What's likely to have happened with our Northern Rock shares?

Glen_Clark

dengrainger wrote: »

Glen Clark
Understood, not easy for any party.

However, the point we make is that some of the 'profit' (estimated at £10 Billion upwards) coming to HMG emanates from the embedded value of the company , value which belonged to the shareholders who were deprived of ANY payment thanks to the Valuer being 'obliged' to find a Nil value via unfair assumptions he had to follow..

The share of the profit, however big or small it is, represents the money reaching HMG which rightfully belongs to the shareholders; in that sense it is not shareholders being paid by the taxpayer, it is a return of monies 'borrowed' from the shareholders during the 'temporary public ownership'.

I guess we will agree to differ on this, but, I have your opinion, thanks.

There was something strange about the Scottish banks getting the treatment they did. And I believe that Bradford & Bingley had similar Valuer restrictions applied, which I would also argue were invalid; but, I don't know the ins and outs of the B&B affair.

As regards whether the taxpayer could give similar support to other banks, as someone posted earlier the taxpayer put well over a £ trillion into the whole sector only a few weeks after grabbing the Rock.

Well of course you can selectively quote figures to prove it either way, because few of us really understand the Banks accounts, I'm sure the politicians dont. Politicians are even counting rent increases as GDP growth instead of inflation and citing that as evidence of 'Recovery'

Political considerations will prevail, and they are not in your favour, or mine as a B&B shareholder.
If politicians did a U turn (political suicide in itself) and compensated NR shareholders now, how many more claims would follow from Bradford & Bingley, Crown Currency, etc etc?

bowlhead99

dengrainger wrote: »

I still believe that the difference in treatment of the Rock compared with other banks, is a valid concern, and that the shareholders are entitled -in this case- to a share of the 'upside', if only as restitution .

On the difference in treatment; perhaps one of the things that NR was a victim of was being early to the party in terms of visibly getting into difficulty.

The scale of the problem due to NR's precarious funding position (of their own making) meant the government had to act quickly and decisively to capitalise it and prevent meltdown; this is not a situation conducive to achieving an optimised exit value for shareholders who owned a business that they could no longer support and which could no longer support itself.

The rescue of NR as a partly- going concern, with the squeeze out of its former owners, was done in a way that appeared reasonable at the time (to those like me who were not an owner) and has survived some level of scrutiny since.

Later, other banks also had serious difficulties and funding packages were negotiated for them which resulted in various degrees of capital dilution from the government for some, and various degrees of dilution through external finance for others. The government was not going to take every bank public. So, perhaps some banks "got away with it", though what they were trying to get away with wasn't so bad as NR (were not so reliant on non-existent external finance, and were not so unfortunate as to experience a Run).

But I'm unimpressed with the "they got away with it so why shouldn't we" argument. If I am guilty of a capital crime and get the death penalty which was agreed a suitable punishment and my own fault under the rules, and then next year someone else is alleged to have committed a crime but it can't be proven or the judge offers some sort of olive branch of leniency, that doesn't entitle *me* to a posthumous pardon, just because somebody else allegedly "got away with murder". I was guilty bang to rights and I lost what I lost be it a cash fine, my freedom, my life etc.

So, whether HM treasury gives a billion or a trillion to anyone else, doesn't mean your investors should get a pay out. They did genuinely lose all their value when exiting in the midst of a failure at the low point of the market.

Cosmicobserver makes the point that there was a timing problem. "You never sell an enterprise at the bottom of the market". The reason you don't do that is that you won't get a good value when in crisis mode. However, the shareholders did not really have a choice. They couldn't meet regulatory capital requirements or meet their day to day cashflow needs to keep the business alive using their own funding. So, they had to exit and let someone else do it.

Saying "hey I was fine, I had £3 billion of net assets!" as Cosmicobserver does, doesn't mean you have a viable business.

I can say I have £1000 in gold bullion coins which I rolled to the bottom of the Mariana Trench for safekeeping. I might put it on my balance sheet against my £900 overdraft and say I have a surplus £100. When the overdraft is called in tomorrow and I can't roll the gold back up again and off to my bullion dealer in time to clear the debt, I don't necessarily have a viable metals trading business. I may have to tell my overdraft provider to simply take the gold, or take all the shares in my business.

This might happen a few years before the price of gold rallies to be worth a lot more, or before a hyper efficient deepsea treasure recovery invention is launched. When those events happen, the overdraft provider might make £200 profit against his £900 overdraft. Just like HM Govt might make £10bn on the £55bn of emergency funding and guarantees. There is perhaps an analogy in there somewhere

dengrainger

I maintain that the damage caused by the Run can not be over stated, and the leak came from within Government.

LOLR was the established route for liquidity cover for all banks.
There are no precedents that I am aware of wherein LOLR agreed funding was immediately taken back, but that was the basis of the Valuer's instructions to ensure a Nil value for shareholders.

The guarantees were given (late) to depositors in all banks, to stop the banking system from chaos or collapse; there was no intention by Govt in giving the same guarantees to Rock depositors to aid the shareholders make a profit.

If a company hits temporary liquidity problems ('cash flow') and goes to its bankers for an overdraft or secured loan to tide it over and enable it to restructure, sell some assets, factor it's invoices, whatever, it would be just unreal and unfair for the bank to turn around a short while later (when all fees and charges were being repaid on time) and seize the whole company and all it's assets for nil.

But in this case that is what the Government did.

I say again that Applegarth told the TSC that it was a contingency he asked for, not even a loan.
Without the Run I am certain the Rock would have restructured and quietly got themselves back on track without Govt support.

The Run killed all that.

What a terrific blow and burden on bank - how could it survive.
Yet it did, does, and HMG is set to rake in £10 Billion upwards in profit.

Shows not how well the Govt stewardship was, but how good the company assets were, as Bank of England secret minutes confirm, and the FSA agreed.

Thus, the shareholders were treated unfairly.

Porcupine

This thread has caused me to check on events in a parallel universe that I was previously following.

Kaupthing Singer and Friedlander (Isle of Man) was an Icelandic bank that went under at about the same time as Icesave. They had recently taken over deposits held in the Derbyshire Building Society's offshore wing, and were using similar short-term money market funding as Northern Rock.

Being on the Isle of Man, it was subject to the IoM depositors' compensation scheme, rather than the FSCS. The IoM scheme was much weaker: 75% of deposits up to £20,000, paid for by a levy on other IoM banks.

After the collapse of KSF(IoM), there was lots of political messing around in Tynwald (IoM parliament) - as I recall KSF was kept alive just long enough for new rules to come into force (which are now 100% of £50,000).

However the Isle of Man isn't a big place, and doesn't have pots of money lying around to pay out to depositors. This was made worse by the credit crunch, where lots of Isle of Man subsidiaries of UK banks closed down, so there was less revenue from the levy. The only recourse was the assets of KSF(IoM), which were mostly their outstanding loans.

I checked back, and it seems that now 100% of the outstanding depositors' money has just been recovered. That's seven years on, and includes no interest earned since the collapse. The money has been coming in dribs and drabs (2% here, 7% there) over the years as the administrators manage to scrape it together.

In the meantime Iceland was unable to intervene to save its three banks which had become 11x bigger than Iceland's GDP. Icelandic depositors couldn't withdraw their money, and the currency collapsed. Needless to say, Icelandic bank stocks were utterly obliterated, but that's the least of your worries when your country is in a severe recession and your GDP is plummeting.

Having looked back, I much prefer the view in our universe...

Glen_Clark

dengrainger wrote: »

the leak came from within Government.

Where is your evidence of that?
Robert Peston admitted they were uneasy about broadcasting information that might start a run on the bank. But they would have been more uneasy about hiding information - if they had hidden information, and the bank went bust, they would have been criticized for that as well. These decisions are even more difficult without the wisdom of hindsight we have now.:(

Glen_Clark

Porcupine wrote: »

In the meantime Iceland was unable to intervene to save its three banks which had become 11x bigger than Iceland's GDP. Icelandic depositors couldn't withdraw their money, and the currency collapsed. Needless to say, Icelandic bank stocks were utterly obliterated, but that's the least of your worries when your country is in a severe recession and your GDP is plummeting.

Having looked back, I much prefer the view in our universe...

Why?
Gordon Brown bailed out the Icelandic Banks and gave the bill to the Icelandic people, but they told him where he could put it. Now Iceland is recovering well, and it seems to be a genuine recovery.
In case you haven't noticed Britain's GDP is inflated with accounting tricks like counting rent increases as GDP Growth instead of inflation, plucking a figure out of the air for illegal drugs and prostitution and adding that on for good measure. All this is being trumpeted as evidence of a miraculous pre election recovery....

Mistermeaner

Glen_Clark wrote: »

Why?
Gordon Brown bailed out the Icelandic Banks and gave the bill to the Icelandic people, but they told him where he could put it. Now Iceland is recovering well, and it seems to be a genuine recovery.
In case you haven't noticed Britain's GDP is inflated with accounting tricks like counting rent increases as GDP Growth instead of inflation, plucking a figure out of the air for illegal drugs and prostitution and adding that on for good measure. All this is being trumpeted as evidence of a miraculous pre election recovery....

Voting labour will Defo fix that, more taxes and borrowing is what we need. Anyway back on topic

bowlhead99

dengrainger wrote: »

Without the Run I am certain the Rock would have restructured and quietly got themselves back on track without Govt support.

The Run killed all that.

What a terrific blow and burden on bank - how could it survive.

It couldn't and didn't. That is an example of why it is risky to be an owner of a bank.

There are risks in owning bank stock. It is particularly precarious to have positioned yourself where you are already unable to pay your creditors and the money markets are unwilling to provide you with any further finance - so you are reliant on the government's Lolr infinite deep pockets - and then to have a run where your depositors walk away too. It is unreasonable for you as a shareholder to say that it shouldn't matter because the government's infinitely deep pockets as Lolr will keep you going for the next 15 years while you spin off your assets and that all the proceeds generated from those assets should accrue to you.

If that were the case, what then is the risk of holding bank stock? You can borrow as much as you like from the money markets and depositors and lend it out as mortgages. If money market lender A needs his money back and money market lender B does not exist, and depositors walk away, any 'ordinary' business would be screwed. For investors to cry that the government is always supposed to have a blank check in your favour at all times, so such trivialities like having no deposits and no third party lending available should not matter, is disingenuous.

It is an example of 'moral hazard' - the idea that there is a permanent backstop so investors and the banks themselves can take excessive risks (because to them they are not actually risks, funding is always available). The fact is, there should be risks.

If a company hits temporary liquidity problems ('cash flow') and goes to its bankers for an overdraft or secured loan to tide it over and enable it to restructure, sell some assets, factor it's invoices, whatever, it would be just unreal and unfair for the bank to turn around a short while later (when all fees and charges were being repaid on time) and seize the whole company and all it's assets for nil.

In that example, you are describing a situation where you have a temporary blip and need to go to a lender to get a liquidity facility. However in NR's case, the business model seemed to be based on using such liquidity facilities and cash available on the money market not to repair short term problems but to actually be the long term source of funding. So then when that goes wrong and you go cap in hand to someone to ask for cash, they are not duty bound to say "sure, as much as you like, take all the time you need, hope it all works out for you". The other mainstream UK banks did not rely on the money markets to such an extent and were not so precariously positioned.

And frankly even if they were, that does not excuse NR because two wrongs do not make a right.

LOLR was the established route for liquidity cover for all banks.
There are no precedents that I am aware of wherein LOLR agreed funding was immediately taken back, but that was the basis of the Valuer's instructions to ensure a Nil value for shareholders.

The valuers look at balance sheet and cashflow and profitability to establish what a business is 'worth' and how credible and sustainable the business is and whether it is solvent. What would someone pay for it and how would / how could they structure its finance.

In evaluating the balance sheet you have your infinitely long term finance (say from equity holders) and your long term finance (say from long dated bond holders) and your medium term finance (at a variety of maturities) and then your short term finance (the stuff that is due or up for renewal quite soon) and then your very short term finance (like an overdraft repayable on demand)

The valuers look at the money from the government provided on an absolute last resort basis and wonder whether this money is indefinitely long term or long term or medium or short term or ultra short. They ask the question. Is this government money repayable in 15 years or tomorrow? Where does it fit on the scale of short term to long term?

They get the answer - it should have been repaid yesterday, it was only courteously extended as a matter of last resort. If someone from the outside world like Virgin or Bad Bank Bailouts plc or whomever is going to come in and take over the business to run it commercially and take the profits from it, they need to settle this loan.

So, the government funding was treated as something that was due for payment, like an overdraft or overnight loan. You have to classify it somewhere.

Perhaps it should have been considered as a formal long term loan......:

I say again that Applegarth told the TSC that it was a contingency he asked for, not even a loan.

Oh, so, it was not something like a formal long term loan with an agreed maturity of, say, 15 years - the term needed to recover the 10 billion of value you are talking about from the 50 to 100bn of gross assets - or maybe 5 years, the term over which credit markets could resurge and provide some other liquidity from the open market? It was ultra short term contingency funds. OK, that's how we'll treat it in the valuation / solvency / liquidity assessment where we consider if you have a viable business or not.

I maintain that... the leak came from within Government.

It is always better if banks can get emergency funding on a no names basis. It protects their commercial interests. If people know they are in trouble, their ability to borrow on the open market is compromised and the borrowing troubles are a self-fulfilling prophecy - you don't want to lend or deposit with someone who is in trouble so you will withdraw lending and depositing to avoid being exposed which will then give the bank even more trouble.

In this case the fact that funding had been granted got out and a journalist went and printed it. You have no idea where that came from.

A journalist could have been talking to a civil servant over a glass of wine, what do you think of all this subprime stuff kicking off, are our banks in trouble, there doesn't seem to be much interbank liquidity, is there contagion, could a UK bank go under? The civil servant says no, there are safeguards in place, if there are market distortions we can allocate temporary funding, we do this for banks from time to time, e.g. I think it was Rock we did one for the other day, so clearly everything is functioning as normal with no systemic problems.

Or journalist was talking to a junior bank bod over a glass of wine, what do you think of all this subprime stuff kicking off, are our banks in trouble, there doesn't seem to be much interbank liquidity, is there contagion, could a UK bank go under? The banker says no, there are safeguards in place, if there are market distortions which make inter-bank credit difficult like you can see it is at the moment, you can always get it from bank of england, they approved one for us the other day so clearly everything is functioning as normal with no systemic problems.

Fundamentally a bank does not want it to be known they are using 'emergency' funding as it is damning and hurts their prospects of getting real world funding. Fundamentally a government does not want it to be known they have written a cheque to a bank for £25 billion because if the information becomes known and the bank's prospects are damaged it may be impossible to recover the £25bn (which is 6 weeks welfare money or 3 years public sector pensions) and you might end up on the hook for the bank's whole balance sheet of £50-100bn. So it is in neither parties interest to intentionally 'leak' the news.

So when you say 'I maintain the leak came from within the government' you are not saying that from a position of knowledge, r that it is logical for the government to want to leak it, you are speculating ; you are saying it was 'the bad guys' rather than one of your own employees. Perhaps that is natural, for you to be on the defensive and make out that there was a conspiracy out there to destroy NR because the government operates from the South and does not like people from the North. I am unconvinced by that.

cosmicobserver

Dear Bowlhead


Appreciating that in the end we may agree to disagree and that your toxic tautology is finely tuned against shareholders and banks I am going to try once more to inform you of the reality regarding the NR fiasco. You may not believe me but every thing I say can be verified -- you will not like the truth.


Firstly I should like to advise you that I am a Monetary Economics Graduate from the LSE, a Chartered Management Accountant, and I have attended senior management tuition at the Harvard Business School. Most people who know me or meet me consider that I am an expert in Finance and Economics. I retired as a Group Finance Director some years ago due to health concerns and now work part time for myself.


Bowlhead the very nature of retail banking is that you borrow "short term" and lend "long term". ALL banks do this. Their assets are primarily the loans made and the assets against which they have been secured or not. As you know Banks give overdrafts, short term loans but for mortgage banks most advances are in the form of mortgages that could mature between 5 and 30 years time. The NE business model was no different to other banks but simply structured more on competitive wholesale market rates that NR passed on to its customers. This allowed it to gain market share from lenders who were determined to keep a 3% plus margin between the cost of capital and lending rates (THIS IS A KEY REASON RIGHT NOW WHY MORTGAGES COST 3% MORE THAN LIBOR).


You keep talking about the Shareholders did this or did not do that during the crisis! The shareholders were never consulted by the Management of NR , never allowed to vote on options for the future. Neither did the Government consult or offer a vote! There is no rationale for you to say that shareholders could not invest more via a Rights Issue -- this is utter rubbish because nobody even consulted them. The NR management "thought" up to £ 1 Billion could be realised from a Rights Issue and restructuring but the Government blocked this option.


You have clearly not read or understood all my previous comments in this debate and I urge you to do so to avoid repetition. Our view is that NR deserved Equal Treatment to other UK Banks that survived following massive State Aid from April 2008. That there was no rationale for taking 100% of an enterprise when you have simply "substituted" 20% of its balance sheet via LOLR which is both a Statutory and Fiduciary obligation. That the "real" UK banking crisis was with RBS, HBOS, Barclays, Lloyds who had far more toxic debts than NR -- which had been subjected to a negative campaign by other UK banks and "short sellers" in a "false market".


The dithering and delay from the Tripartite lost Billions of embedded value for shareholders. Even then Goldman Sachs estimated that the Government could realise a net profit of £ 3.5 Billion WITHIN THREE YEARS! Please remember that NR had reduced LOLR from £ 26 Billion to £ 11 Billion by March 2009 -- yes 2009. Then HM Treasury instructed NR to expand New Business urgently and NOT repay more LOLR. The mortgage market needed urgent support and the Government used NR as a catalyst to boost home loans. We are not saying that LOLR should continue for 15 years and we then reap all the gains! This is sheer distortion of the facts. The UKAR is deciding the "pace" and timing of repayments to Treasury (very good income stream from interest payments!). All LOLR could have been cleared under a scheme of Administration within three years as a "worst case" or with considerable profit over 7/8 years as with Lloyds and RBS. The best customers were sold to Virgin at a "discount" -- the good and bad parts of NR are worth £ 10 Billion NPV. We seek a share of OUR money, in the same way as Lloyds or RBS-- we stand to gain relatively more because NR was not guilty of Billions of mis-selling or misconduct or toxic debt. You say why cant the Government make a Profit of £ 10 Billion on an outlay of £ 56 Billion. Firstly their investment was nowhere near £ 56 Billion -- this is pure fiction. The government has never lost a penny for any guarantees issued! Secondly this is "unjust enrichment" -- Parliament wanted to ensure full repayment but not an obscene surplus at the expense of 150,000 pensioners.

dengrainger

Bowlhead.
Like Mr Peston I am unable (or unwilling) to reveal my sources.
Perhaps it will all be revealed in an inquiry.

The point about the Rock needing a contingency loan (tiny in comparison with future needs, and massive support for other banks not long later) was of course that, at that time, that was all they needed to sort themselves, and yes, as well look for a different business plan no longer relying on the money markets that had been their 70% source of funding for yonks without problems.

But, Mr A was not asking for £61 Billion , in secret, and getting it - without the taxpayer knowing for over a year.......then again this was an English bank and he wasn't in Scotland.

By the time we get to the December the FSA and the Bank of Engkand Court regarded the Rock as solvent and credit worthy despite the Run.

But the very loans made because of the Run deposit withdrawals were in place, being repaid, and obviously would need to be replicated to, or replaced by similar support for any private or in-house bidder wanting to take over (without HMG expropriating everything); that support was not made available to such bidders (who no doubt saw the true worth if the Rock), so they backed off.

Shareholders were not asked to help refinance the company.
As ever, the small shareholders had no power or influence whatsoever.

Huge share holdings were held by Pension Funds; so, in that way, the 'man in the street' lost out once again.