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Rock borrowing - the facts

Robert Peston | 08:08 UK time, Friday, 30 November 2007

You’ll have read around the place this morning that Northern Rock has now borrowed almost £30bn from the Bank of England.

That’s wrong. The Rock has in fact borrowed just over £25bn from all of us in the form of taxpayer-backed loans.

How do I know? Errr. Well I’ve been told by a couple of people I trust.

But it would be equally wrong to point fingers at the journalists who have printed the inflated erroneous number.

Because they have done a perfectly sensible calculation.

More importantly, the Bank of England – as a point of principle – is refusing to correct or guide journalists. And the Rock has been prohibited by the Bank from correcting them.

One Rock executive said to me that there was absolutely nothing he or his colleagues could do to prevent the press reporting exaggerated numbers on the Rock’s borrowing from taxpayers.

Why won’t the Bank of England be more helpful?

That’s very unclear.

But you may be able to draw your own conclusions if I explain how journalists have been obtaining these numbers.

The first thing to do is click on this link.

That takes you to a page on the Bank of England’s website called the Bank Return.

On that page the bank’s weekly balance sheet is published.

Now click on the Banking Department’s balance sheet for September 12 – or the day before the Rock went cap in hand to the Bank of England for emergency help.

In the bottom right hand corner is a category of assets called “other assets” – and its value is £13.1bn.

Now click on the Banking Department’s balance sheet for November 28. There you’ll see that the value of “other assets” has shot up to £42.3bn.

What we know is that the Rock loans are in that category of asset.

And if you assume – which is what journalists have done – that all the increase in the value of that asset is represented by Rock lending, then current Rock lending by the Bank of England would be £42.3bn minus £13.1bn. Which is £29.2bn.

But it’s a false assumption.

There were other kinds of loans in that “other assets” category before the Rock debacle and there are other kinds of loans now.

So not all the increase is down to the Rock.

But what are those loans?

Well, I haven’t a clue. And the Bank of England won’t say.

Inevitably, its silence has fuelled the conspiracy theories, even within the Rock itself – whose executives have persuaded themselves that other banks must be in receipt of secret emergency help from the Bank of England, which somehow it has managed to keep quiet.

It seems unlikely to me that would be the case.

But I can’t be certain because the Bank of England won’t say.

It’s all a bit odd and troubling.

Comments   Post your comment

  • 1.
  • At 08:56 AM on 30 Nov 2007,
  • D MacGregor wrote:

When will the Rock publish its next half-yearly accounts? Surely the exact state of its financial health will have to be revealed then?

Do you know what the September 12, £13.1bn was made up of? The unaccounted for ~£4bn could be growth in whatever that original figure covered or it could represent other loans of a similar type to the Northern Rock's. Any clue which is more likely?

  • 3.
  • At 09:17 AM on 30 Nov 2007,
  • Peter Bench wrote:

For a change this note is factually based. More to the point, why is it only on your blog - why is the BBC not asking this question very publicly? If the answer is 'to maintain confidentiality and stability in the system' then fine, but someone should be asking where taxpayers money is being spent and how much we're earning for it and what the real quality of the security is?

Do you know what the September 12, £13.1bn was made up of? The unaccounted for ~£4bn could be growth in whatever that original figure covered or it could represent other loans of a similar type to the Northern Rock's. Any clue which is more likely?

  • 5.
  • At 11:01 AM on 30 Nov 2007,
  • Stephen Phillips wrote:

Given that there are only two other numbers on the asset side; both fairly specifically defined; the "other" could be all manner of stuff.

How variable has it been in the past?

From random picks for 2006/7, hardly at all. Earlier years seem to have a different structure of numbers.

  • 6.
  • At 11:53 AM on 30 Nov 2007,
  • Onky wrote:

No offence, but how can you put the word "Facts" in your title when by your own admission the BoE are not telling anyone what the real situation is, NR are barred from explaining the actual numbers and that your "facts" are based on "Errr. Well I’ve been told by a couple of people I trust."

This blog is no more factual than the newspapers' judgements that NR have borrowed £30bn.

All we know to date is that NR has borrowed large from the BoE, and that for some reason the BoE is being secretive about the exact quantities. Perhaps this is because the amount is higher than expected, perhaps it's because they've done some creative accounting of their own to disguise this true figure and don't want anyone to know until a takeover has occurred. Maybe they're just trying to save their own bacon, or that of the government.


  • 7.
  • At 01:19 PM on 30 Nov 2007,
  • John wrote:

Outrageous. This is our money. We should know what's being done with it. The front page of BBC News is a scandal over £5000 possible being misallocated. This is a million times that.

  • 8.
  • At 01:35 PM on 30 Nov 2007,
  • Adam Green wrote:

There are a few basic rules in finance. one of them is that if anyone knows your positions you are in for a miserable time. If the market knows you are coming to them for £x on date y, they will all be there waiting to give you a nice friendly rate. The Rock is likely trying to keep the exact figure secret as the market knows the sizes of its issues... a calculator could tell you what they are going to be looking for... having exact numbers will help the market take the taxes payers money, and have a nice Christmas with it.

  • 9.
  • At 01:49 PM on 30 Nov 2007,
  • Chris S wrote:

Can someone explain to me how Richard Branson and others can place bids for a company who's balance sheet is a state secret? Are they in on this secret, or are they just taking a punt based on "sources they trust"? Is the NR board free to disclose these numbers to bidders, but not the public? In which case, is it then not possible to pick and choose which bidders you reveal the numbers to? Transparency is always the best option.

  • 10.
  • At 02:27 PM on 30 Nov 2007,
  • Tim Moore wrote:

You say that the increase is likely to be a general increase in other loans or other general assets. However if you look at the average balance of the other assets for the period January to the end of august it stood at around £12bn. The opening balance was £12bn and the closing was £12bn with very little movement in the year. There is no substantial proof in the weekly reports that the increase is from anything other than Northern Rock. Also don't forget that the supposed terms of the deal is that ontop of accrued interest (also included in the Other Assets) there will be the value of the securitisation. You may be correct that the loans total lower than the £30bn reported, but the increase in assets is likely to include the premium on the mortgages secured against the BofE loan.

The biggest distraction from the facts (politely put) is the indication that we as taxpayers are lending money and that "we may not get it back". No-one seems to want to point out, presumably because it's boring and removes from the story, that the Bank of England is lending on securities, and I'm sure is lending on the most secure of these, at a good interest rate. This surely means that we are making money at any rate over and above what can be obtained on the market, on the most securely backed loans.

I wonder if the secrecy is around the profits that may be being made on the securities at the Rocks expense!

And if the BoE lowers rates then presumably their (and ours as taxpayers) margin increases making it even better for the taxpayers...

  • 12.
  • At 03:31 PM on 30 Nov 2007,
  • Dorte wrote:

Robert. Those NR 'executives' busy talking to you (as incredible as that seems) surely must have told you who they reckon these 'other' banks drawing from the BoE are. As reporting hearsay seems to be your trade mark now, why not tell us who (they reckon) it is?

  • 13.
  • At 04:25 PM on 30 Nov 2007,
  • Neil Forde wrote:

What is all the fuss about the 25 or 30 billion is being lent out as mortgages these are secure lending, Northern Rock has one of the best quality mortgage books in the business, with less than 1% going to arrears or repossession. should northern Rock close up shop the mortgage book would have a list of Banks looking to buy it as it's a valuble loan book and the tax payer would get there money back don't forget there are 8,500 people working for Northern Rock the goverment has taken greater risks with our money on defence protects, computer systems etc.

  • 14.
  • At 04:35 PM on 30 Nov 2007,
  • jim evans wrote:

dear Robert
"Are you sure about Northern Rock, who is the hoding company for its operations">

  • 15.
  • At 05:06 PM on 30 Nov 2007,
  • Puzzled Ben wrote:

I want to ask what must be a very dumb question, but perhaps somebody can help me ...

If NR is really "solvent" then why doesn't it get out of this crisis by simply hiking up its mortgage rates?? Its floating rate borrowers would then switch lenders, and NR would get the cash that it cannot access in the money market. I really don't understand why the B of E has to be stuck in this position for the long haul.

  • 16.
  • At 05:11 PM on 30 Nov 2007,
  • Chris Cook wrote:

It's not surprising Mr Peston is having difficulty with the inner workings of the bank of England.

That's because it is the ultimate financial pornography you will not find in any decent newspaper. Or come to that, anywhere else.

These are the facts.

The Bank of England loans to Northern Rock are not "tax-payers' money". This money has never been anywhere near a tax-payer.

It is the virtual equivalent of bank-notes, and like them, has been created "ex nihilo" by the Bank of England, but without printing and distribution costs.

If you don't believe me: this is what Tim Congdon had to say in the FT a few weeks ago:

"The explanation is that the Bank of England can create money "by a stroke of the pen". Parliament has made it the UK's only issuer of legal-tender notes, and it can expand the note issue or credit a balance convertible into notes at virtually nil cost.

Because of these special powers, the Bank does not need to borrow in the interbank market at a positive interest rate.

Instead the interest cost on its £21bn loan (and indeed its £30bn loan if it reaches that level) is zero. So the Bank's profit on the operation in the circumstances discussed would amount to about £2bn (that is, 6¾ per cent on £30bn. "

The fact of the matter is that - as Congdon points out - it is in the tax payers' interests for these loans to Northern Rock to stay outstanding as long as possible, because it represents a gain to the Bank of England of 5.75% per year (at current base rate) in respect of all outstanding balances.

The "penal" element of a further 1.25% is actually not being paid by Northern Rock but is instead being rolled up as a "subordinated" loan, which, if and when it is repaid, will represent pure profit to the taxpayer.

In the event of losses and/or defaults, the shareholders will take the first hit, and the subordinated loan will be next ie "tax payers" will only lose a "gift" from the Bank of England", and only then will other creditors be affected.

In that case, although it is hard to believe, the surreal fact of the matter is that taxpayers will no more be losing money than when the Bank of England burns time-expired bank notes.

This ability of the Bank of England to create credit = money which may be used to retire secured debt could actually form the basis of a rational monetary system.

Instead of the unsustainable system of interest-bearing credit manufactured by private banks even now breaking down before our eyes.

  • 17.
  • At 05:18 PM on 30 Nov 2007,
  • Chris Cook wrote:

These are the facts.

The Bank of England loans to Northern Rock are not "tax-payers' money". This money has never been anywhere near a tax-payer.

If you don't believe me: this is what Tim Congdon had to say in the FT a few weeks ago:

"The explanation is that the Bank of England can create money "by a stroke of the pen". Parliament has made it the UK's only issuer of legal-tender notes, and it can expand the note issue or credit a balance convertible into notes at virtually nil cost.

Because of these special powers, the Bank does not need to borrow in the interbank market at a positive interest rate.

Instead the interest cost on its £21bn loan (and indeed its £30bn loan if it reaches that level) is zero. So the Bank's profit on the operation in the circumstances discussed would amount to about £2bn (that is, 6¾ per cent on £30bn. "

The fact of the matter is that - as Congdon points out - it is in the tax payers' interests for these loans to Northern Rock to stay outstanding as long as possible, because it represents a gain to the Bank of England of 5.75% per year (at current base rate) in respect of all outstanding balances.

The "penal" element of a further 1.25% is actually not being paid by Northern Rock but is instead being rolled up as a "subordinated" loan, which, if and when it is repaid, will represent pure profit to the taxpayer.

In the event of losses and/or defaults, the shareholders will take the first hit, and the subordinated loan will be next ie "tax payers" will only lose a "gift" from the Bank of England", and only then will other creditors be affected.

In that case, although it is hard to believe, the surreal fact of the matter is that taxpayers will no more be losing money than when the Bank of England burns time-expired bank notes.

  • 18.
  • At 05:36 PM on 30 Nov 2007,
  • Matt wrote:

This is a bit better, Peston. Let's hear no more of this scapegoating Mervyn King again, eh?

  • 19.
  • At 05:37 PM on 30 Nov 2007,
  • Alexander wrote:

My first reaction was: is that all there is? The recent expansion of the global economy has thrown off so much cash that a couple of new money merchants could probably match these funds.

We need full transparency on this important issue as a matter of urgency. This is probably our 1873 banking crisis in the making and confidence in our financial institutions - especially the lender of last resort - will be paramount as the whole sorry mess continues to unfold.

  • 20.
  • At 05:44 PM on 30 Nov 2007,
  • Chris Cook wrote:

The Bank of England loans to Northern Rock constitute money that has never been anywhere near a tax-payer.

This is what Tim Congdon had to say in the FT:

"The explanation is that the Bank of England can create money "by a stroke of the pen". Parliament has made it the UK's only issuer of legal-tender notes, and it can expand the note issue or credit a balance convertible into notes at virtually nil cost.

Because of these special powers, the Bank does not need to borrow in the interbank market at a positive interest rate."

The fact of the matter is that - as Congdon points out - it is in the tax payers' interests for these loans to Northern Rock to stay outstanding as long as possible, because the Bank of England makes 5.75% per year (at current base rate) in respect of it.

Moreover, the "penal" element of a further 1.25% is actually not being paid by Northern Rock but is instead being rolled up as a "subordinated" loan, which, if and when it is repaid, will represent pure profit to the taxpayer.

In the event of losses and/or defaults, the shareholders will take the first hit, and the subordinated loan will be next ie "tax payers" will only lose a "gift" from the Bank of England", and only then will other creditors be affected.

In which case, although it is hard to believe, taxpayers will no more be losing money than when the Bank of England burns time-expired bank notes.

  • 21.
  • At 05:53 PM on 30 Nov 2007,
  • 'Fast Track' wrote:

Let's get one thing straight - Northern Rock has a full share of the self certified mortgage market and most of the 100%+ mortgage book in the UK.

They were, at one time, the lender with the largest lending multiple on the high street and had (and still have) 'non-verification' of income up to 85% LTV.

You don't have 20% of the mortgage market with house prices at historical highs without taking major risks. And as for 1% arrears, the best in the business. It's hidden under the guise of 'payment holidays' - believe me!

  • 22.
  • At 06:31 PM on 30 Nov 2007,
  • peter williams wrote:

But you are also asuming that all the Rock borrowings are included in that figure. who is to say whether thay may be shown [or not] elsewhere? Because the total numbers may be the same does not necessarily mean their make up is the same.
Incidentally this is "tax payer's money" - the UK has not generated a profit or cash from any source other than tax payers - whichever definiton of money or near money that is used it 'belongs' to the taxpayer.

  • 23.
  • At 07:07 PM on 30 Nov 2007,
  • peter williams wrote:

But you are also asuming that all the Rock borrowings are included in that figure. who is to say whether thay may be shown [or not] elsewhere? Because the total numbers may be the same does not necessarily mean their make up is the same.
Incidentally this is "tax payer's money" - the UK has not generated a profit or cash from any source other than tax payers - whichever definiton of money or near money that is used it 'belongs' to the taxpayer.

  • 24.
  • At 07:20 PM on 30 Nov 2007,
  • Mick Humphries wrote:

Is it just me, or did other people find Robert Peston's slot in the 29/11/07 BBC1 Ten O'clock news ridiculously over-hyped scare-mongering, presented in a ridiculously sensationalist way? Please report the FACTS - we don't need tabloid sensationalism on the BBC, especially in the news.

Regards

  • 25.
  • At 08:28 PM on 30 Nov 2007,
  • GF wrote:

No. 17: The BoE has to finance it's money creation, otherwise the public will just have to pay for any NR losses via inflation, rather than directly!

Same reason the government doesn't just finance spending on schools / hospitals etc. via the printing of new money.

  • 26.
  • At 08:57 PM on 30 Nov 2007,
  • john white wrote:

Tubby Isaacs is extremely worried about Ally D because he could barely finish a small portion of eel pie today. Apparently Mother Brown was making threatening noises about Beardie's bid for the Rock and this had affected his appetite. Seems that Mother B is worried by the teenage scribblers in the City who are pointing to the relatively small financial risk which Beardie is taking in order to go for broke on the Rock. Ally D had been given clear orders to get this mess out of the press and now it looks as if the buccaneers bid is being subject to too much scrutiny for it to get a clear green light. Mother B made it quite clear that he was under the table when Beardie's bid was given preferential status and Ally D would be carrying the can on behalf of the taxpayer whether it is £25 billion or £30 billion should it all go pear shaped. Mother B also made it clear that the events of the last 48 hours have made it very clear that the public will be less than joyous to see the Rock in the hands of a government which has trouble in managing sums of £5000 let alone £25 billion going North. Somehow or the other Ally D will have to convince the great unwashed that the Rock can be saved without sending £25 billion of taxpayers dosh up the Kyber. Failure would mean bye bye ministerial limo and the chance to join Mother B for the regular Friday night knees ups at the Red Lion. Ally asked Tubby what he should do. I tell you what what my old mum used to say. When you have got a difficult problem always have a nice cuppa before you do anything else. Before Tubby could go any further Ally's pager started to blurt out the next edict from Mother B. When will it all end?

  • 27.
  • At 09:16 PM on 30 Nov 2007,
  • emelen wrote:

can somebody explain to me what will happen to the shares if/when (Lord!?) bRansom gets control and offers new shares to the current shareholders for 25p? if this represents a bargain, why aren't more funds stepping in and upping their stakes?

.m.

  • 28.
  • At 10:31 PM on 30 Nov 2007,
  • Jo wrote:

I suspect that another Bank - perhaps Barclays, Bradford & Bingley or Alliance & Leicester are also using this facility (as well as using the ECB) - however - the mayhem caused in reporting on The Rock appears to have been enough to result in a 'cover up'

Conspiracy Theory???
Thanks in advance if you publish this
Regards
J
Area 53

  • 29.
  • At 02:06 AM on 01 Dec 2007,
  • Andrew Knight wrote:

Follow the paper trail and you'll notice that a well known high street mortgage lender recieved a cash injection this week fixed at a rate very similar to what the bank of England is charging. And this amount makes up the difference mentioned in this blog.
Either there has been a financial transaction to a third party so a formal statement doesn't have to be made,despite the fact in the current climate it would have been wise to do so. Or the money has been shadowed , which is to say that the Bank of England has not handed over money but matched what was given to this high street lender but is holding the money in a seperate account ready to pay this third party lender any losses it makes by risking giving this cash injection, this of course would be as serious if not more than the fact no statement was made.

  • 30.
  • At 09:22 AM on 01 Dec 2007,
  • Andrew Armour wrote:

One interesting point on the balance sheets. On 12 Sept there were £22.6bn of short term assets (i.e. available to lend to banks such as Northern Rock), on 28 Nov this was down to £5.0bn. What happens if another small mortgage lender needs bailing out? Where would that money come from? IMF? ECB? Could all get a bit embarrassing.

  • 31.
  • At 12:54 PM on 01 Dec 2007,
  • Chris S wrote:

Chris Cook #16 GF #25 - Tim Congdon is right in that the money itself does not come from Treasury tax receipts, hence it's not the taxpayer's money that is put at risk (a commonly held misconception, even by RP). As GF says, that does not mean that it is "free" money.

Writing extra money into circulation doesn't create value in itself, it simply reduces the real value of all the existing money in circulation. Double the money, double the prices of stuff, inflation increases until the money matches the real value of our assets. So no, the loan is not directly paid for by tax, but it is paid for by diluting all our cash holdings (tax, "the Mugabe way").

However, this is a response to an opposite action on behalf of money markets (and Northern Rock depositors). By reducing lending and deposits, they are responsible for *reducing* the amount of money in circulation, and thereby *increasing* the value of our cash holdings (deflationary effect). The BoE is countering this effect.

Hence, we all paid for the loan, but only from a windfall boost in the value of our pound notes.

  • 32.
  • At 01:25 PM on 01 Dec 2007,
  • Chris Cook wrote:

#25

Private Banks do NOT finance their own (interest-bearing) money creation and this fact is the root cause of asset price inflation.

Why then should non interest-bearing money creation by Central Banks be MORE inflationary than money creation by private banks?

In fact the reverse is true. Bank of England credit creation is the least inflationary.

But the underlying point is that ALL credit creation by credit intermediaries aka Banks is potentially inflationary if it leaks into consumption.

The money that the Bank of England creates and lends to Northern Rock is in fact being applied to repay EXISTING bank loans.

This has the effect of extinguishing and replacing money previously created. No new money can or does enter circulation.

This is a very different situation to the unlimited printing by Central Banks of new money for NEW loans, either used for consumption (leading to Zimbabwean and Weimar style inflation) or property purchase (asset price bubbles).

Central Banks are in fact unnecessary: Hong Kong, for instance does not have one, but does have a Monetary Authority.

In my view Treasury Credits (tax payers money) should be issued free of charge, but subject to collective Guarantees (probably operating locally and regionally, but linked), for which users of credit would pay an amount into a "Default Pool", from which defaults and system costs would be met.

In such a dis-intermediated model banks become service providers, whose function is to set appropriate "Guarantee Limits" and to manage defaults.

The model is interest-free, but not cost-free. The difference is that Bank's interests as service providers are now aligned with everyone else's.

  • 33.
  • At 02:55 PM on 01 Dec 2007,
  • Rabbits and Hatz wrote:

#32 Does that mean the BoE could pay of the £1.4T outstanding personal debt and there would be a zero sum gain. Kool.

  • 34.
  • At 04:23 PM on 01 Dec 2007,
  • Jon wrote:

Chris Cook #16 #32

You are wrong. Banks must always balance their books with the exception of central banks which can print money. Other banks must always borrow money (from depositers, or wholesale markets) in order to cover any loans they make. The BOE is printing money to lend to Northern Rock - it is of no importance what is going on on the other side, the BOE IS devaluing the currency by printing money, it is impossible not to unless they are sterlising there loan which will cost approx the base rate. The money multiplier may contract but that is another matter - central banks can always print money, or destroy it (if they have assets) in attempt to counteract expansions/contractions in credit conditions.

You have talked similar nonsense in previous posts and threads about how the BOE is getting a windfall profit from the baserate of interest. I suggest you stop.

  • 35.
  • At 06:02 PM on 01 Dec 2007,
  • Alan H wrote:

Fascinating looking at the Bank of England website. It is worth looking at the balance sheet at other dates there is clearly other balances within other assets. Intersting if you look at a balance sheet from May 16 there is $48MM in other assets.

  • 36.
  • At 06:13 PM on 01 Dec 2007,
  • Martin wrote:

Robert has nothing else happened in the business world in recent weeks you feel inspired to write about?

Unlike some of the more barmy readers/posters here I certainly don't claim you caused the Rock's problems (I still can't work out how they arrive at that conclusion) but it is starting to look like you have some form of obsession with the bank.

  • 37.
  • At 12:30 AM on 02 Dec 2007,
  • Colin Smith wrote:

"32. Chris Cook wrote:

But the underlying point is that ALL credit creation by credit intermediaries aka Banks is potentially inflationary if it leaks into consumption."

What do you mean "if it leaks into consumption"?

Inflation is inflation. Whether it's bread and butter, property or an increase in the FTSE All-Share. The distinction is an artificial, political one...

Grocers are punished for their price increases by higher interest rates. Stock brokers are not.

Assets? As an ex-auditor I think I'd be having serious words with the directors of this bank around the recoverability of these loans. It'd be a big call for someone from the Audit Office to demand that the assets be provided for especially now that they know people are watching.

  • 39.
  • At 09:50 AM on 02 Dec 2007,
  • RichK wrote:

The blogger has asked ""how secure is our £20/30 billion in Northern Rock, what are the assets?"

In houses, house prices. The government is gambling on and speculating on and investing in houses and house prices.

So Mr. Darling has invested about £30 billion in houses. In the scenario where house prices crash, the government could loose a majority of this. But the PM Brown considers it worth it in order to maintain himself in power, and too support the British economy.

Unfortunately, Britain does not lead the world economy, and investing money in failing financial institutions and cutting interest rates in the UK will not work.

Some one should tell the PM.

The wealthy, the rich, the big investors and the bankers don't really qualify for this money from the government, which is really a Social payment to compensate them for their losses and maintain their wealth, with the admonishment "don't do it again! (to soon anyway)".

  • 40.
  • At 11:48 AM on 02 Dec 2007,
  • Jacques Cartier wrote:

> It’s all a bit odd and troubling.

If those "couple of people I trust"
can say exactly how much has been lent,
I'm confident they also know where
the extra 4 billion has gone.

Why not lean on them a bit more? To
tempt them, you could always explain
that their names must go into the
public domain should the situation
spiral. After all, you are a BBC
journalist, working for us, not them.

  • 41.
  • At 04:35 PM on 02 Dec 2007,
  • Chris wrote:

For a revealing insight into what's actually happening i can highly recommend The Mystery of Banking by Murry Rothbard. It can be downloaded here.

http://www.mises.org/Books/mysteryofbanking.pdf

Cheers

Chris

  • 42.
  • At 05:35 PM on 02 Dec 2007,
  • Clive Keeble wrote:

According to a report in today's Sunday Telegraph, Tiffany's have sold their New Bond Street premises (allegadly for £73million to an Irish entrepeneur) and leased it back at £650 per sq foot per annum.

Somebody has more faith in the state of the British property market than the bears who often comment on this blog.

Ah, I hear the dissenters saying, but that is premium commercial property, and the NR mortgage book is for general householders.

If there is a major property crash, similar to the early 1970's, it will first and foremost affect commercial property - hence the current weakness in that general market.

There is enough room in the UK economy for house prices to come back by say 10% (giving some short-term negative equity) without the downturn sending 95% of mortgage holders along to Carey Street.

Me, I ain't no city slicker driving a Ferrari, just an 'umble shopkeeper with his nose a little closer to the ground than them in their city skyscapers.

But it would be equally wrong to point fingers at the journalists who have printed the inflated erroneous number.

I do point fingers at journalists. A lot of the people coming up with huge fingers in billions claim to be economists. It isn't 25 billion either, although you could at a push say that is a figure they have allowed for. It doesn't mean that amount has been borrowed though.

There is no way the BofE are going to give 25 billion to NR in two months (and this is generated money basically). They really would be in trouble if they had to do that, and that would be irresponsible lending. Additionally, logically it can't all come at once. Any loan would be subject to conditions that NR would need to meet, and it would have to be drip-fed rather than given all at once. A lot of people who should know better have then been extrapolating what they think the borrowing is over about four or five years and getting 40 odd billion. Lunacy.

The BofE lending is a facility that is always available, and it doesn't involve taxpayers' money. The securing of depositors' money appears to be backed by the government, but again, not one penny of taxpayers' money has been involved because unless it was a sure bet it would never have been done.

More importantly, the Bank of England – as a point of principle – is refusing to correct or guide journalists. And the Rock has been prohibited by the Bank from correcting them.

Given how this whole thing started, can you blame them?

Inevitably, its silence has fuelled the conspiracy theories, even within the Rock itself...

You can't blame the BofE or NR over this. There has simply been too much ludicrous journalism and reporting of this whole saga.

Jon @ 34

The BOE is printing money to lend to Northern Rock - it is of no importance what is going on on the other side, the BOE IS devaluing the currency by printing money

No they are not. If they were flooding the markets and the economy with money that actually increases spending, then yes, but they're not. All that's happening here is that existing loans are being repaid with this money. No new spending is occurring, and I would imagine the BofE will be making absolutely sure that this is the case at NR.

You have talked similar nonsense in previous posts and threads about how the BOE is getting a windfall profit from the baserate of interest.

In effect, this is what is happening. This is the penalty that NR are paying, and this is payback for an element of risk that the BofE is taking. If this money was being flooded into the economy then other factors would come into play, but it isn't.

  • 45.
  • At 07:50 PM on 02 Dec 2007,
  • steve wrote:

segedunum #44

"All that's happening here is that existing loans are being repaid with this money". But if the BoE was not lending to NR, and as a result NR went into administration, then potentially the existing loans would *not* have been repaid, and whoever made those loans would have completely lost several billion pounds. The effect of the BoE making the loans versus not making the loan is therefore a relative increase in the money supply (gifting billions of pounds to the original lenders, shareholders, depositors or whoever).

The rule is (or should be) that the Lender of Last Resort facility should *only* be made to solvent parties. If NR was not really solvent, then it was highly irresponsible (and inflationary) for the BoE to make these loans. We just can't tell at the moment if this was the case - and really it all depends on what happens to house prices over the coming months.


  • 46.
  • At 09:24 PM on 02 Dec 2007,
  • Peter Copping wrote:

On banks and cash... one of my banks threatened me that it would want my repayments on my a credit card 15 days rather than 25 days from the date of the statement, mopping up just a little of the money you correspondents allege to swimming around (?)Another one has announced it is "ok until midsummer" and sent me a very attractive saving offer for investments up to one million, only 27,000 of which will be guaranteed (not by the taxpayer but by a non existent fund promised by other banks) Methinks deflation rather than inflation is getting more likely day by day. Japan has still not recovered from its credit crunch, dating from sometime back in the last century even when the central back offered to pay people to take its money.

The rule is (or should be) that the Lender of Last Resort facility should *only* be made to solvent parties. If NR was not really solvent, then it was highly irresponsible (and inflationary) for the BoE to make these loans. We just can't tell at the moment if this was the case...

We can tell. NR was, and is, solvent. It still continues to function today, as it always has done, minus an emphasis on lending and borrowing. Money is still coming into the business, salaries are still being paid and contracts are still being honoured. If that wasn't the case then a sell-off would have happened almost immediately.

  • 48.
  • At 11:18 AM on 03 Dec 2007,
  • Jim Allen wrote:

I don't think it will stop with NR, I fully expect another bank or two to go down with them. Talk in the office is centred on the Abbey - their share price has halved since April after admitting to errors in mortgage administration dating back to the 80's. A couple of national papers have picked up on the state of their customer service (unhappy staff could be an indication of job insecurity). Abbey are now offering a current account paying 8% interest - the market leading savings a/c only pays 6.41% - to be that desperate to attract customers might mean the only alternative is to turn to the BoE. I don't bank with Abbey myself, but I'd probably be looking to move savings elsewhere if I did.

  • 49.
  • At 01:14 PM on 03 Dec 2007,
  • KV wrote:

I supported Robert through the barmy accusations also, yet I too am rather bored with the fact that he has turned from bbc business editor into bbc northern rock editor. What about the dollar? oil? British consumers current state of mind? BHP/RIO? Anything, please. 8 out of 10 posts now are about NR. ZZzzzzzz.

  • 50.
  • At 05:50 PM on 03 Dec 2007,
  • John Constable wrote:

I'm sure that the BoE have had to bail out others, apart from NR.

But the natives must not be frightened, that is crucial.

I've just updated myself by printing off the FSCS Compensation Limits and ensured that my families savings are dispersed around various financial institutions, within those limits.

After all, are'nt we always being told by financial professionals that it is sensible and rational to 'diversify'?

PS. Watch Branson walk away now that he can't 'steal' NR.

  • 51.
  • At 12:29 AM on 04 Dec 2007,
  • Colin Smith wrote:

"45. steve wrote:

The rule is (or should be) that the Lender of Last Resort facility should *only* be made to solvent parties. If NR was not really solvent, then it was highly irresponsible (and inflationary) for the BoE to make these loans."

Sorry Steve. You appear to be under a misconception about banks and banking. ALL banks are inherently insolvent.

They ALL lend out more than they hold in reserves, and not just a little bit more. They can lend up to 30 times more than they hold in reserves.

This is why the "trust" in the system is so important, and so laughable. The whole system only works because the plebs blindly trust their high street banks. The instant people start actually demanding their money, it all comes tumbling down.

All banks are fundamentally unsound. Which is why the banks and government have to keep telling us they are safe. Would they have to keep telling us if they were standing on safe ground? Or do they have to keep telling us so because they're walking a tightrope?

The real laugh is that banking is literally a confidence game and bankers are confidence men. All legal and above board. Pillars of society they are.

http://www.mises.org/econsense/ch79.asp

  • 52.
  • At 07:01 AM on 04 Dec 2007,
  • bunker bill wrote:

Economics can be boiled down to "supply and demand" . Once you understand how
these mechanics work you can soon get a
grip on how inflation is created.
If you increase the supply of a commodity but the users of that commodity do not increase, then that commoditys "value" in relation to others will fall .

If that commodity is a fiat currency
then so be it.

Money creation creates inflation.

If you do not beleive that than so be it but then you should realise that you are borrowing future generations wealth to support your own.

  • 53.
  • At 02:04 PM on 04 Dec 2007,
  • Colin Smith wrote:

"48. Jim Allen wrote:

I don't think it will stop with NR, I fully expect another bank or two to go down with them. Talk in the office is centred on the Abbey - their share price has halved"

It's simple. Who are offering the highest interest rates? Why do they need deposits that badly? Oh and don't just look at their deposit account rates and their share price. Look at the bank bond issues.

For instance, there's a perpetual Barclays bond at 9.875% declining to 100.88 just now, given that we're probably going to be deflating next month that's a fabulous deal... Unless...


"50. John Constable

After all, are'nt we always being told by financial professionals that it is sensible and rational to 'diversify'?"

You need to also realise that cash itself is a commodity, like any other. It's value changes year on year, just like any other commodity. Imagine if the government and banks were producing 15% more cash every year. Wouldn't that overwhelm the interest rates you were getting in your bank accounts? Wouldn't your cash be losing value?

The values of all commodities move relative to one another depending on supply and demand, and money is just one more commodity. Money is no more a safe investment than shares or gold. So if all your value is stored in cash... Not very diverse.

  • 54.
  • At 04:02 PM on 04 Dec 2007,
  • William wrote:

It might help to keep things in perspective if we compare NR's borrowing figures with actuarial estimates for the liability of unfunded public sector pensions (see here) which represents money that really will have to be paid by the taxpayer at some point (ie risk = 100%).

I reckon that £960bn represents over £15,000 for every man, woman and child in the UK, regardless of whether they are earning anything or not. Since only around half the population are economically active at any one time, then it becomes more like £30,000 a head. Now that really is something that we should be concerned about!

  • 55.
  • At 12:52 PM on 05 Dec 2007,
  • Bill Ward wrote:

I have found reading the comments associated with the NR situation fascinating!
To those who complain that nothing else is being discussed at the moment I say bear with it because this is VERY important. The other issues such as oil, shares etc, etc will all come back to the fore in due course but as far as I can see this is the first time in history that there has been a bank run that has been so completely in the public gaze. The last one, however long ago it was, was in a different social world.
It is difficult not to be conspiratorial when our politicians are up to their collective necks in back handers but there ARE hidden interests who would rather the prols get on with their little lives and not bother with such technical issues which must clearly be beyond our comprehension.
It is time to wake up to the utter illusion our society has become. An almost infinity of choices where the answer is always yes, but of course at a price. Debt, debt and more debt and the folly of seeing debt as an asset!
I apologise if I misquote slightly however I read some time ago a quote attributed to Thomas Jefferson that "Banks are a greater threat to our liberty than any army"
The scrutiny of NR, the Chancellor and the B of E should be merciless because if it isn't and we don't pay attention then we will all ultimately pay a price.

  • 56.
  • At 03:34 PM on 05 Dec 2007,
  • Jonathan wrote:

Title of this blog:

"Rock borrowing - the facts"

Mr Preston's basis of these facts:

"How do I know? Errr. Well I’ve been told by a couple of people I trust."

Its embarassing and almost lauaghable to see these both side by side in a man's blog who seems to be intent on furthering his career by reporting daily on what appears on the surface as "something to do".

Mr Preston once again reporting on more hearsay, causing yet more panic and more unecessary speculation. I am trying not to be be offensive but I really wish Mr Preston would re-visit the NR issue once he actually does have "facts".

Here's an idea Mr Preston, why don't you visit a NR branch and talk to the staff who have to bare the grunt of the customers on a daily basis that your fascist blogs seem to influence so much. Perhaps then you will get a better perspective of the "facts" that you dictatorship on the NR dillema has caused.

  • 57.
  • At 07:05 PM on 05 Dec 2007,
  • GF wrote:

No. 54. In response to your off-topic post.

Your article explains that the actual government liability is significantly less than that you suggest.

You also seem to be concerned about pension funding, but not other government borrowing. I would be interested to hear your reasons as, so long as liabilities are properly accounted for, they are interchangable. The reason these liabilities are unfunded is because if there were funds, then they would be invested in government bonds. Effectively the government would issue a bond then immediately buy it back, how does that make sense?

The usual angle of these complaints is to rail against the "gold plated" pension schemes that the people like to think that the taxpayer is paying for.

Nothing could be further from the truth. The value of pensions is taken into account when setting public-sector pay. Therefore, the government is actually borrowing the pension savings of it's employees to fund taxpayer spending. The unfunded money is not taxpayer money it is employee's deferred pay!

In fact the government gets quite a good deal by repackaging some of it's employees' pay into pensions. This is because many of the employees are low paid and would otherwise probably fall into means tested benefits if they were paid fully in cash.

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