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Northern Rock: Back to old habits?

Robert Peston | 13:44 UK time, Tuesday, 22 March 2011

I asked someone to pinch me this morning when I saw that Northern Rock had launched its first securitisation issue since its great crisis of 2007.

The bank is raising less than £400m from parcelling up mortgages into bonds and selling them on to investors - which is equivalent to around 2% of its balance sheet. And Northern Rock would argue that it is prudent to diversify its sources of funds - and not be wholly dependent on retail deposits.


Northern Rock advert

But as you will know, it was Northern Rock's excessive dependence on raising money from securitisations, from selling asset-backed bonds, which almost killed it three and a half years ago, when the market for those bonds closed down.

So here is the question: Is it good news that those markets have recovered enough, and Northern Rock's reputation has improved enough, for the bank to be able to raise money in that way again?

Or does it show that banks are still too dependent on what some would see as a failed financial technology?

To be fair to Northern Rock, the size of this bond sale is pretty small. It would be wrong to accuse the Rock of falling off the wagon, in the sense of getting drunk again on allegedly easy money from wholesale markets.

But it is nonetheless striking that this bank which is now tiny doesn't think that it might be more sensible to have no gap at all between what it lends to households and the money it takes in from households.

Arguably if banks got back to their position of 2000, when in aggregate there was no gap between what they lent and what they took in from customers - and therefore they had no net dependence on funds raised from bond markets and wholesale providers - the UK financial system would be more solid.

So given that Northern Rock is nationalised, there is powerful symbolism in the implied decision of the Treasury to allow the Rock to engage in securitisation again.


Northern Rock office block

That symbolism is even more powerful when for banks in general, both here and throughout the EU, there is still a substantial refinancing problem stemming from the previous boom in securitisations. Over the next couple of years, vast amounts of maturing debt, including emergency loans from taxpayers made to fill the gap created when commercial markets closed, will come up for repayment.

So for example the Financial Services Authority, the City watchdog, disclosed last week that more than £110bn of bank debt guaranteed by taxpayers under the Credit Guarantee Scheme is still outstanding and is due for repayment within two years. And something like £100bn has to be repaid to the Bank of England in 2011 as a result of the winding up of the Special Liquidity Scheme.

On top of that, there's at least a further £100bn of bonds that aren't guaranteed by taxpayers which has to be repaid by the end of 2012.

Now on the one hand, it looks like good news if banks can raise money again from asset-backed bond markets to repay these debts, because it means they are under less pressure to curtail what they lend to households and businesses - and it means that there's less of a drag on our economic recovery from constraints on banks' ability to provide credit.

However, there is another argument which says that if the borrowing habits of the years leading up to the crash of 2007-8 were so dangerous, it would be better if banks increased their loans in the longer term only in proportion to the money they take in from reliable customers like you and me.

Update 13:44: Northern Rock tell me the main reason they are selling the bonds now is that raising money in this way looks relatively good value.

They are keen for me to point out (which of course I already did in my last note about their annual results) that as of now - and following the break up by the government of the old Northern Rock into an active deposit-taker and a separate organisation managing the repayment of historic loans - they have lent less in mortgages than they have taken from individuals in the form of deposits.

So, for the avoidance of doubt, the sale of bonds should be seen as a signal of how the bank see their future financial needs.

Comments

Page 1 of 2

  • Comment number 1.

    It must be genetic and yet contagious for all those who pull the strings in NR. Are we sure the Treasury approved. It may be a relatively small sum but it is the symbolism that may excite the banks critics and could become quickly political (shows what Osborne really thinks about bank regulation). Is it the abstaining alcoholic's renewed taste of the forbidden substance?

  • Comment number 2.

    Given that one of the fundamental "challenges" with banking is maturity transformation - then this matching of the duration of assets and liabilities is surely a good thing.

  • Comment number 3.

    Thanks for making an interesting point Robert. As our banks remain essentially unreformed it makes me fear for the future. The same old practices are reappearing.

  • Comment number 4.

    Robert Peston.

    "So here is the question: Is it good news that those markets have recovered enough, and Northern Rock's reputation has improved enough, for the bank to be able to raise money in that way again?"

    there's a war on and I suspect that the scoundrels* who push this deal are simply being opportunistic, thinking no one will look too closely now. ;)

    * no realistic description of these people will get past the moderators

  • Comment number 5.

    The banks simply can't win with Mr Peston. On the one hand, 'it would be better if the banks increased their loans in the longer term only in proportion to the money they take in from reliable customers like you and me'.

    On the other hand, RBS, Lloyds et al get pilloried, often on this very blog, for not lending enough money to UK business or for making mortgages too difficult to get.

    And on top of it all, the regulator tells them (again in line with what this blog advocates) to hoard more capital to make them safer - again reducing the money available for lending.

    You can't have it both ways, you either want the banks to lend more or lend less. Which is it?

  • Comment number 6.

    The problem is not about returning to old failed habits but the fact that the combination of accounting rules and company law are such that all banks have to actively consider securitisation of all long term loans. I would hestitate to say this is a requirement of law/accountancy but it is very very close to that.

    The point is that mark to market accounting rules require long term loans to be marked to the market even if they intend to hold until maturity. As that would create volatility in the p&l which is not in interests of shareholders then this means directors have to consider whether securitisation and hence certainty in the p&l is the better long term approach - depends on securitisation price

    Classic example of rules producing unintended and perverse results

  • Comment number 7.

    Robert, i have to pinch myself that you still write this mis-informed, half-truth nonsense.

    This is a prudent, sensible approach from Northern Rock - would you prefer it if it just trundled along with far too much capital and too many assets and never made a profit for its government shareholders? I guess that would be a good story for you too. Cake and eat it, sir??

    I have had a very bruised arm for some time now.

  • Comment number 8.

    After the good bank bad/bank split these bonds must offer a reasonable return now that all the toxix sub-prime loans have been stripped out. Depositors like you an me are unlikely to hand over cash for a negative return whilst interest rates are so low. We might just as well take a punt on Premium Bonds. Hopefully the FSA/BOE will monitor more carefully in future.

  • Comment number 9.

    The public are the fall guys in these situations and the banks and building societies will carry on as they have in the past until it all goes pear shaped and we pay again and again and it's about time there was legislation intrdouced to stop the public having to bail them out. Other businesses are left to face the consequences of their actions and it inevitably means they go bust. How much more are the British public expected to pay or indeed put up with.

  • Comment number 10.

    So glad that my Northern Rock shares are worthless or else I would have to get worried all over again.

  • Comment number 11.

    I'm sure many many people will point out that with interest rates so low just how many people will deposit money with any bank, never mind Northern Rock. So how else will they get funds except by the method you decry.

  • Comment number 12.

    Amazing that any investor would want to buy any of this junk! Just so I understand, a loan to NR based on the notional value of a bunch of mortgages, in turn based on the notional value of residential property, in turn based on the assumption that property prices will not go down, in turn based on the assumption that the mortgage holder will keep their job and that interest rates will not go up, in turn based on the ability of the BOE to control inflation, in turn based on the premise that The Fed will stop printing money after QE2 finishes, in turn based on the assumption that The Fed will be able to persuade somebody else to start buying US Treasuries other than itself. Doesn't sound very promising, does it?

  • Comment number 13.

    "Or does it show that banks are still too dependent on what some would see as a failed financial technology?"

    That statement is an Oxymoron and so is the term Financial Innovation - an Euphemism for fraud.

    Make no mistake if it was technology/innovation involved in Finance, the Germans and Japanese would have whipped our back side by now. Our 'Masters of the Universe' are speculators and not innovators!

  • Comment number 14.

    One of the reasoins mortgage lending remains so tight is that lenders know current house prices are unsustainable. Graduates will soon have as much debt as the average first time mortgage, far more will be paid in tax, pension contributions will increase. These all mean a smaller percentage of wages available for mortgages. Only when prices moderate to reflect this will lenders be able to lend again sensibly. Deflating the boom doesn't just mean dealing with means of finance as many would like us to believe. The real adjustment has to be in prices.

  • Comment number 15.

    criminal lunacy! Comes immediately to mind.

    Somehow sometime we HAVE to return to 'prudential' banking (and saving). Until we do the bubbles will come thick and fast and the currency will be destroyed - we are the new idiots of money - the new Weimar Republic without the excuse of reparations.

    We need to get back to sane money.

    To that end let me introduce the new organisation for promoting sane and prudential money

    - The Twenty Timesers -

    objective sane money and a National Maximum Income of twenty times the national minimum wage. Just like David Cameron proposed when he came to office. Remember not all Tories are bonkers some have the one national at heart.

    So here is to the Twenty Timesers, may they live long and help the Nation return to prosperity with equality. I've run it up the flagpole to see if anyone will salute!

  • Comment number 16.

    > But it is nonetheless striking that this bank which is now tiny doesn't think that it
    > might be more sensible to have no gap at all between what it lends to
    > households and the money it takes in from households.

    Why are those fools meddling again in things they barely understand?

  • Comment number 17.

    Surely the question is: What is the credit rating of these bonds.

  • Comment number 18.

    6. At 11:53am on 22nd Mar 2011, Justin150 wrote:

    > that would create volatility in the p&l which is not in interests of shareholders

    Don't forget - the last time those fools tried this, they went bankrupt! And bankrupcty is not in interests of shareholders!

    > Classic example of rules producing unintended and perverse results

    Indeed - they must be told what we allow them to do, and all else is banned. That's the only rule they need.

  • Comment number 19.

    The devil is in the detail which I cannot see in the article

    Is it a securitisation or a covered bond - there are many differences between the two?
    What is the maturity date of the paper issued? Is it short term, which was NRs problem before in that all paper matured within close proximity? Or is it longer term and so giving them a more stable platform from which to lend?

    Securitisation in itself is not a bad thing as long as the maturity dates are decently spread and as long as people keep paying their mortgages. It makes no differene whether the house values or prices go up or down, as long as people keep paying

  • Comment number 20.

    The problem with this financial crisis is that journalists do not understand it. They did not understand it when banks were lending too much, irresponsibly and they do not understand it now.

    Given that a great deal of our population now has to be spoon fed (a legacy of the Labour years) the media becomes their brain and if the media are stupid, the people are stupid. Gone are the days that journalism was a respected career, gone are the days when they recruited people who wanted to make a difference and as they say, you reap what you sow.

    What I am trying to say, in as nice a way as possible, is please refrain from passing comment on that which you are not qualified to do so. The fact that you revel in "breaking stories", which anyone with decent contacts and a mobile phone could do, and not properly criticising stories that have been written simply proves that you are more interested in you and your career than enlightenment. For me, that is the journalist's cardinal sin.

    There are a few comments here already which you would do well to read, I will not cover the same ground.

  • Comment number 21.

    Someone else wants a piece of the MBS action, foreclosuregate anyone?

    http://www.bbc.co.uk/news/business-12814609

    This begs another question, who actually owns a Northern Rock mortgage and could they prove it in court. Just a thought.

  • Comment number 22.

    "I asked someone to pinch me this morning when I saw that Northern Rock had launched its first securitisation issue since its great crisis of 2007."

    Never mind a 'pinch' Robert. I'm off to the pub for something stronger......

    Anyone seen 'Groundhog Day'?

  • Comment number 23.

    15. At 12:27pm on 22nd Mar 2011, John_from_Hendon wrote:
    objective sane money and a National Maximum Income of twenty times the national minimum wage. Just like David Cameron proposed when he came to office. Remember not all Tories are bonkers some have the one national at heart.
    ============================

    DC meant that for the public sector only - in full knowledge that the current average from top to bottom is 12 times in that sector, thereby legitimising increasing pay awards for the small number at the top and cuts for the majority at the middle or bottom.

    You are dreaming if you believe he meant it at the national level including the private sector.

  • Comment number 24.

    Well, while some one (banks) was enjoying me at my expense they even took photo’s and are now throwing them in my face!

    While others and myself have been condemning these monstrosities no one will listen, THEY LEAD TO LIQUIDITY PROBLEMS, they are a prime example of inward spirals and when they reach the centre we bail them out.

    Simple Maths:

    Spend 10, receive 9
    Spend 9 receive 8

    Spend 2 receive 1
    Spend 1 = Liquidity problem

    NOW!
    The only way to reverse the above is to spend more!!! i.e. create a bubble e.g. housing!

    I give up? Not really!

  • Comment number 25.

    "Those that fail to learn from history, are doomed to repeat it"
    Winston Churchill

  • Comment number 26.

    I've just done a guarantor mortgage for my daughter with NR, and I have to say having done the rounds of the other banks, NR actually sorted it out properly, asked the right questions and were very responsible in explaining it all to her.

    I much prefer NR to use the bond sale approach, rather than look to roll over their wholesale borrowing as it used to before, which led to the meltdown when the sub-prime crisis hit the USA. I'd be happy to have some of my pension pot invested in NR bonds, provided their lending policy was as responsible as my personal experience indicates it is.

    VOTE OF CONFIDENCE IN NR!

    IMHO the previous management were totally irresponsible in the way they mismanaged the wholesale borrowing profile and in the "sub-prime" mindset for much of their lending.

    Now with UKFI on their case, we're seeing the right mix of financing and lending risk profile - my experience of going around the other banks was their EXTREME risk aversion now to the point that with £1m of assets, 25% deposit and a good family income to provide the guarantee, they still made it virtually impossible for us to meet their lending criteria - first time buyers with small deposits and no help from parents have zero chance, as far as I can see....

  • Comment number 27.

    Yes, sounds like the Boy George is happy for the banks to get back to their bad old ways again.

    It's stupid.



  • Comment number 28.

    And so the circus begins again and 'Can't Do, Won't Do' Osborne sits by and does nothing whilst the thieves recreate the financial mess and this downward spiral continues. Stupid!
    Either way the banks and corpoations are practically running the government and the government are too inept to do anything about this. An absolute shambles.

  • Comment number 29.

    "If it ain't broke, don't fix it..."

    That's what the banks have been saying all along...

    And every bail-out since the crash of 1987 has INCREASED the moral hazard...

    So yes, the Treasury are positively ENCOURAGING the banks to go back to business as usual... in order to save the financial system...

    Maybe we'd better get used to it...

    But on second thoughts...

  • Comment number 30.

    I've had a brilliant idea as to how the banks can pay back those huge amounts Robert mentions. They can take advantage of the low BoE rates to push lots of low cost mortgages with upfront discounts to all those people who are currently unable to get onto the property ladder. Doing this will increase demand which in turn will push up house prices and increase the value of the banks assets, making it even easier for them to generate additional debt^W money for further loans. Everyone wins !
    What could possibly go wrong ?

  • Comment number 31.

    All this user's posts have been removed.Why?

  • Comment number 32.

    12. At 12:11pm on 22nd Mar 2011, geofffromleeds wrote:
    '........, in turn based on the assumption that The Fed will be able to persuade somebody else to start buying US Treasuries other than itself. Doesn't sound very promising, does it?'

    Indeed it doesn't

  • Comment number 33.

    What sort of investor would buy into bonds directly connected to the UK domestic property market just as that market is beginning to crumble?

    How quickly can prime become sub-prime? When there is unemployment about!

    Time for banking reform!

    And time that revolving door between the Treasury and the City was locked, bolted and barred.

  • Comment number 34.

    C'mon everyone...

    The Banks make the rules, which are followed by the fools

    Bankers need bonuses - Get back to work - Know your place!

  • Comment number 35.

    Afternoon Robert,
    thank you for your blog alerting the populace as to what the politicians are up to again!
    Two thoughts come to mind. If it's a small insignificant sum of money then why do it?
    How long before the other insolvent banks jump on this bandwagon and start the securitization fraud all over again?
    Have you noted, Robert, that banks in China now have to have liquid reserves (Tier1 Cap) of 20%? This is expected to rise to 23% for some of the more dodgy Chinese banks. This is so that the Chinese Government can try and slow down the rampant inflation there.
    What is the UK's response to this?
    Hyper-inflation, here we come again!

  • Comment number 36.

    RP Wrote:

    "However, there is another argument which says that if the borrowing habits of the years leading up to the crash of 2007-8 were so dangerous, it would be better if banks increased their loans in the longer term only in proportion to the money they take in from reliable customers like you and me."

    --------------------------------------------------------------------------------

    How dare you accuse me of being reliable.

  • Comment number 37.

    Sad to see the usual suspects trotting out their hackneyed conspiracy theories and prophecies of doom. Let me enlighten you:

    A securitisation is just a secured bond. One of the bloggers asked what the difference between a securitisation and a covered bond is. The answer is not very much. Sure there are a few techical differences but nothing to get excited about. Sorry, now move along.

    Also, these bonds will indeed be rated AAA. Oh the howls of laughter, I can almost hear them now. Well how many residential mortgage backed bonds originally rated AAA have EVER defaulted in Europe? Answer: 0. How many AA? Answer O. How many single A? Answer O. How many BBB? answer O. Do you really want me to go on. Hmmm - maybe they're not a bad investment - particularly when you've got so many people around who don't have the first idea about them who prefer just to sling a few mis-informed comments around.

    Stick to talking about stuff you know about i.e. failed marxist dogma.

  • Comment number 38.

    29. At 12:52pm on 22nd Mar 2011, rock_and_roll_economics wrote:
    "If it ain't broke, don't fix it..."

    ............

    Capitalism wasn't broke but they broke it when they tried to fix it by bailing out companies that should be allowed to fail.

    The root causes of the banking crisis still exists within the financial, regulatory, rating and political systems..except we have problems now we didn't even have in 2008..

    Portugal will kickstart the Eurozone crisis, the Fed will begin QE3, food prices will keep jumping with each new disaster (expect lots this year due to solar activity) and the middle east crisis will continue to push up the price of oil.

    The other major problem that the banks have now that they didn't have in 2008 is they have been exposed as the greedy vampire squid corporations they are and customers do not trust them one bit. Everyone I know is paying down debt and if they can moving their accounts from the big four.

    Capitalism is in a death spiral and the austerity measures have only kicked the can down the road.

  • Comment number 39.

    When will they ever learn eh?

    Speaking of which - the Irish seem to be in a little trouble - rumours are that someone forgot to pay the bond bill!

    http://www.bloomberg.com/apps/quote?ticker=GIGB2YR:IND

    Now where is that profit from our rescued banks? - I mean we should get our hands on it before we have to bail them out again.......oh wait, I just remembered....WE'RE NEVER GETTING IT BACK!

    "But it is nonetheless striking that this bank which is now tiny"

    ...and this is why....because when NR was a multimillion pound institution it's profits were equally huge.
    The problem is that NR is now a fraction of it's former self - so even if it returns to the profitablility % of it's former self - the absolute value will be pitiful.

    This is a basic point missed out by MSM and the people that follow it. I'd like to know how anyone expects us to gain the same profit from our 'enterprise' when NR has gone from being a nationwide fruit seller - to an individual market stall trader in less than 3 years......oh and it's get debts to pay off too.....oh and the competition is harder as many banking monopolies have been formed during the crisis.

    It's not hocus pocus - it's logical reality. I'd love it if someone can explain how the taxpayers money will be returned - I don't think people can comprehend the scale of downsizing and therefore the improbability of generating the profits required to pay back the taxpayer.

  • Comment number 40.

    Good to hear that Northern Rock is returning to normal.

  • Comment number 41.

    Asset backed securitisation is a perfectly legitimate source of funding from the wholesale markets - the idea of taking multiple assets (mortgage loans) and packaging them into long-dated bonds for institutional investors (like your pension fund)

    What I'm more interested in is (a) the extent of that funding model for any given bank and the subsequent business model risk, and (b) whether the ratings agencies actually finally understand how to rate these instruments (HINT: It won't all be AAA!).

    And for all of those homeowners out there...you should be pleased this is happening as long-needed capital may well finally start flowing back into the property market. Or would you prefer the value of your house to drop again?!

  • Comment number 42.

    37. At 13:36pm on 22nd Mar 2011, a_sensible_comment

    Here we go lets listen to the claptrap!

    Here’s some facts about how to bundle these monstrosities together:

    Lets assume the average default rate over the last 20years is 6% and that the tipping point is 10% on defaults for these monstrosities to fail.

    This is where your nice but dim bank mathematician comes along and says:

    BASED ON AVERAGES WE CAN PUT UPTO 4% NOT VERY GOOD OR SUSPECT MORTGAGES IN THE BUNDLE WITH NO EFFECT!

    A suspected 10% default rate will still give an AAA rating BUT! 1 or 2 unsuspected defaults ‘baggersit up’ good and proper

    As I said Nice but Dim!

  • Comment number 43.

    38. At 13:38pm on 22nd Mar 2011, stennylfc wrote:

    "Capitalism wasn't broke but they broke it when they tried to fix it by bailing out companies that should be allowed to fail. "

    OK - so does that mean you would have volunteered to tell all the account holders "sorry, your savings are gone - caveat Emptour!"

    I have yet to meet anyone who is prepared to actually do this - I'm sure the people would go easy on you - I mean they didn't look that angry!

    http://i.telegraph.co.uk/multimedia/archive/01800/rock_1800363i.jpg

    I mean some of the people look almost jovial - I'm sure losing everything over 25k would seem like a bit of a laugh to them!

    Capitalism was broke when it started - Karl Marx identified the 'broken bits' in his book Das Kapital - but fortunately nobody took any notice and as a result we're now saying regulation or Government broke it.

    Isn't total absence of responsibility fun eh?

  • Comment number 44.

    12. At 12:11pm on 22nd Mar 2011, geofffromleeds wrote:
    Amazing that any investor would want to buy any of this junk! Just so I understand, a loan to NR based on the notional value of a bunch of mortgages, in turn based on the notional value of residential property, in turn based on the assumption that property prices will not go down, in turn based on the assumption that the mortgage holder will keep their job and that interest rates will not go up, in turn based on the ability of the BOE to control inflation, in turn based on the premise that The Fed will stop printing money after QE2 finishes, in turn based on the assumption that The Fed will be able to persuade somebody else to start buying US Treasuries other than itself. Doesn't sound very promising, does it?

    .....

    Alternatively known as a pack of cards. Picking up on one point I dont think the Fed will stop printing after QE2. There will be a temporary lull, and I suspect commodity and stock prices will tank, and then they will start QE3 to reinflate the bubble, that is until the dollar collapses. There is signs that the end game is drawing near and the confidence in the dollar is slipping, eg. Iran is quietly getting rid of its dollars for gold.

  • Comment number 45.

    Robert;
    Can you at some point explain who and where the wholesale markets of money are. We often hear about big institutions going to the wholesalers and I have a mental picture of a bank trundling down to the cash and carry, loading up the armoured car, and driving off home.

    Then I suppose the next question is where do the wholesalers get their stock from..??

  • Comment number 46.

    Just one question.

    Are they still Too Big To Fail?

  • Comment number 47.

    Bob,

    Have you have made a couple of errors in that article?

    1) Should your "watchdog" in
    "the Financial Services Authority, the City watchdog"
    really be "lapdog"?

    No doubt you have heard today that the FSA have asked but been refused permission by their banking masters for mortgages to be supplied based on affordability? Also Interest Only loans are not going to be banned after all.

    2) The whole tone of your article seems to imply that you think the governmint are in charge of the banks. Shouldn't it be the other way round?

    Obviously there are the usual bonuses based on fictitious profits. However just last week we have a new "innovative" mortgage scheme where Councils are going to give Lloyds 20% deposits as guarantors for FTBs with 95%(!!) mortgages. If the government were really in charge do you think they would be allowing council taxpayer's cash to help inflate property prices again and be used to generate more profits for Lloyds?

  • Comment number 48.

    37. At 13:36pm on 22nd Mar 2011, a_sensible_comment wrote:
    "Sad to see the usual suspects trotting out their hackneyed conspiracy theories and prophecies of doom. Let me enlighten you:

    A securitisation is just a secured bond. One of the bloggers asked what the difference between a securitisation and a covered bond is. The answer is not very much. Sure there are a few techical differences but nothing to get excited about. Sorry, now move along. "

    Para 1 - totally agree :-)

    Para 2 - was asking if RP could make it clearer for there are some regulatory differences between the two and CBs are generally regarded as safer by investors. But as you rightly point out, they are the technicalities :-)



  • Comment number 49.

    #44. At 16:19pm on 22nd Mar 2011, Averagejoe wrote:

    "There is signs that the end game is drawing near and the confidence in the dollar is slipping, eg. Iran is quietly getting rid of its dollars for gold"

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Near, we're in it my friend. PIMCO have no faith in US bonds and many countries are talking about currency trades/exchanges eliminating the dolllar from key commodities.

    As for Norther Rock, deperate means call for desperate measures when funding dries up and you live for funds. Like a thirst crazed man at a stagnant pool, do you drink or not, The Rock have chosen to drink, they may live and propser or they may fall ill. One thing is for certain if they drink too often they will become mortally unwell but as for now this is simply a token risk, nothing extreme just a toe in the pool to see if it burns.

  • Comment number 50.

    Do the terms come with a taxpayer bailout guarantee, i.e that we will NOT provide one?

    I mean why should we have to provide another bailout?

    But this should be seen for what it is, one of the first steps on the road to credit crunch 2. How long will it take this time if, back in 2000 things were in "equilibrium," but busted by 2008?

  • Comment number 51.

    @39. At 13:51pm on 22nd Mar 2011, writingsonthewall wrote:
    "When will they ever learn eh?

    Speaking of which - the Irish seem to be in a little trouble - rumours are that someone forgot to pay the bond bill!"


    Lost the coupon? Easily done. Just had a whip round the bar and we’ve got a few IOUs together. It’s all in the post.


    “I don't think people can comprehend the scale of downsizing and therefore the improbability of generating the profits required to pay back the taxpayer.”


    Not everyone. I’ve got EM pics ~1 million x mag. Similar scaling?

  • Comment number 52.

    Once the government had made the fundamental mistake of bailing out an irresponsible financial organisation, the whole picture changed. Now the precedent has been set, it becomes foolish to avoid risk, given that you're a big enough bank.

  • Comment number 53.

    It would have sent a strong message to all banks if Northern Rock had simply been allowed to go bust

  • Comment number 54.

    In a submission to the Banking Commission, someone calling himself by the pseudonym ForensicStatistician put forward the following measured and sober criticism of what Northern Roch has just re-commenced doing:-

    1. The very structure of separating loan origination from ownership awakens deep-rooted concerns about exploitation of asymmetric information, namely adverse selection and moral hazard.
    2. The expectation of market operations to effectively regulate credit risk is shown to be unfounded, instead resulting in ill-conceived and excessive lending practices.
    3. The recent growth in debt levels therefore may be masking a more fundamental issue of declining debt quality, such as debt for consumption and Ponzi financing.
    4. Risk transfer practices mean that poor credit risk judgments are increasingly likely to be borne by unsuspecting counter-parties such as underwriters of credit default swaps and central banks enjoying government support.
    5. Finally, the climate for fraudulent activity is amplified as government support for institutions with the potential for suffering losses (on securitised assets) increases.

    For me, what that meant was that securitised assets were poison and that their continued use ought to be banned as soon as possible (I firmly believe they ought to have been strangled at birth).

    That, of all banks, Northern Rock (given its history and the fact that we own it) is being permitted by the authorities to resume issuing these misbegotten near-fraudulent products of nefarious financial engineering is a scandal of major proportions.

    Bankers are the unacknowledged rulers of our country, without ever having sought - let alone won - election. We are governed by a plutocracy, and only profit counts.

    Does anyone know what bonuses the NR traders and managers stand to earn? It was the prospect of colossal loot from bonuses that drove the whole mortgage-backed securities/sub-prime scam (aided and abetted by ratings agencies paid million to falsify credit-ratings).

    I think Bernie Madoff should be canonized, for being the only one to put his hand up.

  • Comment number 55.

    "...The bank is raising less than £400m from parcelling up mortgages into bonds and selling them on to investors..."

    ++++++++++++++++++++++++++++++++++++++++

    What do you mean by this? A mortgage is an interest in land. As such it should be transfered by deed (if legal) and its ownership registered at Land Registry.

    What exactly is going on?

  • Comment number 56.

    @2. okeen wrote:

    "Given that one of the fundamental "challenges" with banking is maturity transformation - then this matching of the duration of assets and liabilities is surely a good thing."

    Not by a bank that we own it ain't. A bank that, having been rescued once by us, clearly isn't going to be allowed to fail again - otherwise why bother to rescue it in the first place? Whose staff's earnings are therefore enhanced by virtue of its being able to borrow money cheaper than it ever would be able to were our implicit guarantee not in place.

    Such a bank ought to be practising *maturity matching* not maturity transformation. Maturity transformation should only be for banks that can go bust if they get it wrong, and whose depositors are not covered by taxpayer-funded deposit insurance.

  • Comment number 57.

    At 13:51pm on 22nd Mar 2011, writingsonthewall wrote:

    "Speaking of which - the Irish seem to be in a little trouble - rumours are that someone forgot to pay the bond bill!"

    Where did you get that idea from - are you saying the Irish State has already defaulted on its debt??

    Our dear friend Mr Writingsonthewall (a supposed revolutionary anti-capitalist freedom fighter - who works in the City for a financial institution. Interesting....) also wrote:

    "It's not hocus pocus - it's logical reality. I'd love it if someone can explain how the taxpayers money will be returned - I don't think people can comprehend the scale of downsizing and therefore the improbability of generating the profits required to pay back the taxpayer."

    What you, and a lot of other people, fail to understand is that the taxpayer isn't going to "get paid back" as such, because it didnt extend a loan to the banks. The State injected new equity capital into the banks. What will happen one day is that the 83% shareholding the State currently has in RBS, say, will be sold back into the public equity markets. This may not happen for another few years, while RBS continues its restructuring (which actually has been carried out in quite impressive way so far), but it will certainly happen one day.

    The £35 or £50 odd billion injected by the State into RBS is not going to get directly paid back, pound for pound, by the bank from its profits, like a classic loan. It will get paid back by selling a pound for pound amount of stock to investors, once the RBS share price goes back to a level at least equal to what the State paid for it in 2008/09. The effect of this is that the RBS shareholders prior to the bailout have been totally diluted and will be the big losers - not the taxpayer (who may even make a profit).

    You really need to understand what you are talking about before posting the regular sweeping and generally ill-informed and ignorant posts that you seem so adept at.

  • Comment number 58.

    @5. Andrew wrote:

    "You can't have it both ways, you either want the banks to lend more or lend less. Which is it?"

    Speaking for myself, I don't want it both ways. I want the existing system reolaced by an entirely re-structured one - honest banking. With effective, genuine, competition.

    http://www.positivemoney.org.uk/

  • Comment number 59.

    @6. Justin150 wrote:

    "Classic example of rules producing unintended and perverse results."

    Very well said.

    So, isn't the moral obvious? Change the rules so that they make sense. Once upon a time they did, I understand, but they were changed. Could that have been because that got in the way of the wide-boys so they were changed to let them make hay? Or was it just plain cockup?

    Rules are made by humans for humans; they can be changed whenever necessary to make them more fit for purpose. It's just a matter of will.

  • Comment number 60.

    George bernard Shaw most certainly got it right,
    'If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience'.
    One really has to question how much longer the uber capitalists are going to get away with continually lining their own pockets at the grassroot populations expense.

  • Comment number 61.

    @54. At 17:29pm on 22nd Mar 2011, torpare wrote:
    "......I think Bernie Madoff should be canonized, for being the only one to put his hand up."


    St Bernard of Butner. All in good time......

  • Comment number 62.

    41 Matt

    `And for all of those homeowners out there...you should be pleased this is happening as long-needed capital may well finally start flowing back into the property market. Or would you prefer the value of your house to drop again?!'

    Sorry, but I want the value of my house to drop so that I can sell it to someone who can afford it when I retire in a few years time. I have no debt secured on it and want to walk away with some cash to make up for the pension that has been looted by both government and administrators.

    If the price goes up how the blazes could anyone afford it?

    This is just fantasy economics. The value of your asset is the price someone will pay for it which is directly linked to the value they place in that asset. If the purchase of the asset requires that they mortgage their lives and income away on some stupid multiple then we continue in the world of fantasy economics.

    This is self-delusion compounded by dishonesty. Domestic property prices have to fall. You might not like it but you know it makes sense.

  • Comment number 63.

    @57 bigbankerbonus has it right. The taxpayer gets repaid when the shareholding is sold, hopefully at a profit. So all those who want RBS to pay its people peanuts should think about how "we" are going to get paid back if the bank is run into the ground for purely political reasons. Remember: Fred Goodwin and his cronies, who did the damage there, are long gone, replaced by (hopefully) better management. Let them run it like a proper bank and make some money so that the government can get out at a profit sooner rather than never.

    @54 torpare ... what can I say? You're joking about Bernie Madoff, right? Canon Bernie is 2 years into a 150-year prison sentence for fraud. He didn't put his hand up, he put it in the till.

  • Comment number 64.

    @62 stalinic - please call me urgently. I have some great deals for you.

  • Comment number 65.

    Well it worked before. Didn't it?
    Presumably the current NR masters want a repeat of getting the government, taxpayers, us, to take on all their debts.
    Again and again it would seem.

    As a business model it makes perfect sense.
    Get the taxpayers to pay. Job done.
    You know the public want to be ripped off.
    Expecting it.
    Fill your boots time.

  • Comment number 66.

    19. At 12:37pm on 22nd Mar 2011, yam yzf wrote:

    > It makes no differene whether the house values or prices go up or
    > down, as long as people keep paying

    Only a dunce would pay, once negative equity is reached. Lesson number 1: One would only continue to pay for an asset that is worth paying for.

  • Comment number 67.

    Northern Rock securitised debt previously so that they could lend more than their deposit base could support. If they are doing the same again their management should be crucified. But I suspect this time they are doing it to bring their asset to liability ratio more into line.

    And Jacques C, you say:

    'Only a dunce would pay, once negative equity is reached. Lesson number 1: One would only continue to pay for an asset that is worth paying for.'

    No not just a dunce, it could also be somebody who wants to try to keep their home, somebody who recognises that having a residual debt and no property is even worse, or somebody who just believes they should honour their contractual commitment to maintain repayments.

  • Comment number 68.

    The whole concept of signing somebody into a mortgage or loan and taking the profit from the deal but selling the debt liability on to another organisation needs stopping period.
    If they do not want the risk they should not get the reward its as simple as that, toxic debt is what got all of the financial institutions into a mess in the first place!
    What would be interesting is if the consumer adopted the same tactic e.g we sold our debt on to somebody else ! They are resorting back to type.

  • Comment number 69.

    Personally, I don't like the concept of securitising Mortgages.
    It passes the liability for the quality of the Mortgages on to the buyer.

    If a Bank wants to raise money, why does it not simply sell a Bond secured on the assets of the Bank ?

    It was packages of poor quality Loans, lent by people who really didn't care who they lent to (on commission) which helped bring about this crisis in the first place.
    Add in corrupt dealings and shortselling and you have the recipe for the crisis of confidence that took place.

    Why would another Bank wish to buy Loans it never made ?
    The Buyer has no idea of the quality of the Loans, Ratings agencies failed to see the poor quality Bonds that did the rounds last time, why would they be any different now ?

    These people have learned nothing from the last few years.

  • Comment number 70.

    torpare + Jacque Cartier

    Whilst I do not agree that securitisation was what caused NR to go bust (125% mortgages and total reliance on wholesale market to fund all activities was the problem)...

    the current accounting rules are wrong. They should be changed. To penalise banks for old fashioned relationship lending is totally absurd.

  • Comment number 71.

    • 55. At 17:34pm on 22nd Mar 2011, Eddy from Waring wrote:
    "...The bank is raising less than £400m from parcelling up mortgages into bonds and selling them on to investors..."

    ++++++++++++++++++++++++++++++++++++++++

    What do you mean by this? A mortgage is an interest in land. As such it should be transfered by deed (if legal) and its ownership registered at Land Registry.

    What exactly is going on?
    XXXXXXXX

    I cannot recall exactly what year it was but between 1999 and 2002 as chancellor GB extended the period of time in which the owner of a mortgage i.e. bank, had to register it at the land registry. This gave time for the lender to split the mortgage in two: the property side and the money side. In theory you do not owe the lender any money they are purely an agent/collector for the owners of the money side.

    In the US it is going through court as we speak because of this IMHO ‘fraud’. Many repossessions have been stopped in numerous states because the original lender cannot fully state that they are the owners of the mortgage. Unfortunately we have common laws which have never been tested with this but in order for a lender to take you to court all interested parties must be in agreement but the people/institutes/governments who have bought into these securitised ‘bonds’ are anonymous.

    Sorry EfW but what do you think me and others have been shouting about?

  • Comment number 72.

    'pinch me'!? Try using "punch me" - you'll get a bigger response.

  • Comment number 73.

    #57. At 17:42pm on 22nd Mar 2011, bigbankerbonus wrote:

    "What you [WOTW], and a lot of other people, fail to understand is that the taxpayer isn't going to "get paid back" as such, because it didnt extend a loan to the banks."

    No, that was done separately and is due for repayment between now and the end of 2012


    "The State injected new equity capital into the banks. What will happen one day is that the 83% shareholding the State currently has in RBS, say, will be sold back into the public equity markets. This may not happen for another few years, while RBS continues its restructuring (which actually has been carried out in quite impressive way so far), but it will certainly happen one day."

    So, you mean the state bought a stake by means of emergency share acquisition, these shares being "manufactured" for purpose in sufficient nuumbers alone to devalue the shares already in existence.

    "The £35 or £50 odd billion injected by the State into RBS is not going to get directly paid back, pound for pound, by the bank from its profits, like a classic loan. It will get paid back by selling a pound for pound amount of stock to investors, once the RBS share price goes back to a level at least equal to what the State paid for it in 2008/09".

    Tell me that's the comedy bit. This is the WHOLE point, the shares will never reach a value sufficient to sell at a profit for two reasons - One, bulk sale would devalue them sufficiently they would need to be around double the acquisition value. Two, drip feeding leaves investors in doubt to the future influx of shares, would you uy shares you knew would be abundant over the next few years, hardly investment material. Of course this doesn't take into account many banks are still in deep trouble so rises in share values are highly unlikely anyway.


    "The effect of this is that the RBS shareholders prior to the bailout have been totally diluted and will be the big losers - not the taxpayer (who may even make a profit)."

    Hey we agree on something, but not as diluted as a future sale will leave them

    "You really need to understand what you are talking about before posting the regular sweeping and generally ill-informed and ignorant posts that you seem so adept at."

    Pots and kettles spring to mind.

  • Comment number 74.

    #71. At 19:06pm on 22nd Mar 2011, common_man_123 wrote:

    "Unfortunately we have common laws which have never been tested with this but in order for a lender to take you to court all interested parties must be in agreement but the people/institutes/governments who have bought into these securitised ‘bonds’ are anonymous."

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Be patient, it's coming to a court near you soon. We have a problem here in the UK that mortage titles are "Named" against the mortgagee whereas in the US the title is land only giving mortagee's more rights to walk away or not as the cases are developing. In the US proof of ownership by a mortgagor is becoming difficult because of the anonymous MBS audit trail on notes, in the UK we think there may less uncertainty to ownership but it really has to be tested in court.

  • Comment number 75.

    66. At 18:36pm on 22nd Mar 2011, Jacques Cartier wrote:

    "Only a dunce would pay, once negative equity is reached. Lesson number 1: One would only continue to pay for an asset that is worth paying for"

    Very strange view to take.

    So if you buy a car on a loan, stop paying the loan immediately for you are immediately in negative equity when you drive the car off the forecourt?

    Negative equity is like appreciation - it is only true when you sell, not whilst you are living there.

  • Comment number 76.


    Mr Peston I am beside myself with apoplectic rage.

    Not with NR... the story seems evidence that the financial system may be on the mend.

    My strident criticism is reserved for the BBC. There is one rule for you Mr P, and for your team, and quite another for the voces populi.

    How else can one explain that your rubric uses the 24 hour clock correctly: eg 13.44 .

    But the plebs have to endure the tautology of having their remarks predicated by the clock's false use: eg 13:22pm

    I can accept that in the morning using 'am' avoids misunderstanding. But what in God's good name is the point of using 'pm' after 12.59 ?

    It is so difficult to understand life....at all.

  • Comment number 77.

    71. At 19:06pm on 22nd Mar 2011, common_man_123 wrote:

    "...This gave time for the lender to split the mortgage in two: the property side and the money side..."

    ++++++++++++++++++++++++++++++++

    Thanks for the reply that does open a chink, but matters still seem very confused.

    I can only assume that by "mortgage" you really mean shorthand for the whole deal, that is, a loan and undertaking to repay capital and interest, secured by an interest in one's land, the mortgage, given to the lender.

    The mortgage gives the lender the same rights that he would have, in case of default, if he had a 3,000 year lease in the property. In other words, he could take possession under the lease. (Some bright sparks have even tried to possess where the borrower was not in arrears, but failed, happily).

    It's possible to deal "off the register" in land registration terms, but this would at best only create equitable, and not legal interests. A claimant would in general only get what the Court thought fit then, and competing interests might not be overreached.

    There does indeed appear much about which to shout.


  • Comment number 78.

    any danger of lloyds giving shareholders a dividend?
    those who were shareholders before all hell broke loose or will the only return on theuir investment be by flogging them off!

  • Comment number 79.

    74. At 19:26pm on 22nd Mar 2011, NorthSeaHalibut
    ++++++++++++++++++++++++++++++++++++++++++
    I think you might have the terms "mortgagee" and "mortgager" reversed. The mortgager is the borrower who gives one (an interest in his land) to the lender, the mortgagee.

  • Comment number 80.

    Yes, back to old habits, but so what?
    The world is rapidly descending into a Second World Economic Depression of CATASTROPHIC proportions. Since the collapse of Bear Stearns, most of the global economy has moved toward the disintegration of financial systems, based on
    - the declining status of the US dollar as a reserve currency,
    - the lack of meaningful reform,
    - the failure to split investment banking from retail banking, and
    - the failure to segregate and oversee dervatives and CDOs.
    Also hurting the global economy is hegemony - London, New York, and the US-UK controlled international lending institutions like the IMF and the WB.
    There is coming a tsunami of financial breakdown that will wash away all financial systems as we know them.
    The EU is just about the only entity capable of leading Europe out of the current crisis. The United States is lost, just as the UK (on its own is lost).
    Cause of destruction:
    $1.5 QUADRILLION DERIVATIVES! Read this number carefully. Try to imagine it.
    Derivatives brought down
    - Bear Stearns,
    - NORTHERN ROCK,
    - Lehman Brothers,
    - AIG,
    - Merrill Lynch,
    - Wachovia, and
    - most other financial institutions that fundamentally went belly-up.
    It seems no lessons got learned; it seems nothing changed.
    Trillions in the other various derivative bubbles is plenty, but 1.5 QUADRILLION? that figure just boggles the mind. I don't understand the global community's ability to just ignore the size of this financial tsunami. Can the economists not see?
    Catastrophic losses are inevitable. Roughly half of these derivatives are listed on exchanges, but the other half are totally UNREGULATED, poorly documented, carelessly bundled, and NAKED (no reserves or collateral to secure performance).
    This is just a snapshot of why financial institutions will not lend to one another - loss of confidence...crazy finances!!
    You may think I'm crazy, but financially I am not:
    Losses will exceed the world's GDP, obliterating the balance sheets of every major Wall Street commercial bank, including the Fed itself.
    All the big players can do is delay, delay and delay - distract from the tsunami so that they can continue making profits from those bundled derviatives.
    The final solution: the nationalization of our financial system will be little more than a formality. Further the people will be beaten down with hyper-inflation, bailout may follow bailout, QE may follow QE, but nothing can fix a problem this HUMUNGUOUS.
    Can anything make a difference?
    Problems:
    1. using naked credit default swaps to cover bonds and derivatives secured by house-borrowers
    2. ownership of derivatives by those who did not own the underlying assets, hedges (known as "dry derivatives," which are essentially the equivalent of insurance taken out on someone or something in whom the policy holder has no insurable interest),
    3. corruption by all these financial weapons to the point of mass destruction.
    We are the owners of @ 75% of all the toxic waste derivatives produced by the American big players; they have piles of banking bonds covered by credit default swaps, likely issued by AIG.
    As the implosion of these derivatives transpires, the majority of economies are going down - inflation, recession, and eventually propound depression.
    The major Wall Street investment banks, all leveraged to the hilt, are now all but gone, whether by bankruptcy, buyout or change of charter. Goldman Sachs, the only investment bank which has retained its name (other than the bankrupt Lehman Brothers) is on the verge of going under in a Bear Stearns Titanic squeeze on liquidity and net equity.
    The latest idea, suggested by the Bank of England and now being generally accepted is to make liquidity injections into the banks in return for equity positions, such as preferred stock ownership. Like this is going to kill the credit default swaps, restore a feeling of confidence so banks will start to lend again! Even the bondholders of this toxic waste will end up holding only a bubble, or maybe a little chump.
    All these toxic cesspools (a quadrillion in derivatives) are headed for bankruptcy and nationalization. All we the people are doing is keeping the elite employed with exorbitant salaries and bonuses as they continue their insider trading and derivative schemes.
    I say: "It's the derivatives, stupid!!!" I've been saying this for so long that I am bored with muself. The credit default swaps will be the first to explode as we move from hundreds to billions to trillions in quarterly losses. This will send risk orbit while the bailouts send inflation into orbit. Now come double-digit interest rates. Interest is the largest of all the derivative bundles by notional value, and thus by potential loss.
    Take R.V. Greed (a made up name): $100 trillion derivative portfolio by notional value. Let's say that $60 trillion are in interest rate swaps. If they have even a mere two percent overhang, they will suffer horrendous losses.
    Consider this: The corporate debt in Europe, due to the lack of so-called insurance from credit default swaps, has already doubled from previous single digit rates into much higher double-digit rates in the 12% area.
    So Northern Rock is back to old habits; it's not alone, and again I ask: SO WHAT?
    Northern Rock will soon be a drip in a quadrillion!

  • Comment number 81.

    #79 EFW

    You are absolutely correct, heaven only knows what my head was doing there. Considering I worked in a bank for 22 years I have no excuses, shame on me for such a basic error. Mind you not the first time I've made that mistake I'd wager.

  • Comment number 82.

    @63. wandsworthdog wrote:

    "He didn't put his hand up..."

    Yes he did.

    "On December 10, 2008, Madoff's sons told authorities that their father had confessed to them that the asset management unit of his firm was a massive Ponzi scheme, and quoted him as describing it as "one big lie." The following day, FBI agents arrested Madoff and charged him with one count of securities fraud."(Wikipedia)

    In court, he pleaded guilty as charged.

    I imagine he just got tired.

  • Comment number 83.

    BluesBerry just above I'm sure you are right. But you omit the plagues of locusts, invasion by warlike tribes from Mars and outbreaks of ebola in Surbiton. Actually the last of these really is frightening - I'd take the locusts and Martians any day.

    But what's your definition of a quadrillion? It's one of those numbers that means different things to different people. How many noughts do you have in mind?

  • Comment number 84.

    • 74. At 19:26pm on 22nd Mar 2011, NorthSeaHalibut wrote:
    #71. At 19:06pm on 22nd Mar 2011, common_man_123 wrote:

    "Unfortunately we have common laws which have never been tested with this but in order for a lender to take you to court all interested parties must be in agreement but the people/institutes/governments who have bought into these securitised ‘bonds’ are anonymous."

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Be patient, it's coming to a court near you soon. We have a problem here in the UK that mortage titles are "Named" against the mortgagee whereas in the US the title is land only giving mortagee's more rights to walk away or not as the cases are developing. In the US proof of ownership by a mortgagor is becoming difficult because of the anonymous MBS audit trail on notes, in the UK we think there may less uncertainty to ownership but it really has to be tested in court.

    Xxxxxxxx

    From how I see it is that even if and a big if! It comes to court it will end up like the other fiasco’s – you had it so pay it; from the common law brigade? They have, 3? chances to find one? And how difficult is that? But we/I have to believe in the justice system or WoW as a point. And the banks will pick the ones to fight on this basis - precedance!

  • Comment number 85.

    It seems eminently sensible and to the advantage of us taxpayers.

    Written at 22:30

  • Comment number 86.

    If banks had to operate as banks ensure other businesses do,then they would go under. Either we live in a capitalist society or we don't - what is the issue here? The answer is of course to nationalise all the banks to put them on a level playing field and then the public would know that their best interests are being served. This might also mean that we might sharpen up our other areas of economic activity.

  • Comment number 87.

    20. At 12:39pm on 22nd Mar 2011, RelentlessForce wrote:

    "The problem with this financial crisis is that journalists do not understand it."

    Absolutely. At the height in every paper, journal, both National and local, TV radio etc etc, there were instantly myriads of journo's writing about the issues and sounding off as if economic experts.So much so they even convinced (brainwashed) the populace into believing that they too had become experts in all that is economics of the money markets and therefore knew everything that is needed to be known in order to make a judgement.

    Headline grafters, or is it shafters the lot of them and I bet most don't even attempt to understand their household budgets, waving credit cards at all they desire, whilst berating lenders for not lending enough,but taking huge personal credit lines (just in case, or for the bragging rights) and adding to organisations commitments and capital requirements.

    Ask them to explain that in words of more than a headline and they without responsibility or sanction write some more utter junk, yet sensationalise it wrapped up from the viewpoint of a garrulous herd of headline junkies.

  • Comment number 88.

    The one thing I would propose is that NO Bank would be on the sovereignty of any country.
    In this case, should a bank fail a sovereignty does not do down with it as liken in the case of Iceland.

    There is no problem with a national bank so long as funding is legitimate and honest.

    What is not quite honest is the banks, having failed, depended upon the taxpayers (of more than one country) to bail them out.
    Once healthy, they fail to participate in rebuilding social structure (preferring securitisation, ropey debt and gambling with futures).

    A bigger problem still exists.
    The toxicity of past "bad business" still lays in wait to get processed, somehow.

    At the peak of the banking crisis, money practically died and was the object "Too big to fail" as it would have meant the collapse of world wide trade and society.

    It is not a conspiracy theory that only 12 Banks rule the world; itself an aspect of total failure.

    Our present capitalist civilization was deemed "too big to fail"... and rightly so.
    Humanity would have all went back to scavenging caveman style.

  • Comment number 89.

    @ 80. At 20:35pm on 22nd Mar 2011, BluesBerry wrote:
    "============================================="

    -------------------------------------------

    Sorry : I had not read your post prior to my input.

    Probably nobody has any real idea of the scale of the problem as derivatives and debts circumvents themselves possibly many times.

    I have no affiliation with any business or banking but seen the problem 2 years before it happened when I learned banks could print "fictitious" money.
    One bank lends to another bank that can then print more "fictitious" money.
    Paying back unearned fictitious money simply inflates the mirage and someone says
    "We cannot all have 20 trillion because there was only 5 billion to start with".

    From different aspects, we are of the similar opinion.

  • Comment number 90.

    At 11:52am on 22nd Mar 2011, Andrew wrote:
    "The banks simply can't win with Mr Peston....You can't have it both ways, you either want the banks to lend more or lend less. Which is it?"


    I don't know about Peston but what I want is for banks to stop paying mega bonuses so that they can lend more while borrowing less to do so.

  • Comment number 91.

    The main problem with NR before was not that it was funding itself by such types of long-term securitisations, but from the Asset-Backed Commercial Paper ("ABCP") market.
    ABCP (like the rest of the CP market) has a maximum tenor of 270 days, and most of it is shorter than 90 days (and most of that is shorter than 30 days).
    In addition, the CP market in general is incredibly fickle and risk-averse, and runs for cover even at the sight of its own shadow.
    NR was funding something like two-thirds of its loan book from such sources - without a meaningful Plan B, if the CP market did one of its periodic disappearing tricks.
    That was the real problem for a lender like NR with a mortgage loan book with an average maturity of more than 10 (probably more than 15) years.
    This new securitisation would be much better, in that its maturity will be much more closely linked to the underlying loans being securitised.
    Remember also that the huge funding mis-match that NR had did not happen over a long weekend, behind closed doors.
    It was built up over several years, and should have been seen by the likes of not only its Directors, but also the FSA, BoE, and market commentators.
    However, I don't remember hearing much from them at the time, although we are deafened by many of them now.

  • Comment number 92.

    Mr Peston is right to warn us about the antics of the bankers' community who have NEARLY brought down financial system of the whole of America and Europe.

    I have no doubt in my mind that this community's greed is boundless and to satisfy their hunger for money they would sell thier mothers and the country alongwith that. CLIP THIER WINGS NOW BEFORE IT IS TOO LATE AGAIN!!!

  • Comment number 93.

    Robert, my flabber was so gasted by this news that it's taken me a day to think of a polite and constructive comment.

    The government's stated aim is to "rebalance" the British economy towards manufacturing and useful economic activity. High property prices, private or commercial, are a barrier to this rebalancing, as they enable banks and property developers/speculators to extract "rent" from the useful economy far beyond the objective value they contribute. High property prices are uniquely dependent upon credit, and susceptible to the banks' ability to create new money.

    So, the securitisation process is part of a strategy to reinflate the property bubble. As such it adds new instability to the economy and perpetuates the old imbalances. In addtion, if the new money raised by the Rock comes partly from abroad, it will put unwelcome short-term upward pressure on the pound, and encourage imports.

    This is bad for the economy as a whole. The process should be illegal. We need not only internal money reform, but exchange controls to stop foreign money being used to inflate British bubbles.

  • Comment number 94.

    7. danilosilva wrote:
    "This is a prudent, sensible approach from Northern Rock - would you prefer it if it just trundled along with far too much capital and too many assets and never made a profit for its government shareholders? "

    Erhm.. .so remind me.

    How much "profit" did NR make the LAST time they were in this area of business. What risks have gone now but were present then to avoid a repeat of the same problems?

  • Comment number 95.

    62 wandsworthdog

    It's not me that's `meshuggeneh'; it is everyone else. This is the country of the mad.

  • Comment number 96.

    73. At 19:14pm on 22nd Mar 2011, NorthSeaHalibut wrote: a lot of rubbish.

    "So, you mean the state bought a stake by means of emergency share acquisition, these shares being "manufactured" for purpose in sufficient nuumbers alone to devalue the shares already in existence."

    What actually happened is that the Govt underwrote the RBS rights issue, in other words the Govt took on the risk on the emergency RBS share offer to existing shareholders back in 2008. Given the take-up of the new shares from existing shareholders was so low, the Govt ended up retaining the bulk of the issue and therefore suddenly found itself owning a majority of the RBS shares. Yes of course the shares were "manufactured" but that is what happens when a company needs fresh new capital. And obviously when this happens it "devalues" existing shares, in other words shareholders are diluted. This is part and parcel of the risk taken as a shareholder.

    "One, bulk sale would devalue them sufficiently they would need to be around double the acquisition value. Two, drip feeding leaves investors in doubt to the future influx of shares, would you uy shares you knew would be abundant over the next few years, hardly investment material. Of course this doesn't take into account many banks are still in deep trouble so rises in share values are highly unlikely anyway."

    Thats hard to tell. But RBS is a bank which still has a huge amount of value in it, with a successful and profitable investment banking division, a large branch network and various other businesses which are valuable (e.g. the recent sale of the WorldPay division for £5bn). So I can definitely imagine that in 3-4 years' time, the share price will have reached a level high enough to sell to the market at a profit.
    If they are sold in batches, or a "drip feed", there may be a small premium which adds to the price they are sold at, because demand will be higher than supply.

    "Pots and kettles spring to mind."

    As someone who actually works for an investment bank in corporate finance, therefore makes a living helping companies raise capital, I think I am know what I am talking about.

  • Comment number 97.

    75. At 20:01pm on 22nd Mar 2011, yam yzf wrote:

    >> JC: Only a dunce would pay, once negative equity is reached.

    > So if you buy a car on a loan, stop paying the loan immediately for you
    > are immediately in negative equity when you drive the car off the forecourt?

    Think about what you are saying: if it would have been cheaper to have bought (in the first place) the equivalent second-hand car (in exactly the same state as the one you did actually buy but then drove off the forecourt, reducing its value), then you are a dunce for throwing away the difference in cost between those two indentical objects.

    It's daft to pay more for the exact, same, fungible thing. That's basic economics.

  • Comment number 98.

    Surely anything in moderation is OK. One of the problems we have is that this area is highly complex and open to misinterpretation (Peston) and manipulation.

    If NR relied fully on securitisation (the mortgage bonds referred to in this blog) and were allowed to continue like 2007 then they could indeed take on too much leverage but would have no risk of their borrowing not matching their lending exactly.

    Remember it was rapid growth and the mismatch of short-term borrowings vs long-term lending that caused the problem to NR not an over reliance on securitisation. Allowing depositors to have NR’s fate in their hands again due to a heavy reliance on deposits alone would risk a repeat of the Savings and Loans Crisis experienced in the US….remember that….

    In the same way that banks will no longer allow us to borrow under the same terms as 2007, institutions will no longer allow them the same terms (cost and leverage).

    The only one who seems to be supporting high leverage is Osborne with his 95% LTV loans (75% mortgage plus 20% interest free for a 5 year period) for notoriously over valued (expect the remaining 5% or more to come from builder deposits) new build properties.

  • Comment number 99.

    67. At 18:54pm on 22nd Mar 2011, Slessac wrote:

    >> JC: Lesson number 1: One would only continue to pay for an asset
    >> that is worth paying for.'

    > No not just a dunce, it could also be somebody who wants to try to
    > keep their home, somebody who recognises that having a residual debt
    > and no property is even worse, or somebody who just believes they
    > should honour their contractual commitment to maintain repayments.

    All of those things come under my "get out clause" - an asset that is worth paying for. You are right - many are plagued by fear and greed - fear of no home, fear of "residual debt" and fear of contracts. Our shabby little "system" depends on fear.

    In many years to come, historians will look back at the stone age, the bronze age, the iron age and this age - the age of fear and greed. It's tragic that it has all led to this.


  • Comment number 100.

    88. At 04:41am on 23rd Mar 2011, Kelly wrote:
    Our present capitalist civilization was deemed "too big to fail"... and rightly so.
    Humanity would have all went back to scavenging caveman style.

    ....

    I dont believe that. Capitalism has a fatal flaw, it requires perpetual growth to avoid crisis. In a world of finite resource that is simply not sustainable. Add in peak oil and I cant see how it can survive the next 20 years. But I dont believe that without it we go back to being cavemen. We will simply come up with a new and better system that allows us to live sustainably within our planets means.

 

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