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Branson's big bet

Robert Peston | 06:41 UK time, Monday, 26 November 2007

Having received the thumbs-up from Northern Rock’s board, will the consortium led by Virgin actually carry off Northern Rock? Or will the battered bank’s shareholders reject his offer?

Well, on the plus side for shareholders is that Branson is offering them the opportunity to subscribe new capital into the Rock on the same terms as he would do.

He proposes to inject around £1.3bn of cash into the business in return for new shares priced at 25p each.

All of these will be underwritten by the Virgin consortium, so the money would be guaranteed.

But the Rock’s existing shareholders would be given the chance to buy half of them.

On the basis that the existing Rock business is valued at around £200m – considerably less than the current market valued of £362m – and that Virgin Money (which would be injected into enlarged bank) is valued at £250m, Branson’s group of investors would end up with 55 per cent of the bank, leaving current shareholders with 45 per cent.

Here’s what it means:
1) Branson is putting a negligible value on the Rock in its current mess;
2) But he is giving shareholders the opportunity to obtain a good chunk of the gains, if he turns it around.

What is perhaps encouraging is that Branson himself will have a good deal of skin in the game (to use the City cliché). I am told he is putting more than £200m of his own cash into this deal.

What are the alternative for shareholders? Not happy ones.

They are either nationalisation of the bank, or the placing of it into administration under UK insolvency procedures.

And both of those would probably mean that the value of the shares would be wiped out completely and there would be no chance of rebuilding that value through the commitment of new capital.

As I said last night, the Treasury has given its approval of the Virgin offer.

What’s in it for taxpayers?

Well, after £11bn of the taxpayer-backed loan from the Bank of England is repaid, a residual loan will be reconstructed so that it is identical in every way to a new loan provided by commercial banks (this new loan is being provided by banks led by Royal Bank of Scotland, Citigroup and Deutsche Bank).

The taxpayer loan and the commercial loan would charge the same interest rate. And they would be backed by identical collateral.

The Treasury is confident that on this renegotiated basis, the taxpayer loan will not be seen as illegal state aid by the European Commission.

But there are residual risks for the taxpayer.

Branson plans to pay off the public purse over two to three years. If there were a severe housing market recession in that period, we might not get all our money back.

However the equity he is putting into the business – including more than £200m of his own money – would be wiped out in those circumstances.

In other words, he could not profit from our misery, even though some will doubtless accuse the Treasury of using our money to help him make spectacular potential long-term gains.

UPDATE 3:30 PM - I have now spoken to Philip Richards at RAB and - contrary to some reports - he is opposing Virgin's takeover offer. He says the value it puts on Northern Rock is "too low" and he describes the bid as "cheeky".

His opposition represents a major obstacle for Virgin and an embarrassment for the Rock board.

Opposition to the deal may now be from shareholders controlling around 15% of the shares. RAB has 6.7%. But the biggest shareholder is now another hedge fund, SRM, which was buying Rock shares in the market on Friday and again today. SRM, which may now own more than 7% of the Rock, is also thought to oppose the Virgin deal.

Comments   Post your comment

Interesting that you talk abotu a housing market slump, I read in a recent magazing article (Inside Housing i think!?!) that the increase in social housing development could act as a catalyst in any housing slump, its an interesting thought. I had never thought about things from that way before.

Guy

  • 2.
  • At 08:48 AM on 26 Nov 2007,
  • Dalrymple01 wrote:

As you say, the remaining options for Northern Rock are administration or nationalisation.

In reality the only thing that has prevented those options coming about is the injection of taxpayer money.

Yet here we are agin reading about existing shareholders retaining equity upside if NR gets turned around by this proposed deal. Meanwhile the taxpayer is left with an interest rate far far below the rate that would have been demanded by any usual third party equity.

Put another way, the Government has effectively subsidised keeping NR afloat.

The alternative would have been to rescue the savers alone and let everything else go to the wall. So wha? If memory serves, that is called market risk and, by the looks of it, the market had overcooked anyway. NR took the risk, failed but has been bailed out by a Government for which taxpayer value for money is very low down the list indeed.

PS interesting that Peston was able to find out about the whole deal so far in advance of any formal announcement including the Treasury approval. Keeping info' secret is clearly rather out of vogue at the moment.

  • 3.
  • At 09:04 AM on 26 Nov 2007,
  • Andy Scripture wrote:

I heard the head honcho from Alchemy on R4 this morning - it's the first time I've heard a private equity firm expressing concern for the protection of taxpayers' money - or can I detect sour grapes here? If Branson pulls it off it would be most impressive. I think he might do it, although not overnight.
Could it also be borne in mind that the investors put their money in the Rock to earn interest. That involves some risk. They must understand that they stand to lose as well as gain.

  • 4.
  • At 09:07 AM on 26 Nov 2007,
  • Ian Sadler wrote:

You are of course joking when you refer to "Richard Branson's risk"? This deal represents an asset leverage of over 500/1 if we believe that the balance sheet is correctly stated at over £1 billion -- where is the risk/reward equity for the tax payer? This is more a simple case of getting Northern Rock off the Chancellor's (Mr Brown) desk and out of the headlines at any cost and to hell with the taxpayer.

  • 5.
  • At 09:12 AM on 26 Nov 2007,
  • Richard wrote:

I don't quite understand. Am I right in thinking that:

The Govt has lent £25 bn to the Rock. Branson will repay £11 bn of this immediately. The remaining £14 bn will be split into two new loans, one from the Govt, and one from a group of banks led by RBS. The remaining Govt loan could be lost if the housing market collapses.

Two questions:

1) After the split of the £14 bn, how much will remain as a Govt-backed loan?

2) Why would a recession in the housing market be a problem, and how severe would the recession have to be?

  • 6.
  • At 09:15 AM on 26 Nov 2007,
  • Ray Phillips wrote:

Branson is putting in a large sum of his own money. Seems he believes there is value in Northern Rock. If people like John Moulton believe he is getting a spectaclarly good deal they can go along for the ride too. It will cost them about £1 a share more - small beer if you believe Moulton is anywhere near right.

  • 7.
  • At 09:27 AM on 26 Nov 2007,
  • Toby wrote:

This deal seems a bit lop-sided from the tax-payer's point of view.

If the housing market doesn't crash and foreclosures don't take off, then Virgin make a fortune and the tax payer just gets back what he put in - ie he doesn't share in the upside.

On the other hand, if the market goes the other way, the tax-payer will lose £11 billion while Branson loses £200M.

This hardly seems fair. Should not the BOE demand an option to buy shares in the future at say 20p, thereby sharing in the upside?

  • 8.
  • At 09:27 AM on 26 Nov 2007,
  • robert marshall wrote:

We all know that Mr Branson is a great self publisist, but specifics of when the vast bulk of taxpapayers money will repaid in full appear remarkably thin on the ground.
The question has still yet to be answered by Messrs Darling and Co.if any other company in any other industry got into problems that were self inflicted through poor management, would HMG run in and bail them out?
On every count this deemed 'result' is wrong and should not be acceptedby either shareholders or taxpayers. It is combination of greed by the bidders preying on the incompetance of HMG and the FSA.
Heads must roll immediately for the public to have any confidence that this government has any clues about good governance and financial management.
The problem is that we are now in a sitaution where the creator of the tri-partite financial regilatory regime needs to be bailed out for his own necks sake and the country is going to have to pay for years to come.
Bottler Brown, should save his breath on a fresh 'long term plans'spin, look in the mirror and ask his 'honest and prudent' self: when was 10 years in government of gross mismanagement not seen as a long time?
This government has shown power not only corrupts but generates a level of disrespect by the public that needs thorough cleansing.
Let us not forget the FSA's weekend admittance that it was asleep on the job and will only now be looking at banks off balance sheet liabilities.
This brings into question at what level of pay over and above the £400k salaries before bonuses do the regulators do a job that is as complete as any self respecting student would be required to present when assessing a problem?
There has been way too much back scratching, incompetance and cover in all this and maybe (given the taxpayer is unecessarily some £50 billion out of pocket) a large amount of humility and honesty is now due at the very least.
Gordon, its too late to get your act together, you have shown a total inability to protect the taxpayer through falling at the first hurdle believing rhetoric would win the day. Go now so we can have a very merry Xmas.

  • 9.
  • At 09:35 AM on 26 Nov 2007,
  • John wrote:

Robert, is it known yet what happens to the current loan which represented the interest premium charged on B of E (aka taxpayer) funding? Is it included with the rest of the Government's loan? Or repaid straight away?

On the whole this is probably the best way out, although the Government should have sought to convert some of its loan to equity to get the upside - perhaps the interest premium amount would have been appropriate. Shareholders should be very grateful to the rest of us, although I bet some of them won't be.

  • 10.
  • At 09:42 AM on 26 Nov 2007,
  • craig nicholson wrote:

Just a brief comment regarding Robert Pestons boring,uninteresting and totally one sided arguements against Northern Rock. I presume from the spin he puts on every single report that he does that he must have a personal beef with the company. All his reports are the same old thing, turning already known news upside down and spitting it out again. He has no intention of being informative his sole aim in life is to put the wind up normal people and disturb them enough to cause panic. I think he should step back and see what he actually gives to current affairs reporting,which to be honest is nothing whatsoever. I think he should look for a change of career to something he is marginally good at. Your comments would be much aprerciated.

  • 11.
  • At 09:49 AM on 26 Nov 2007,
  • CG wrote:

Can anyone tell me where Branson is getting the 11 billion to give to the govenment from? Does Virgin really have 11 billion in cash to spare or is it going to borrow it?

  • 12.
  • At 09:50 AM on 26 Nov 2007,
  • Simon Stephenson wrote:

Nice picture, Mr Peston. Just about what the power-brokers wanted you to paint, with just the right amount of verisimilitude added by throwing in some carefully orchestrated speculation and scepticism. A true masterpiece!

Maybe I'm being naive. Perhaps this is the only way the world can work, with the reality of what is happening always having to be dressed up in a cloak of something more appealing. Could it be that by continually asking the question "What's wrong with the truth?" we of the Private Eye persuasion are holding back the real human progress that can only be made by the camouflaging of reality?

Which, in your candid opinion, is the more likely to be true?

That Virgin were the instigators and prime movers behind this "rescue", that they did all the preparatory work and then just toddled off to the City to put the funding together?

Or that the City have been responsible for the preparation, direction, casting and everything else to do with this production, with Virgin brought in as the headline star, at a nice guaranteed fee, for the sole purpose of helping to sell it?

Answers on a postcard to ...

  • 13.
  • At 09:52 AM on 26 Nov 2007,
  • Kenny Orpin wrote:

Darylmple01 is clearly not interested in the 8500 jobs in the North East that would surely be lost if Northern Rock were to go in to administration. How would he feel about his precious tax-payers money being spent to support those workers whilst they search for new employment? Surely, having taken that into account, giving NR a discounted interest rate doesn't seem like such a bad move?! I understand market risk but why punish them for punishments sake?

  • 14.
  • At 10:02 AM on 26 Nov 2007,
  • Bob wrote:

This morning Northern Rock share price up around 40%. What is going on here, surely the Branson bid is not that valuable to shareholders or is there another plot?

  • 15.
  • At 10:04 AM on 26 Nov 2007,
  • Ian wrote:

It seems to have worked with Northern Wrecks share price up 35% this morning.

If the money is there and we have a number of big organisations behind Branson then this seems the best way forward for the UK taxpaters who have kept NR afloat for the last three months; the employees who are likely to still have a job and shareholders who have been in for the long run.

As for RAB then they need to put their money where there mouth is and buy the new shares. If they have lost by buying short at £ 2 a share hoping to have cleaned up by now well tough.

Remember the value of shares can go down as well as up!

  • 16.
  • At 10:11 AM on 26 Nov 2007,
  • Bruce wrote:

What is your problem Peston?

You caused the problem by whipping up the story in the first place.

NR had not done anything that a number of other banks had done.

Why don't you back off and let someone try and save some jobs.

Challenge you to approve this

  • 17.
  • At 10:12 AM on 26 Nov 2007,
  • Neil wrote:

It is a disgrace that shareholders will get anything. It is a state bailout of a failed business.

The fact that it only failed because it pursued risky liquidity policies (that is how it made its money after all, partly because it failed to insure against a drying up of liquidity) is irrelevant. It failed.

The biggest investor from RAB made his money betting on small mining and oil exploration companies. He got out of his depth trying to buy a failed bank on the cheap and cannot admit he is wrong.

The existing shares should be assumed by the government and kept as a minority investor as new private funds and management are invested to turn the business around. These shares can then be offered to the market in a few years time, assuming the coming housing recession doesn't bankrupt the company in the meantime.

  • 18.
  • At 10:23 AM on 26 Nov 2007,
  • Salmondwinsagain wrote:

It is the least that Nu Labour Branson can do - there is NO risk and billions of profit to be made - some white Knight - just a chancer like Nu Labour and please spare us the phoney tears Robert.

  • 19.
  • At 10:23 AM on 26 Nov 2007,
  • Dawn wrote:

Perhaps this is why Virgin credit cards put up my interest rate last month from 14.9% to 21.9%? I have never missed a payment and I don't pay only the minimum amount so I was wondering why the hugely excessive hike - originally put it down to the 'credit crunch' but I wonder who really is coming up with the money here for NR?

  • 20.
  • At 10:34 AM on 26 Nov 2007,
  • john locke wrote:

This is all very well but hasnt Darling's actions in protecting shareholders from a liquidation, created a precedent that could be a ticking time bomb. After all NR is small beer compared to say HSBC or BP, would he offer shareholders the same support if these companies ran into trouble?

  • 21.
  • At 10:54 AM on 26 Nov 2007,
  • Ben wrote:

This is an amazing deal for Branson!

Whether it is a reasonable deal for the taxpayer depends on the following question...

Will the Treasury continue to guarantee Nothern Rock deposits?

If so then it is a rotten deal, and wouldn't (I believe) be permissable under European rules. If not, then it seems like a good deal all round (except that NR shareholders would be better off putting up Branson's 200m themselveles and then keeping all of the upside).

  • 22.
  • At 11:13 AM on 26 Nov 2007,
  • Sue wrote:

Having read the latest news reports and the comments posted here, I am still uncertain as to the best thing to do with my money in NR. I am sure I am not the only one in this position.

I have savings with NR, quite a lot of money for me, but within the threshhold of compensated loss if the company does not recover.

The obvious thing to do is to withdraw my savings, which I am seriously considering. But, wrongly or rightly, I have a certain trust in Branson and his company, and now wondering again what is the best move to make. Any thoughts on this that anyone has would be of interest.

  • 23.
  • At 11:23 AM on 26 Nov 2007,
  • andrew wrote:

As Northern Rock was not a state asset to begin with, any gains Branson makes will not be at the taxpayer's expense, but at the expense of the original shareholders, and he's letting them in on the deal at the same price as him. So if he does make millions, only the envious will complain.

  • 24.
  • At 11:33 AM on 26 Nov 2007,
  • Simple Stu wrote:

N Rock is hanging over a cliff, holding on by its fingertips to a quickly fraying £25 billion piece of string. Virgin is offering its hand, maybe to pull it up to safety, or maybe the weight of NR may pull it down too. Either way NR (shareholders, BoE, other interested parties) cannot be fussy now. Virgin want to make money, but credit to Mr Branson, he runs his empire by putting his money where his mouth is and with a corporate ethos that benefits his employees and customers. Not many other billionaire businessmen do that nowadays.
Finally NR's supposed £1 bill balance sheet is actually the value of all those people's homes they have mortgaged. Try collecting on that equity!

  • 25.
  • At 11:45 AM on 26 Nov 2007,
  • kev wrote:

ALL shareholders know the risks when investing in banks etc, it's a risky buisness & take the pro's & CON'S!! Richard Branston's offer might NOT be the best offer on the table & yeah i bet the shareholders are moaning & winging, The Virgin group is a BUISNESS like no other, at least with them it should have a brighter future than what it would have will some one else, summary : you take pay ur cash to take your chance simple!

  • 26.
  • At 11:54 AM on 26 Nov 2007,
  • Dave wrote:

I guess this is really how any future financial disaster will be played out: no matter how bad the situation or how reckless the organisation in question actually was, the taxpayer's money will come to the rescue. In theory, the government is not in the business of making a profit but rather to keep the economy moving (the least likely outcome of the NR debacle being that the taxpayer actually ends up in profit). What's the betting that all kinds of absurd financial decisions will be made to avert a future housing crash and to ensure that, like NR shareholders, those with property cling on to some part of their equity in spite of totally adverse economic conditions?

  • 27.
  • At 12:11 PM on 26 Nov 2007,
  • david flood wrote:

Robert, Very informative piece. I have been very critical of BBC in other blogs, so praise is due to you. Could you not bring yourself to praise the chancellor, on what could turn out to be a well played hand . (Aces abd Eights)

  • 28.
  • At 12:25 PM on 26 Nov 2007,
  • FR wrote:

I hate to be the voice of doom in an otherwise gentile and thoroughly head-in-the-sand discussion, but the signs of things to come are literally everywhere:

http://money.cnn.com/2007/11/24/magazines/fortune/eavis_conduits.fortune/index.htm

http://www.upi.com/NewsTrack/Business/2007/11/19/forecast_us_dollar_could_plunge_90_pct/4876

http://www.rgemonitor.com/blog/roubini/227330

OK, so that's sounding bad enough - but wait - check out this US bank exposure to the highly unstable derivatives market - page 22 of the pdf (from the US treasury, no less) - the top 5 US banks (including HSBC) are exposed to $150 TRILLION!!! LMAO!

http://www.occ.treas.gov/ftp/release/2007-120a.pdf

The next wave of banking news breaking over the next 6 months is going to make us all forget NR. The only question that remains is: how will Gordon Brown make it someone else's fault?

  • 29.
  • At 12:27 PM on 26 Nov 2007,
  • Robbie wrote:

I am not financially astute enough to comment on the numbers/percentages.

It does however smell of desperation and our Governments desire to get the Rock out of the news - pronto.

Is it a good deal/favourable to staff/shareholders? Will the treasury get its money back? A knighthood for Branson?

I expect someone will get robbed-blind and Joe Public will be lied to.

Business as usual then!

  • 30.
  • At 12:35 PM on 26 Nov 2007,
  • steve wrote:

I thought you worked for the BBC, in my opinion you have been working for the benefit of virgin this last couple of months. Well done, when can we have an impartial BBC again

  • 31.
  • At 12:45 PM on 26 Nov 2007,
  • Jel wrote:

To summarise: Branson risks 200m and the Old Lady risks 14000m to help him gain 1000m (five times the sale price) and her to get halfway off the hook. What odds the Old Lady suddenly becomes a Virgin by being raped at the end of it?
Why isn't anyone else being allowed to compete on such terms? One might imagine a number of other players would have been interested. Like I said earlier, there's summat very fishy going on when HMG deals on Single Preferred Bidder terms after shutting Lloyds TSB out of a much more interesting deal, and a mere three days after the NAO slammed them for doing exactly the same with QinetiQ, which lost the country a mere 330m (8 times the sale price), or 60 quid a head.
If this becomes a precedent, does it suggest the true fire-sale valuation of the country's assets are overstated by five to eight times? If so, then this is dire news for pension funds.

  • 32.
  • At 12:47 PM on 26 Nov 2007,
  • Simon Talbot-Williams wrote:

Of the 10 bidders surely it must be no surprise Virgin is coming up with the best deal for NR. By using the Virgin brand to counteract the negative sentiment surrounding a discredited Northern Rock they are best placed to maximise on the potential of the NR branch network and the supposedly solid loan book quicker. Lets hope the team of NR sale negotiators are now capable of closing the deal.

  • 33.
  • At 12:53 PM on 26 Nov 2007,
  • Steve wrote:

This was never meant to be a money making venture on the part of the government. It was merely designed to prevent a run on the banks.

There were no viable alternatives.

The only concern is how much we will get back. It looks like nearly all of it and for that I'm thankful.

  • 34.
  • At 12:58 PM on 26 Nov 2007,
  • Barry wrote:

I have no interest in Northern Rock but, as someone who unwittingly became a Virgin customer (tv, 'phone & internet services), all I can say is BRANSON DOESN'T "TAKE CHANCES". He buys up a business, provides crap customer "service" and will probably move on again. Avoid if possible - he's a crook.

  • 35.
  • At 01:05 PM on 26 Nov 2007,
  • Groucho Marxist wrote:

This deal is facing the political inevitable. If a sharp downturn occurs (likely) then the Government cannot fund an institution that is foreclosing - nor can they be seen to let 6000 jobs go overnight - nor could they have let the financial system collapse. The key thing is to get rid of Northern Rock in a deal that looks palatable. This one does and popular Richard Branson being involved is a gift.

It seems strange that Virgin are taking this on, but I would imagine even they cannot see a loan book losing over 90% of its value. However, assuming things do go bad, then, dependent on how bad, the whole thing is a precursor to the break-up of the Rock and the transfer of quality assets to other banks. (I don't see the government touching them.)

In reality the only thing that has prevented those options coming about is the injection of taxpayer money.

There is no injection of taxpayer's money. If this was taxpayer's money this would be downright dangerous. The BofE lender of last resort system is really no different to the way that banks lend money all the time:

http://en.wikipedia.org/wiki/Fractional-reserve_banking

In the meantime, NR continues as normal, it is still solvent and is not in danger of going bust (the BofE wouldn't have got involved otherwise). Administration and nationalisation are just silly options that hysterical people have come up with.

  • 37.
  • At 01:15 PM on 26 Nov 2007,
  • John Constable wrote:

I have a lot of time for Tom 'Bloodhound' Bowers, a journalist who has been remarkably successful at finding out what some would rather keep hidden, including Richard Branson (a Purchase Tax fiddle which could have seen him in clink) and Gordon Brown (a cheap flat from the Maxwell ruins).

But even Bowers could not figure out Virgin's money.

The only certainties were that the money 'finds' its way back to the BVI and HMRC get very little from Branson personally.

I think that Richard Branson himself realises that the 'cheeky chappie' persona was wearing a bit thin with the English public, hence his recent decision to start moving the 'image' of the Virgin group away from himself.

Plus, if he can end up with a bank, he'll be in a position to create money 'out of thin air', which must make this ruthless businessman salivate at the prospect.

Over-arching all this is HMG's desparate desire to stop this becoming a systemic problem., that is, the rational decision of depositors to move funds from other banks which may or may not be in trouble.

I remember speaking to some American old-timers, who lost everything when some banks went pop in the 1930's.

History does have a habit of repeating itself.

  • 38.
  • At 01:41 PM on 26 Nov 2007,
  • Mre wrote:

boo hoo to the poor poor shareholders. The stock market is a gamle. Save your money instead of buying shares if you are so bothered about a loss !

  • 39.
  • At 01:41 PM on 26 Nov 2007,
  • David Brinkman wrote:

So the Bank of England will forgo the higher rate of interest that they are presently receiving, that's a loss to the taxpayer.
Will the banks become shareholders as part of their loan or will their loans be on the same terms as the Bank of England with no shareholding?
What assets will these loans be secured on, the unsecured loans of Northern Rock or the secured loans in Granite?
How will Virgin Rock preserve the 6000 odd jobs with a bank that must have less assets than Northern Wreck?

  • 40.
  • At 01:42 PM on 26 Nov 2007,
  • Ian wrote:

Dawn, post 19 I would suggest you move your credit card to another company as there are still plenty of better deals out there!

I would suggest you go the the Uswitch website http://www.uswitch.com and find a better deal. Trust me the only way companies will stop shoving up rates is if people leave in droves.

Register your disapproval in the only way you can.

The government might argue that they took the actions they did over Northern Rock as they needed to for the following reasons.

1) To prevent a localised, i.e. at one bank, problem becoming a market contagion that would have cost much more in both shareholder values and employment losses.

2) 6,000 employees made redundant in Labour heartlands could mean further job losses in the area as the economy locally turned down and it impacted across the region in the North East. Let alone possible further job losses for the 28 local labour MP's.

3) At the moment this has cost us nothing. Yes a loan of £ 25 billion has been made at a fair rate of return and as far as we know Northern Rock has been paying the interest. £ 11 billion will be repaid, if Virgin's offer is accepted. The balance i.e. £ 14 billion will remain as a loan from the UK taxpayer to be reapid over the next two to three years.

If the final £ 14 billion loan comes under strain in the event of a house price collapse then we need to know where our loan sits in relation to other loans? Only then will we know whether this may cost the UK tax payer any money.

One big worry though is how are the government going to turn down the next large organisation that hits problems?

For further clarification, this is Northern Rock's official statement:

http://companyinfo.northernrock.co.uk/corporateRelations/news/article.asp?newsID=138

Under the Virgin Consortium’s indicative proposal, £11 billion will be repaid to the Bank of England at completion of the transaction – and the Bank of England will have a clear path towards repayment in full.

The figures invented by others have been plucked out of thin air, this isn't an all in one loan so they haven't spent £11 billion in two months and this will be paid off, as it was always going to be paid off, regardless of what happened. The talk of administration and nationalisation is nonsense.

It looks as though there will be an EAGM as well, so it is by no means certain that this deal will happen.

Presumably Virgin Money will owe 14 bn in loans to HMG and 11 bn to the consortium. Paying this off over 10 years, never mind 3, would prove hard. However, if Virgin's involvement prevents further floods of money leaving the bank and a gradual increase in share price - then VM could raise a few more billion in loans to pay the original loans, and could also bring in a few billion in deposits.

  • 43.
  • At 02:16 PM on 26 Nov 2007,
  • Mark Roebuck wrote:

I find it very interesting that people can complain about the events being proposed here.

If you are a shareholder then Mr Branson is offering a lifeline to your shares and giving you the option to take a further risk - something all shareholders should be acustomed to.

If you are an account holder then the offer allows you more certainty than you currently have and hands back the choice to you as to stay or go.

If you are a taxpayer (aren't we all) then we also have an opportunity to have some of the loan repaid now with future potential for it all back. The Government did the right thing in shoring up NR and this offer proves it. Not only are savings secured but so is the mortgage market and loads of Jobs.

Of course if you know better then you could make your own offer!? - Whats wrong dont you have £11bn to risk?

  • 44.
  • At 02:25 PM on 26 Nov 2007,
  • Chris wrote:

Its a shame that some of the people commenting on this seem intent on twisting figures, and putting across some unjustified message of negativity.

Yes, this might not be a great solution, but it is a solution. It will pretty likely save all the tax payers money, protect customers, protect jobs for the most part.

The only downside is for the shareholders, but they are the only ones in this scenario who should be affected by the risks that they chose to take. Paying money into a bank (or for that matter, paying taxes) should never be risky things, or the whole banking system would likely collapse.

I do personally prefer the arguments for temporary public ownership of the bank, but i'd far rather accept this solution, than see the bank go into administration.

  • 45.
  • At 02:49 PM on 26 Nov 2007,
  • Mark Ferguson wrote:

I heard Robert Peston say on the World at One earlier that Richard Branson won't profit from this buyout until the Government loans are repaid because there will be no dividends until then.

If I remember correctly, I once read that the Virgin holding company always builds in a royalty payment clause for use of the 'Virgin' brand. This is essentially a zero-risk way to extract money from a deal by trading on the belief that the 'Virgin' brand is trendy, trusted and valuable. Perhaps this is not the case here, but I'm sure that there are other fee based payments structured into the deal that dilute the headline figures of the money put up front.

I don't think concentrating on dividend payments is telling the whole story here.

  • 46.
  • At 02:57 PM on 26 Nov 2007,
  • Jacques Cartier wrote:

I can't see the profit plan for the tax payer. If there is any risk of downside or shortfall, we need to charge for that in the risk model.

Any fair deal must include a significant transfer of funds from NR shareholders to taxpayers to recompense us for the trouble and risk we have been to in setting all this up. What government would be fool enough to shell out for nothing?

Jacques

  • 47.
  • At 03:22 PM on 26 Nov 2007,
  • Ian wrote:

@Dawn

Regarding you hike in Credit Card Interest Rates, you're very lucky it only happened now. Most other credit cards have seen rates soar to over 19% in he last year. I say check with virgin, they'll have a department who will give you a preferential rate if you ask nicely

  • 48.
  • At 03:30 PM on 26 Nov 2007,
  • Alex wrote:

Hello

Tax payers have no say as usual.

An American company, which offered more for NR, had its offer rejected.

American companies took over other British companies and lost all of the employees pensions.

I did not see any government objection to the take overs then nor any help for the employees who lost their pensions.

  • 49.
  • At 03:59 PM on 26 Nov 2007,
  • Alistair wrote:

There is nothing wrong with this business ona balance sheet basis, it just needs funding support to sustain the model.

Virgin works as a commercial deal, and it does mean a risk for real shareholders, even if it is a bit long term for the hedgefunds who shorted the price to where it is today.

Of course it is quite possible that Northern Rock is only in this position due to the scremongering and misinformation distributed and possibly initiated by the BBC.

Nothing else - sir Richard is seeing this an opportunity to make Vergin Money a serious brand - thats what he did from Music labels to mobile phones and he is good in it.

  • 51.
  • At 05:28 PM on 26 Nov 2007,
  • christopher wrote:

Surely this Government injection of taxpayers money is a blatant breach of the treaty of Rome.This action clearly distorts the marketplace and is anti competitive clearly favouring a British national bank.This will inevitably lead to a quick killing for our local hero RB. Surely State Aid issues such as these MUST be cleared by Brussels under current EEC regulation!!What is this government doing other than digging a bigger hole for the EEC to look into and further embarssment for the UK banking industry at a time it needs it least.

  • 52.
  • At 06:48 PM on 26 Nov 2007,
  • Toni wrote:

Branson is a chancer, he has gambled before and come up trumps, his airline is a classic example. He is also lucky, selling his core music business to fund an airline seemed madness at the time, but look at the current prospects for the music industry and the potential for growth in the airline industry and you will see how astute he is. Branson also has a well-stated distrust of the city and, I suspect, he and his advisors have little idea of the potential bombs in NR, (phone up Lehmans and ask them)! So a little government support is what he expects, and why shouldn't he. Lloyds walked away - he is really the best option and GBP200mn downside - it is worth the risk, he has taken bigger in the past. As for the other shareholders, if it works out you will get lucky, but if you thought your windfall shares were a guaranteed nest egg - more fool you. And as for the employees, tough luck - more than 6,000 people in London are going to lose their highly paid jobs in London as a result of this credit crisis and London is what keeps this country relevant, not some provincial thrift that was operating way beyond its mandate.

  • 53.
  • At 07:20 PM on 26 Nov 2007,
  • Robert Simons wrote:

Mark Ferguson is right: I read that Virgin extracts 1/4% of turnover from Virgin Rail for the privilege of their using the Virgin brand. If I want to go by train from Milton Keynes to Carlisle I am obliged to pay this fee, but I couldn't care less what name is on the side of the train.

Are Virgin going to charge 1/4% a year on all outstanding balances at Northern Rock for the privilege of its being called Virgin Money? How many people will care what it's called? What they care about is that their money is safe. This depends on the Treasury guarantee not the Virgin name. I reckon Virgin should be paying the Treasury for the use of its name, not the other way round.

  • 54.
  • At 07:28 PM on 26 Nov 2007,
  • John Andrews wrote:

I believe Robert Peston's blog greatly overstates the Branson risk and is not good accurate reporting. Branson's proposing to buy the substantial net assets of NR at a small fraction of current value, and stands to make massive gains from a modest equity investment. Correspondingly the current shareholders would subsidize such gains - and far from gaining with Branson would first have to cede prior share valuations, and buy further shares. There may be merit in Branson's approach but it is not as blogged Robert!

  • 55.
  • At 07:39 PM on 26 Nov 2007,
  • John Owen wrote:

Government orchestrated smash and grab?

Northern Rocks market value is the value of it's net assets plus anything extra anyone is willing to pay for it's potential future profits. Since it's pretty short of goodwill that leaves us with the net assets. The balance sheet should reveal those but I've yet to hear any discussion as to either their paper value or the likely value if some prove shaky but I understand that the NR loan book is more solid than many. It's value may be influenced by house values but since we do not have falling house prices in the UK and forecasts for next year are still generally positive we should not get carried away. Finally NR is a profitable company that has run out of cash through poor cash management / over gearing. So come on what is NR really worth based on something a bit more solid than what an opprtunist is willing to offer?

  • 56.
  • At 08:04 PM on 26 Nov 2007,
  • Graeme wrote:

I'm a shareholder by virtue of having an account when it was a mutual. I sold half of them a few years ago, I'm obviously a bit gutted that they've lost a hell of a lot in value perhaps strangely not devastated since it wasn't a personal investment. I still find this unsympathetic view of shareholders a bit harsh, i mean is this what we are now as a society that we can't feel sorry for someone who's lost a load of dosh (and i'm not including myself)

I don't blame Robert Peston, he was doing his job and he's not the only city journo with sources so someone would have broke the story. I partly blame the Treasury for not acting sooner to guarantee depositors. I partly blame the depositors who stood for hours on end to withdraw a few hundred quid. There were far too many in those queues who simply didn't have thousands in their accounts. Most of all i blame the Nothern Rock Board for being too greedy and pushing to grow the business too fast.

As we approach the expensive Christmas period good luck to all the staff (bar directors) at NR.

Can someone please answer a question for someone a bit naive in terms of takeovers? If Virgin is successful will i be forced to sell my shares or can I just hang onto them and maybe in donkeys years they will have recovered some value/

  • 57.
  • At 08:56 PM on 26 Nov 2007,
  • Adrian Martin wrote:

So RAB Capital say they will block the Virgin bid. If they want to force Northern Rock into administration so that Richard Branson can pick up the pieces even more cheaply, then that's the way to go! These "Johnny come lately" hedge funds and financial ambulance chasers are like vultures. In reality, they will all fly away if the Rock goes bang! The real question is "When will the great British taxpayer be repaid?" It's our £24 billion that is keeping Northern Rock alive. What's in it for us, never mind the shareholders!!

  • 58.
  • At 09:36 PM on 26 Nov 2007,
  • Narco wrote:

Does anyone actually understand where this 'borrowed money' came from?

It was created from THIN AIR. ie - Absolutely NOTHING.

Look at the money supply, the cost of goods and services, the price of commodities. Regardless of what the CPI and RPI says, inflation is now out of control and the prudent saver WILL pay for this.

  • 59.
  • At 09:38 PM on 26 Nov 2007,
  • Scamp wrote:

The real question is what has the Govt promised Branson to take the NR problem off their hands?

Some years ago, I started a finance company. One of the things I did was to look at the pattern of lending, so that I could see what to do in a serious crisis.

By using extensive computer modelling, it became obvious that the way to maximise return in such a situation, was actually to shut the company down and just service the existing business. You have no sales costs, only the cost of making sure that everybody pays up on time, which just needs a good collection department.

I have no detailed knowledge of the Northern Rock problems, but I suspect that the way to make the maximum amount of money from the company would be to shut all branches, get rid of most of the staff and then just collect the money owed on its extensive mortgage book. Any new business and remorgaging would be put through another company.

So taking over Northern Rock should be very profitable for another banking or mortgage lender, but it will be absolutely dire for any of the existing employees.

Sorry to be so gloomy, but I spent a lot of time analysing the figures of a finance company, for such a scenario.

Of course Branson's offer is "cheeky".

What in the world would anyone expect?

As far as capitalists are concerned, Branson is a choice act, but understand reality. He wants to make yet another big splash in cheeky sort of way.

What Branson is offering, is to placate the ridiculously absurd vanity of shareholders, employees and a dumbstruck new government that threw £25bn in taxpayer money down a rat hole solely to postpone the eventuality of surely more embarrassment for what has surely transpired right under all those stiff upper lips.

A whole country of financial suckers... Well, Hail, Britania!

Sorry.

Branson's bet is no bet at all really.

He's going to call in a consortium of investers who will back him right out of his £200 million carnival folly all for the one off chance that pride in the Rock and shame in the consequences otherwise will pull the thing through ten or twenty years ahead with a lot more government paydowns, and a lot more insider traffic racing proudly through Sir Richard's increasingly important doors, insider traffic that will refill Branson's own coffers with tribute a plenty, and perhaps even ask him to be King, or PM, whichever crown fits the toothy smiling Mr. Branson's head more aptly at the time it is proposed and he is hoisted upon the shoulders of so many working class heroes again made tired of so many other fools that end up in government for a time.

Ignoring the sorry dog-like howling of RAB as is best under the circumstances, (beggars shant be choosy) the only question remaining is, will this dog hunt and flush out the bird so it can be shot by this big time game preserve hunter in his khaki hat poking through the roof of a black, yellow and orange zebra-striped Safari SUV?

I think so. Though, you can rest assured Rock-stock will trade for £20 long before it ever again trades for £200, if it ever does trade for £200.

Even as little as Sir Richard is offering for the Rock, it is too much, except as it was intended, for the thrill of hanging yet another trophy on an already crowded wall in the most bizarre of indoor menageries.

Don Robertson, The American Philosopher

  • 62.
  • At 10:55 PM on 26 Nov 2007,
  • Jel wrote:

As I've said before and will say again, the Bank's lending is only theoretically unsecured. Northern Rock's assets are around 40 000m, less the marginal losses on reselling bad debtors' (sub-prime defaulters') properties in a falling market - if, that is, they really have to sell, which under the current restructuring is improbable.
That provides for a sizeable carcass to be picked over in liquidation, if necessary. The only question is, how will the Treasury carve it up? Some of Gilray and Hogarth's 1814 cartoons inevitably come to mind, but the thought of HM Treasury owning the homes of a sizeable chunk of the UK population leaves me shivering.
Perhaps the British Virgin Islands will soon include Great Britain and North America, rebranded - or perhaps this will be the ultimate Branson Pickle.

  • 63.
  • At 11:23 PM on 26 Nov 2007,
  • Emil Yformelaux wrote:

Branson is receiving state funding at a "commercial rate". Why can't he get the loan from the commercial sector? You do the math.

Is the government, ie the taxpayer, in the high risk banking sector or not. I think we need a referendum!

  • 64.
  • At 12:17 AM on 27 Nov 2007,
  • David wrote:

Lord Norman Lamont is a non-exec director of RAB capital (according to their web site).. so now we can see why RAB have got involved and are prepared to push the Virgin deal over the edge.

Hedge funds aren't usually stupid, Lamont will think he knows how far the Treasury can be pushed in this market (but then his track record in pushing the market is a tad flawed!)... and if it all goes belly up, he still wins, because he will have Darlings scalp instead (or is that as planned?)


Over to you Robert to investigate RAB's real agenda...

  • 65.
  • At 10:43 AM on 27 Nov 2007,
  • Chris Wills wrote:

Sorry to remind the shareholders but; 'shares can go down as well as up...' and therefore 'don't put all your eggs into one basket...'
I'm sure few were complaining when NR were paying larger than true value dividends on the strength of a shaky business plan and dodgy lending. It's worth stating the first law of investment; 'the higher the gains over the Bank of England interest rate, the higher the risk'. The shareholders have learnt a brutal lesson; shares carry risk and no amount of bleating will change that.
The cynic in me wonders how interested Labour would have been in bailing out a bank of predominantly Tory voters?

  • 66.
  • At 11:16 AM on 27 Nov 2007,
  • Tony wrote:

Virgin's offer looks like a great solution to almost everyone's problems, in the sort term at least. But . . .
If NR foundered due to a flawed business model and tight credit markets, and if those credit markets are still tight, then will the business model still work?
Specifically, can NR/Virgin Money practically carry on NR's practice of borrowing short to lend long?
If not, where are the funds going to come from to lend to house-buyers?
Obviously the brand cannot trade without new business. Do Virgin expect to be able to fund new mortgages from account holders in the traditional business model?
I still haven't heard anything at all about how NR (whatever they are called) can successfully trade in their main business now credit markets have changed. Or is everyone hoping they will simply go back to 'usual' in a few weeks time?

  • 67.
  • At 11:55 AM on 27 Nov 2007,
  • Ted wrote:

The #56 comment is about right.
Discussing the issues without that dimension of sympathy for all those people losing quite significant amounts of money through no real fault of their own, or faced with great uncertainty over their jobs, can make honestly held views seem unduly harsh.

Perhaps much of the suspicion around the deals is the thought that while a sale completion will be called "the end" by the government, and will define a true end (one way or another) for the shareholders.

But the true, real outcomes for the taxpayer...and possibly the staff levels won't be known until some time afterwards, whatever is being said at the moment.

  • 68.
  • At 12:00 PM on 27 Nov 2007,
  • Toni wrote:

The cost of banking mistakes can be severe, look at creaky old Citibank. This is a company that straddled the globe and finally seemed to have that one stop, international presence that bankers have always wanted. They have just had to accept $7.5bn in funding from Abu Dhabi in order to meet their capital adequacy requirements and what are they paying for this...11% John Reed or Walter Wriston would be furious. I think post 61 has it right, Branson is once again playing the role of consumers champion that he perfected through his airline, check out the recent fines handed to BA that Virgin avoided by playing whistleblower. Branson is notorious for splashing his brand on any product he can and if it fails or margins arn't good enogh - he ditches it, some times he finds synergy, don't they still serve virgin cola and virgin vodka on his airline? I am sure there is many oportunities in owning his own bank, although in most 3rd world countries, it is generally recognized as a bad thing for a corporate to have its own bank.

  • 69.
  • At 12:36 PM on 27 Nov 2007,
  • Duncan wrote:

WHY DOES THE TREATMENT AND GOVERNMENTAL CONCERN FOR NORTHERN ROCK SHAREHOLDERS DIFFER SO GREATLY FROM THAT OFFERED TO FAREPAK SHAREHOLDERS? CAN YOU EXPLAIN, DARLING? WHAT IS THE DIFFERENCE?

  • 70.
  • At 03:01 PM on 27 Nov 2007,
  • Alexander wrote:

There is a certain irony that Branson having begun his career with a major scam to defraud the revenue -something he ought to have gone to prison for - now seeks to further fill his boots at the taxpayer's expense as the crowning glory of his no doubt illustrious career.

This bid has much the same feel as the Saatchi Bros. ludicrous bid for Midland Bank at the end of the 1980s boom.

But much more chance of success this time round, such is the way in which we live now.

It has to be said that marketing men give good talk. But if old City heads and The Economist still conclude that nationalisation is the least worst option - such is the sums of money involved - then it is good enough for me.

In the meantime Robert it would be very illuminating, I think, if you were to do some more background reporting into Branson's Backers.

If we are going to get into a Branson pickle then we might as well be advised at this juncture as to all of the key ingredients.

We should find out exactly what kind of bitter sweet taste they are likely to leave in the mouth.

  • 71.
  • At 04:17 PM on 27 Nov 2007,
  • Ian wrote:

For posting 56 the situation is as follows.

Virgin are offering to invest money in the business. They are offering to purchase additional shares at 25p each by means of merging in their current Virgin money business.

They are also inviting current shareholders to buy additional shares to help re capitalise the business.

If, or when this is completed there will be approximately 222 new shares where there were 100 before. Virgin will hold 122 of these and the existing shareholders will hold 100 of the 222.

The Northern Rock will keep its stock market listing and be renamed Virgin money. You will continue to hold shares in the business and will be entitled to any capital gain if the share price rises and any dividends that are declared.

Equally you could sell your shares today or tomorrow as the price has risen based upon an increase in confidence in the long term prospects of Northern Rock as it currently stands.

RAB are against the deal as they believe that Virgin are buying the company up too cheaply. The rise in the share price may bear them out or equally the share price may be rising as people buy the shares now expecting another potential purchaser to come in to bid.

Several people have in the last month estimated that a financially sound Nothern Rock, or at least one where new long term funding is in place, could have a share price of £ 6 per share. In which case the view may be that 45% of £ 6 is £ 2.70 and that is where the current buying spree has come from.

As to castigating the shareholders we need to remember that most of us will have had some shares in Northern Rock by default as it is a constituent of the Footsie 100 index (at least for the time being) so most UK pensions and ISA's tracking UK shares will own some shares.

Hope this helps.


One should keep in mind here something few are even aware of concerning these stock exchanges.

Pricing of a stock is normally set by the liquidity occuring as shares are being transacted, bought and sold as it were.

Pricing at this time is only rarely set by the intrinsic value of any given shares.

When pricing is set by the intrinsic value of a given number of shares, the price always falls.

A Ponzi scheme isn't what it is because anyone is thinking rationally about the money they're throwing onto the table.

Don Robertson, The American Philosopher

  • 73.
  • At 07:32 PM on 27 Nov 2007,
  • Alex wrote:

Robert is it your understanding that the myself and other taxpayers will get our money back plus interest at 5.75% + 1% penalty rate applied by the Bank of England?

If this is not the case then I do not think the Virgin bid is a good deal for taxpayers. If I lend money to somebody I do expect not just to get my money back but also the commercial rate of interest. If Virgin is not prepared to to do this then nationalisation is a better option. Why? Because not only will the taxpayer get their money back from the loan book unless there was a catastrophic slump (i mean 50% fall in house prices in the next 24 months) in the housing market. But we the taxpayer would also be the recipients of the profits generated by Northern Rock. At a time of high public sector borrowing this extra money would be most welcome to the Treasury. May pay for a few more schools!

  • 74.
  • At 07:40 PM on 27 Nov 2007,
  • M.Ackem wrote:

I think it's a bit choice of RAB to describe Bransons bid as 'cheeky'. This is a company that went piling into Northern Rock when the shares were little more than £2, trying to make a hefty turn on his money at the expense of shareholders and staff ....if ever there were a shark or spiv, it is this company.

I would think Mr Richard's argument would have more credibility if he were a shareholder of long standing who cared a jot for NR's future. He isn't, he took a cheeky punt, it has backfired and now he's whingeing.

TOUGH ! take it on the chin like the rest of us have had to.

Oh you are so Cheeky Mr Richards !

  • 75.
  • At 09:40 PM on 27 Nov 2007,
  • Anne-Marie Garrett wrote:

I am a Northern Rock mortgage-holder. My mortgage is approx 10% of the conservative value of my house.
I am not tied to any fixed rate product - its a simple variable rate repayments mortgage.

I need to know what happens in my situation if:
(a) Northern Rock is taken over and continues as a going concern; or
(b) Northern Rock is nationalised by the UK Govt; or
(c) Northern Rock goes into administation.

Should I be looking to move the mortgage elsewhere at this point?
Should I stay put with Northern Rock?
Anne G

  • 76.
  • At 09:54 PM on 27 Nov 2007,
  • Alex H wrote:

If Mr Branson's bid is to be made attractive, there must be some shares sold to the Treasury in order to match rate of interest that will be added to the loan. If this is not done, the Treasury has not gained from the loan and nationalisation would have been a better choice. The tax payer is also at a loss on what was, in essence, an investment made on their behalf by HMT. If the investment was a success and Mr Branson does manage to turn NR around, we will expect a cut of the profits!

  • 77.
  • At 10:04 AM on 28 Nov 2007,
  • Jonathan R wrote:

What people are fogetting is that Northern Rock has thousands of mortgage holders with them. If Northern Rock went into administration and the mortgages were recalled, then not only would thousands of people have to repay their mortgages they would have to obtain new ones from other banks. With this sudden influx of people wanting mortgages this would put a strain on all the other banks and potentially cause more problems.

I think structuring a loan from public money to avoid this issue affecting the wider economy is sensible.

In respect of Richard Branson's offer, he is risking £200 million of his own money. There is not going to be anyone who will risk such a venture without the possibility of a decent return on his capital.

The bank of England is there to control the finances of the country and in this case they have moved in the right direction to stabilise the economy.

  • 78.
  • At 01:29 PM on 28 Nov 2007,
  • Silas Denyer wrote:

Talk of saving jobs makes my blood boil. If HMG had lent just a fraction of this £25m to, say, MG Rover then just as many jobs (up to 10,000 through the supply chain) would have been saved. There cannot be one rule for the goose, etc.

I do wonder, had Brown not been contemplating a General Election, would NR have received help?

  • 79.
  • At 04:21 PM on 28 Nov 2007,
  • Paul S wrote:

Jonatahn R at #77 - There would be no need at all for Northern Rock to demand repayment of its mortgages if it went into Administration (and probably no legal way in whch it could breach its contractual obligations anyway). Several banks that have run into difficulty over the past 15 years have quietly run-off their mortgage books with no big disruption for borrowers, and there is no reason that NR should not do the same.
The advantge of Administration, possibly followed by a Corporate Voluntary Arrangement with creditors, is that the bank can agree a strategy with creditors to maximise the return to creditors. Shareholders may even get something back if a run-off is successful and repays creditors.
What Administration does do is recognise that if a company cannot meet its liabilities as they fall due it should be the creditors, not the shareholders, who call the shots.

  • 80.
  • At 11:09 PM on 28 Nov 2007,
  • Mark Jones wrote:

Re Post 75# & relevance to 77#, 78#/

Dear Anne Marie,

a)Going Concern. Your mortgage will be taken over by new owners. They will be free to increase or decrease your standard variable rate. If Virgin as preferred bidder is approved, they are likely to charge a very competitive rate. My reasoning is based on the following assumptions;
1)Virgin have expressed a wish to expand rapidly into financial services. Re-branded as Virgin Money, the purchase will obtain a stock market listing at a stroke, with further access to competitive funding.
2)Branson has worked hard with his other businesses to develop the concept of the ‘people’s champion’ based on value for money. Remember his desire to run a non-profit making ‘people’s lottery’. Charging an above average market rate to mortgage holders would be inconsistent with this approach. It would certainly lose him ‘Brownie Points’.

b)Nationalised by Government. The government are frankly desperate for Northern Rock’s problems to disappear. Politics rather than economics are now the driving forces behind the Government’s approach.

1)Much has been made of the ‘moral hazard’ by the Governor of the Bank Of England, Mr King on why a penal rate of interest was charged for the £24 billion pounds and counting. Now it turns out this penal rate is to be turned into a rolled sub-ordinated loan by the Treasury to Northern Rock paid only before shareholders. To quote Mr Preston’s blog - Treasury five year Rock Loan,” it actually qualifies as part of the Rock’s capital base. To be more precise, it ranks alongside Tier II capital under BIS rules.”
How absurd is this, the so called ‘moral hazard’ penalty being converted into an asset for Northern Rock!
2)Over 6,000 people are employed by Northern Rock, many in the North East. I believe 26 out of the 28 MP’s close to Newcastle, Northern Rock’s headquarter’s are Labour. The Northern Rock charitable foundation supports many more businesses and individuals. Northern Rock where at the forefront in providing 125 % mortgages and mortgages based on large multiples, (4 or more times earnings). Estimates vary on how many people in these catagories have mortgages with Northern Rock. Politically I believeLabour would find extremely difficult to raise the standard variable rate Northern Rock charges above market rate. How could these people afford the rate increase? Futhermore as the credit crunch continues to bite, which lending institutions would agree to fund these switches?

c)Administration. Contrary to 77# and 78# the full balance of Loans do not immediately become payable. Borrowers have a contract with Northern Rock over a fixed term. A number of years ago I was a data processing manager in a finance company providing loans to customers that went into administration. In my experience the following would occur;
1)A large accountancy firm would be appointed to administer the affairs of Northern Rock.
2)New lending would cease. The focus would be trying to obtain the best possible outcome for creditors. Shareholders interest would be their least concern. A review would take place, staffing levels cut to the minimum needed to administer existing loans like your mortgage. Bear in mind the Government would exert considerable influence due to its £24 billion loans (and counting). The Government’s priorities would be as follows:
i)Repayment of the taxpayer’s £24 billion loans.
ii)Ensuring the political fallout in the Northeast of job cuts, the stigma of a Labour Government involved in homes repossessions is minimised. This latter point may prove more important to an under pressure government than the actual full repayment of the loans.
In the last published accounts, Northern Rock has considerable assets. Whether this proves to be the case when the Granite involvement comes to light (the off Balance Sheet, structured investment vehicle) is debateable. Lets proceed that it has these assets and whilst not rosy are basically secure.
In order to obtain the quickest return to creditors by the administrators a ‘carrot and stick approach’ may be used.
Firstly the carrot. You mention your mortgage is 10 % of the value of the house. An administrator may accept a discount for early repayment. Remember it is in their interest to resolve Northern Rock as quickly as possible. For example £300,000 house value, £30,000 mortgage. I would enquire what amount they would accept to settle the loan. If they give you any rubbish concerning early settlement penalty fees, point out the desirability of early repayment, rather than being paid over the remaining term of your mortgage. It could be 10 to 20 years. Offering £25,000 would in my opinion be reasonable. If they are not willing to accept this, provided the rate is not prohibitive continue with Northern Rock. They may have second thoughts at a latter date.
The stick. The mortgage rate increasing sharply, to force borrowers to repay loans by switching. Having 90% equity I believe you will have little difficulty in obtaining a new loan / mortgage. As I have pointed out, the Government would find a hefty rate rise politically unsatisfactory.

  • 81.
  • At 12:06 AM on 12 Dec 2007,
  • Silas Denyer wrote:

Talk of saving jobs makes my blood boil. If HMG had lent just a fraction of this £25m to, say, MG Rover then just as many jobs (up to 10,000 through the supply chain) would have been saved. There cannot be one rule for the goose, etc.

I do wonder, had Brown not been contemplating a General Election, would NR have received help?

  • 82.
  • At 03:01 PM on 22 Dec 2007,
  • Amin choudhury wrote:

I believe Richard Branson is doing a great job, as he's a billionaire. However, he is somewhat a wasteman, and Virgin isn't that much of a successful business either.

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