Comments on: Time to get a grip on loans to Northern Rock

By: Ian

Ian — Mon, 21 Jan 2008 17:38:17 +0000

What is being proposed is what the US Federal Deposit Insurance Company has been doing for years. It is called a Purchase and Assumption where the FDIC takes over the risky loan portfolio (Assumption) and then liquidates it in an orderly fashion. In all the hysteria there has been little discussion of how sound the underlying mortgages are. They are certainly not all going to go into default, although some the commentators seem under this illusion since they keep on equating the loan of 55 billion with a subsidy of that amount, even though with the present terms the Bank of England is actually making a (notional) profit.

By: Big Andy

Big Andy — Sun, 20 Jan 2008 23:52:55 +0000

Whilst your comments sound very persausive: i.e. the government should treat Northern Rock like a private entity and not prolong its assistance longer than necessary, however, i think you are oversimplifying things.

If Northern Rock were subject to the market and the government acted as an ordinary creditor, it would go under.

You could argue that this is fair enough, but the consensus appears, that the potential domino effects are too great or unknown.

Therefore, if the government is having to back Northern Rock, it should look at how it can do this in a cost effective way; selling the loans whilst providing a guarantee appears one such way.

As to placing limits on the timescale of government support, this would not really work as - due to the very reasons for intervention - if Northern Rock was not able to stand on its own two feet at the due date, the government would presumably have to renege on its tough stance and would appear even weaker than present.

Big Andy

reply: I am talking about putting some proper banking discipline into the situation. Of course the loans can be repaid over a sensible time scale - if necessary by selling off the assets, whilst giving the bank the chance to trade itself back to health.

By: Bob

Bob — Sun, 20 Jan 2008 19:21:27 +0000

I notice that the Rock’s Audit and Risk Committee Chairperson (Sir Derek Wanless) has been very quiet. He’s the same bloke who sorted out the NHS isn’t he? How did he miss the huge risk of funding a multi billion pound mortgage book on short term borrowing?
On Radio 4 last evening they declared that the debt will be converted into bonds and then sold off. The host (Jenny something or other) interviewed Phil Hammond and he explained that the Goldman Sachs plan would leave taxpayer’s money at risk for many years. He said the taxpayers interests (as creditors) must be protected, to which she replied “what about the shareholders”. However, when I listened again on the iPlayer her remark about shareholders had been deleted. BBC censorship at work - what are they affraid of?.

By: Eddie

Eddie — Sun, 20 Jan 2008 18:28:21 +0000

It si suggested that the Bonds will be repaid as people redeem their mortgages… but banks normally relend this money. If the money is not to be available to re-lend (and it shouldn’t be, the taxpayer should be repaid first, how will the Northern Rock be able to grant new mortgages?

The alternative is that they borrow from the wholesale markets, but in doing so they should use the proceeds of any borrowing that becomes available to them to repay the taxpayer backed bonds.

If the money is used to generate profits through further lending, it allows shareholders to profit at the taxpayers expense.

This is a solution to the problem only if the taxpayer is allowed to be treated as the doormat.

By: griswold

griswold — Sun, 20 Jan 2008 18:15:46 +0000

Because NuLab ministers of the past decade have very little experience of the commercial world, they have effectively subcontracted major policy implementation decisions to consultants whose primary interest is the generation of profit for partners and shareholders.

Consultants and PFI principals have rung rings around the Govt whose ministers do not have the nous to analyse proposals and solutions put forward. Ministers are babes in the wood.

Consultants have cost us dear. Not the

By: Tears for Tier 1

Tears for Tier 1 — Sun, 20 Jan 2008 18:00:50 +0000

Surely in the short term the problem is this:
Northern Rock is worthless in every respect except one, its ownership represents a call option on the upside (probably inflation bailing out all its debtors as Brown devalues our currency and allows negative real interest rates).

Brown seems to be suggesting a transfer of ownership of this option from existing shareholders to his mate Brown.

The rescue is being made possible by the tax payer who will certainly be left holding the baby on the downside. The tax payer should therefore keep the call option, not Branson or any other private sector hedge fund.

By: Steve

Steve — Sun, 20 Jan 2008 17:48:00 +0000

I hope that someone will accurately calculate the present value of the guarantee. To provide a gtee worth 50-100bps on such an enormous sum will show the true scale of the “loss” to the taxpayer.

Brown is simply using public money to subsidise a private sector sale to save political embarrassment. Shocking.

By: mikestallard

mikestallard — Sun, 20 Jan 2008 16:50:33 +0000

I don’t think you get the problem, John.
Mr Brown, financial wizard, “who provided the best economy the world has ever seen for the longest period of time ever”, runs the government.
His ministers are kept in the dark and they are deliberately chosen because they are his minions. They do what they are told when they are told.
The Chancellor is a lawyer who knows nothing about either the economy or the Bank. He is there to please his master.
The whole problem is that his infallible master is a ditherer who, as a mere politician, really knows very little about finance.

Given that this is true, please expect nothing from this government except more and more chaos in every single department.

Watch the ministers on Newsnight or on Question Time, or listen to them on the radio and see if I am not right.

It must be really frustrating for you, as an ex minister, to see how badly your country is being ruled. But - fear not! - “Europe” is coming up and also Northern Rock, which is going to cause huge tax rises at a difficult time. Both of these could easily cause a back bench revolt of unimaginable proportions.
Even the Lib Dems might attack the government!

I give them until Easter. then the Conservatives will storm in.