only lose 90% of their shirts rather than everything.

BoE may get the chance with some other similar banks in the future. Whilst recently Sir Meryn King said that (roughly) "the banks are facing a crisis of solvency, not liquidity" I believe he was in the main referring to the big banks of systemic importance and with heavy involvement in investment banking and other such financiial shenanigans.

IMO those institutions whose business is dominated by savings, mortgages and personal loans - the likes of building societies and even the independent UK subsidiaries of foreign banks (like Santander and Bank of Ireland) - facing a run of withdrawals by depositors could be shored up with additional liquidity, at least for long enough to allow an orderly sale or disposal of assets.

HAMISH_MCTAVISH

Indeed.

It was absolutely the case that Northern Rock was not insolvent, it was however facing a liquidity crisis.

Lets not forget Northern Rocks "bad bank", containing the very worst of UK mortgages, made a 790 million pound profit last year alone.

Some day in the future, when the emotion has passed and people look back on this time to learn the lessons, it will be seen that Merv allowing Northern Rock to fail to try and establish "moral hazard" was one of the biggest mistakes the UK made.

The correct response from day one would have been for the BOE to provide unlimited liquidity to all UK financial institutions, and then a liquidity crisis would not have turned into a solvency crisis through inaction, as ended up happening.

This whole mess could have been completely avoided.

Kennyboy66

CLAPTON wrote: »

the reason they went bust was nothing to do with mortgagees failing to keep up with payments; their bad debts from loans and mortgages were about the industry average.

t

simply not true.


They had to fiddle the figures when reporting them to the CML & FSA.

In May 2009 - 3.2% of their customers were in arrears and 30% (yes thirty percent) in negative equity

Kennyboy66

HAMISH_MCTAVISH wrote: »

Indeed.

It was absolutely the case that Northern Rock was not insolvent, it was however facing a liquidity crisis.

Lets not forget Northern Rocks "bad bank", containing the very worst of UK mortgages, made a 750 million pound profit last year alone.

Some day in the future, when the emotion has passed and people look back on this time to learn the lessons, it will be seen that Merv allowing Northern Rock to fail to try and establish "moral hazard" was one of the biggest mistakes the UK made.

The correct response from day one would have been for the BOE to provide unlimited liquidity to all UK financial institutions, and then a liquidity crisis would not have turned into a solvency crisis through inaction, as ended up happening.

This whole mess could have been completely avoided.

Same old Hamish, same old....


Northern Rock Asset Management (NRAM) the so called "bad bank"

2007 accounts LOST £ 199 million
2008 accounts LOST £1356 million
2009 accounts LOST £ 258 million

It has of course made a profit since - it would be difficult not to as it can borrow very cheaply courtesy of the government, while its poor mortgage holders, a highly unattractive bunch on up to 125% mortgages are stiffed.

Some of it profits since are gained by buying back certain of its issued bonds at 25p in the pound. It also doesn't even have to pay interest on some of these bonds.

A real long term banking strategy that is.

HAMISH_MCTAVISH

Kennyboy66 wrote: »

Northern Rock Asset Management (NRAM) the so called "bad bank"

2007 accounts LOST £ 199 million
2008 accounts LOST £1356 million
2009 accounts LOST £ 258 million

2010 accounts PROFIT £191 million
2011 accounts PROFIT £790 million

Having many years of profits, followed by a few years of losses, followed by a a return to many years of profits, simply should not be a problem for a large UK lender.

Had the BOE provided liquidity support when markets became dysfunctional, it wouldn't have been.

Thrugelmir

CLAPTON wrote: »

the reason they went bust was nothing to do with mortgagees failing to keep up with payments; their bad debts from loans and mortgages were about the industry average.

The reality as was later found out was totally different.

Two of Northern Rock’s top former directors have been fined by the City watchdog and banned from working at any bank for concealing the scale of bad debts at the mortage lender in the years before its nationalisation.

David Baker, the deputy chief executive from 2004 to 2008, made “misleading statements” about loans that were three months or more in arrears, according to the Financial Services Authority, and Richard Barclay, Northern Rock’s managing credit director, “failed to ensure that the information reported was accurate despite warning signs at an early stage”.
Revelations that the bank knowingly mis-stated its bad debts in the months and years before it was nationalised will come as an embarassment to the Government, which repeatedly stressed Northern Rock’s strong asset quality and solvent position to the markets before and after the run on the bank that ultimately led to its demise.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7585460/Ex-Northern-Rock-directors-fined-and-banned-by-City-watchdog.html

RenovationMan

Kennyboy66 wrote: »

Northern Rock Asset Management (NRAM) the so called "bad bank"

2007 accounts LOST £ 199 million
2008 accounts LOST £1356 million
2009 accounts LOST £ 258 million

It would be interesting to see how 'good' banks fared during those samethree years. It would also be interesting to know if you had the data for 2010 & 2011 and left it out because it undermined your argument. A shockingly manipulative tactic worthy of a government minister, if that was the case.

Another interesting fact is that NRAM repaid £2bn to government in 2011.