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Rock steadier

Robert Peston | 16:59 UK time, Wednesday, 28 November 2007

Something remarkable happened after the news was broken by me on the BBC last Sunday that the consortium led by Virgin had been selected as the preferred bidder for Northern Rock.

The rate at which the Rock's depositors were withdrawing their cash slowed by 75 per cent.

Although the fully fledged run on the Rock ended more than two months ago, many depositors had continued - in a more orderly fashion - to move their cash elsewhere.

The staunching of this outflow was a big thumbs up by one important constituency for the Virgin deal.

But those who own the Rock, its shareholders, were less pleased.

They were miffed that Sir Richard Branson and his chums were offering £200m for a business that was worth £6bn only a year ago.

And malcontent shareholders have the ability to block the Virgin deal.

It requires approval of 75 per cent of voting shareholders.

With hedge funds controlling well over 15 per cent already signalling that they don't want what they perceive as Virgin's pittance, Sir Richard Branson has a fight on his hands.

Which is why the Rock's board and the Treasury have indicated to me that they are beginning to look almost favourably (almost) on a more shareholder-friendly rescue proposed by Olivant, a financial company

Or to put it another way, they are at last supplying info to Olivant which would allow it to turn its idea into a detailed formal proposal.

Olivant's basic plan is simplicity itself. It would inject new senior management into the Rock. It would launch a rights issue of new shares to raise more than £500m of new equity capital. And it would allow existing shareholders to retain ownership of most of the Rock.

But what about taxpayers, you shout? How are we going to get our £26bn back?

Well the Virgin Consortium's press release for its proposal makes it clear that the jumbo loan it plans to raise from a group of banks led by Royal Bank of Scotland and Citigroup is potentially available to the Rock, even if the Virgin bid flops.

So it should be avallable to a Rock reorganised by Olivant and its boss, Luqman Arnold. Which means that they, like Virgin, could repay £11bn of the taxpayer-backed loan from the Bank of England on day one.

Shareholders might yet actually find themselves with a choice of offers. Which won't eliminate the dire capital loss suffered by most of them, but it could reduce the pain a bit.

Comments   Post your comment

  • 1.
  • At 07:26 PM on 28 Nov 2007,
  • Ted wrote:

I have some questions. What would have happened to Northern Rock if the Treasury hadn't intervened in any way? In other words, if Darling hadn't said that deposits would be secured by the government. Is it not probable that the run would have continued until the bank had completely collapsed as it was forced to sell its assets to honour deposits? Could it then be concluded that the only reason that shareholders have anything left at all is because the government stepped in? If so, then how important should the rights of the shareholders be in this deal to rescue the bank?
I'm not trying to make a point, I'm genuinely interested in this aspect of the story. Thanks.

  • 2.
  • At 07:32 PM on 28 Nov 2007,
  • MJA wrote:

This seems like wishful thinking. Although all valuations will be different, any interested party will want to make a profit from taking the risk - Virgin, Olivant or anyone else. Thye have to factor in the downturn in NR markets generally, some will be less optimistic than others but nobody knows the future.

If most of the employees be retained, and pensions safeguarded, and the depositors are Ok (the mortgages are anyway), then any takeover should be seen as welcome.

The status quo is not an option and shareholders will take the hit, that is the risk they take. Especially the hedge funds who should know what they are doing.

  • 3.
  • At 08:04 PM on 28 Nov 2007,
  • blair wrote:

What I find funny is why any shareholder would want to accept an offer at all. Why would they want to sell?

Maybe I have missed the point. Everyone is discussing a sale, but who is selling? And why?

The way I see it, Northern Rock have plenty of money. OK, so it is the tax payers money. They can survive without problems. I am certain that they will be profitable at th end of the year too. They have £24b in expensive loans, they have over £100b in profitable loans. What is the problem?

OK, so the tax man wants our money back. If Northern Rock refuse to pay, exactly what are we going to do? Bankrupt them? That is just daft. It is a profitable business.

Looking on the disasterous side, if interest rates go up then they might have problems with some of their fixed rate morgages (in the short term). They will be fine in the long term, surely. (Let's face it, interest rates are not going up, but it was worth considering).

If interest rates go down then Northern Rock are laughing. They have sold more fixed rate mortgages than anyone this year. They will make lots of money.

If they stay the same, well, I assume that they will still pull a profit. Of course, they could have their numbers wrong and go bust. I think that this is unlikely.

So, if I was a shareholder of Northern Rock and I has some shares that I paid UK£10 for, I may as well not sell for anything less than £5. Below this it is gamble time anyway.

Is there something more obvious that I am missing?

Great Blog Robert.

Thanks

  • 5.
  • At 09:28 PM on 28 Nov 2007,
  • Alex wrote:

Your blog is flawed. How did you get the statistics with regards to 'The rate at which the Rock's depositors were withdrawing their cash slowed by 75 per cent'. There is no such method to derive this information and this must be considered as the BBC ramping up the share.
Furthermore, there is a slight oversight in your piece with regards to the billions dished out by the taxpayers, who incidently fund the BBC as well!
Please put some effort into the maths of how such a bankrupt private company is to be bailed out by taxpayers and the consequences for taxpayers, shareholders and employees.

  • 6.
  • At 09:38 PM on 28 Nov 2007,
  • Northern Cock wrote:

Bollox. The rock is a wreck and you know it Peston, so why the ramping?

  • 7.
  • At 09:59 PM on 28 Nov 2007,
  • M.Ackem wrote:

I do have some sympathy with the smaller shareholders (of which I am one myself) in this current situation, but quite frankly i wish RAB & SRM would p*** right off. They both came steaming into Northern Rock when the price plummeted, hoping to make fat profits, as is the way with these hedge fund vultures. They took a punt and lost and I've got nothing but contempt for them.

It's absoluetly absurd watching them whine and whinge about preferred bidder status being given to Virgin. Both hedge funds wanted to dance on the grave of the Rock while holding aloft fists full of fivers, would that I were guven the opportunity to do the same to you guys.

BLOODY PARASITES !

Robert - would you like to see the staff retain their jobs at the end of your scoop ? Just wondered.

  • 8.
  • At 10:08 PM on 28 Nov 2007,
  • Ray Phillips wrote:

Well this is getting very interesting. Virgin not going to find it quite so easy and cheap to get its hands on NR assets. Seems the Rock is in play and bets are now one way.

  • 9.
  • At 08:58 AM on 29 Nov 2007,
  • Geoff Brown wrote:

So at last we can see a glimmer of hope (albeit a small one) for the beleaguered Northern Rock but am I wrong in thinking that the only problem facing this bank was one of continued funding brought about by the confusion in the financial markets over the level of junk bonds circulating in these markets.

It appears to me that the financial smart arses who caused the problem now realise that they have lost control of the situation and have become paranoid. Since none of them seems to know how big the problem is (is it millions or trillions-pretty soon we'll be talking serious money)or which companies are more exposed than others and are liable to go under. So now they don't trust anyoneone, least of all themselves.

Since this problem has been ongoing for several years it is a mystery to me why the decide to draw a line in the sand, on such behaviour, now. Likewise I am at a loss to understand why NR (who we are told is solvent) became affected so soon and in such a big way


  • 10.
  • At 09:08 AM on 29 Nov 2007,
  • Dan wrote:

I have NO sympathy with NR's shareholders, be they large or small.

Shares are a gamble - sometimes you win, sometimes you lose. If you chose to be a shareholder, you take on that gamble.

When people start bleating now about the best rescue package for shareholders smacks of having your cake and eating it.

Given the £24bn lent to NR, surely the long sufferring tax payer's interests should come uppermost? After all, if the money had not been provided, there would be no NR left by now to rescue.

  • 11.
  • At 09:10 AM on 29 Nov 2007,
  • Ian Jurowski wrote:

"Something remarkable happened after the news was broken BY ME on the BBC last Sunday..."

Wow. What an ego!

  • 12.
  • At 09:30 AM on 29 Nov 2007,
  • Ben wrote:

75% slowing of withdrawals? I'm amazed that you have this number, especially considering that NRK are saying very little publicly anyway. I think its about time that you tell your audience where your leak is coming from as its starting to bring your integrity into question now Robert.

  • 13.
  • At 10:24 AM on 29 Nov 2007,
  • Tim wrote:

"was worth £6bn only a year ago"

That is sloppy use of language. Market opinion of what it was worth was £6bn.

The market was wrong, and misunderstood the real condition of the company.

Bearing in mind that quite a number of writers have been pointing to the fundamental flaws in NR's business model and the inevitable outcome if credit markets tightened, it is hard to see why investors would take the view they did, but that is another matter.

  • 14.
  • At 10:36 AM on 29 Nov 2007,
  • Kv wrote:

Well said M.Ackem.
I don't have a problem with Hedge Funds as a whole. However, I do have a distaste for these "Activist" funds, whose only investment strategy is to talk their holdings up and attempt to strong arm corporations into going about their turnaround plans, despite only holding 1% of shares. If you're so confident in the company, buy it and do what you like. Otherwise 'p**s off'.

  • 15.
  • At 11:22 AM on 29 Nov 2007,
  • mikey wrote:

About NR 'leaks' to newspapers, is there any chance of criminal insider dealings by bears ? I seem to have bought when those in the know were selling. Could the FSA look into dealings please ?

  • 16.
  • At 01:08 PM on 29 Nov 2007,
  • A Lewis wrote:

Whay are the tax payers being put into a position where by they would be bailing out a sunken ship?
If it were any other business it would be left to sink, not at the expense of the tax payer!
Why has it become our problem that some guy ran his business wrong?
Why are we bailing him out?!?!?!

  • 17.
  • At 01:17 PM on 29 Nov 2007,
  • Andybhoy wrote:

"...after the news was broken by me... The rate at which the Rock's depositors were withdrawing their cash slowed by 75 per cent."

So, are you now finally admitting that your stories DO have an effect on the Rock?

Perhaps you will finally show a little more care and attention to the potential damage of your words, and a little less concern for getting your face in print.

Andy

  • 18.
  • At 03:53 PM on 29 Nov 2007,
  • Robbie wrote:

BoE data suggests Northern Rock loans from its central borrowing have climbed £2.7bn to more than £29bn.

Counting on my fingers I reckon by Feb 1st = £57bn.

Want to be first to wish ALL shareholders/staff a Merry Christmas!!

Love Santa xxxxxx

  • 19.
  • At 03:19 AM on 30 Nov 2007,
  • Charles Adams wrote:


As a sharehoder 'HEAR, HEAR'. Time for a general shareholders meeting.

  • 20.
  • At 08:10 PM on 30 Nov 2007,
  • Ian Leonard wrote:

"Which is why the Rock's board and the Treasury have indicated to me"

Mr Peston, are you seriously telling us that both HM Treasury and the offical(s) of Northern Rock are indicating their views and intentions to you. Perhaps you can elaborate and explain the nature of this "indication" and maybe let us know at which Forum this took place?

  • 21.
  • At 10:14 AM on 01 Dec 2007,
  • KLM wrote:

Care to spare a thought for staff (who are also shareholders!!) in amongst all this "inside" reporting and stats??.. OK, so NR's business model was higher risk than most, but it wasn't that long ago Mr.P that you were talking up NR as a shining example of banking innovation! 6000 peoples livelihoods come at moral price...I hope you can sleep at night Sir.

  • 22.
  • At 09:56 AM on 02 Dec 2007,
  • Big Red wrote:

The point that we should have ALL learned from this is that NO business is totally safe. Shareholders purchased their shares knowing the risks, or at least they should have. That's not to say they don't have a point when they complain. Were they fed mis-information at the time of purchase? If not, and all the information was available to them, then they have no one to blame but themselves.

By the way, I am a NR customer and will continue to be so. If Mr Branson comes along to the rescue, then he should be thanked, not berated. If, as in all business transactions, you don't like the terms, then just say NO.

  • 23.
  • At 11:54 AM on 02 Dec 2007,
  • Jacques Cartier wrote:

> it could reduce the pain a bit

That works against it. The idea is
to increase the pain of business
owners who damage British Banking,
not decrease it!

Shareholders must make sure bosses
operate properly, else they'll loose
money hand over fist. The system has
worked so far (look at the share
price), but I still can't see
the huge windfall for the taxpayer in
either of the plans. "Have yer money
back" doesn't cut it - we want compo
for the risk and bother as well.


  • 24.
  • At 06:11 PM on 02 Dec 2007,
  • M.Ackem wrote:

#21 'Spare a thought for the staff'

Well heres a thought from some of the staff, and yes it is appreciated that the overriding public concern is in relation to the reduction of the £24bn loan facility granted to Northern Rock (It ain't £30bn). So don't come back and preach about the staff really not being of any concern in this. They do have a serious interest in all of this, as I'm sure you'll understand.

Issues with Rover and Equitable Life involved giving money to those Co's for salaries and investment etc. As has been said repeatedly on these blogs, the arrangement for NR is a loan at a better than commercial rate for the Govt, so a slightly different scenario, as I'm sure you'll agree.

So here's a few points ;

i)Can you imagine what it is like to see your career picked apart daily for three months in the tabloids. To say the staff are under pressure is an understatement. Nevertheless they are loyal and committed to keeping the structures of the company in place, and to that extent it really is business as usual. Should anybody choose to buy the Rock, what they will get is a fully functioning bank with a motivated workforce determined to rise again .....if given the opportunity !

ii) The staff are not responsible for funding decisions. When they are asked to jump, they jump extremely high and as a consequence the Rock is the lowest cost, most efficient mortgage bank in Europe. All processes and procedures are second to none.

iii) The staff are very professional and well educated with a great number of lawyers, accountants, marketing professionals etc within their ranks. Previous posts have described NR jobs as low grade. This simply is not true.

iv) NR staff are as incredulous as to recent events as are all opinionated observers who make free with their views on these and other blogs. The constraints placed on NR by the tripartite authority make it impossible to counter many of the speculative comments made about the company but the staff are sure that the structure of the company is inherently sound and if the funding issues could be resolved then NR would work tirelessly to restore its reputation ....and I know that may appear fanciful given where the company is.

So do spare a thought for the staff, they may only be North East based which to the london centric views presented here will be a total irrelevance and an irritation, and there may only be 6,500 of them (20,000 plus linked in support businesses, communities etc), and your primary concern is probably the reduction in the loan facility (which is secured as mentioned here and elsewhere)and not their welfare. But without them, there is no bank to save.

I thank you.

  • 25.
  • At 01:15 PM on 03 Dec 2007,
  • chris wrote:

to robbie at #18

i'll have a merry christmas at the rock, after they announced payrise and bonus payments

cheers!!

  • 26.
  • At 02:04 PM on 03 Dec 2007,
  • Anonymous wrote:

To M.Ackem

Finally a well written post supporting the staff of Northern Rock.

As a member of NR myself i can confirm first hand that everything you say about the support and dedication we give to the company is completely true.

It's sickening however unfortunate to think that some of us have been there for years, and are also shareholders, however do not have any say in what out futures will be.

They are in the hands of two greedy Hedge Funds who wanted to make a quick buck whilst the bank was on it's knees - and realising they will not get a return on their investment (that they made about 2 months ago)are digging their heels in.

Sorry but it was a gamble - shares always are - but its like buying a lottery ticket, realising you havnt won and asking for your pound back.

The longer this goes on, the less the shares will be worth anyway - and the risk of the Government nationalising the rock is even greater. And guess what? shares worth big fat zero.

Many of the Rock's employees are also shareholders and have lost thousands. All we want is job & life security, not profit.

Do you really think that when NR/Virgin etc pays the 'tax payers money' (some also contributed by the staff of NR - employees funding employers - fancy that) back the government will say 'Ok, lets build a hospital/improve roads' etc?

The answer is no. It will either line the pockets of the royal family, be thrown into the toilet that is iraq, fund immigrants & asylum seekers' plush lifestyles, given to the Arts council or used to fund the Olympic Games and ridiculous logo's.

It WILL not be refunded in your next pay packet. One of the main benefits is that it will keep 20,000+ people in jobs.

For God's sake lets get this put to bed and move on.

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