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Rock's £500m loss

Robert Peston | 21:00 UK time, Monday, 4 August 2008

I have learned that Northern Rock will tomorrow morning announce a substantial loss of around £500m before tax - or a £200m loss on a so-called underlying basis, stripping out one-off charges - as it presents its first trading results as a nationalised bank.

However it will also disclose that it is paying back the huge loan it received from the Bank of England, which is guaranteed by taxpayers, faster than it had expected to do.

The Rock's slump into bigger-than-expected losses has three main causes.

There will be one-off charges associated with reorganising and shrinking the business, including the cost of 1300 redundancies which were announced last week.

Also it has changed its approach to accounting, which has had the effect of increasing reported losses.

But most attention will be on the charges it takes to cover losses it expects to suffer on mortgages made to financially stretched homeowners who are having difficulty keeping up the payments.

These loan impairment charges have risen sharply - just as those of HBOS, Alliance & Leicester and Bradford & Bingley have all done.

Mortgages provided by the Rock where the borrower is three months or more behind with payments rose dramatically in the first four months of the year, by two thirds as a percentage of all its mortgages.

The Rock is expected to say tomorrow that the loss is towards the worse end of what it expected when it created its business plan in the spring but is consistent with that business plan.

But even if trading conditions became much worse, there would be nothing for the Rock's savers to worry about because the bank is state-owned and therefore cannot collapse.

The better news for taxpayers is that the Rock is making faster-than-expected progress in paying back the £26.9bn it owed to the Bank of England at the end of last year.

The reason for the early repayment is that it has been applying pressure to borrowers to pay off their mortgages or take their business to other banks.

Comments

  • Comment number 1.

    I feel sorry for all those losing there jobs thanks to the greedy fat cats at the top.

  • Comment number 2.

    "by two thirds as a percentage of all its mortgages."

    Think you'll find that's a fraction not a percentage. Srange mistake for a know it all.

    Give us the name of the NR leak! G.B.????

  • Comment number 3.

    This is what I call
    Nationalisation of Losses

    For all the remember that Adam Applegarth was paid £760,000 to leave.

    Should we not get hold of the people who profited from good times to carry the can?

    Wonders of Gordon economy!! Maybe one day even he will understand what he is upto!!

  • Comment number 4.

    Robert,

    Your report is not surprising. The question that needs to be asked is "Did Alistair Darling and Gordon Brown carry out a due dilligence before they (we) aquired Northern Rock, if not why not?"

  • Comment number 5.

    Asia 1 - The Western World 0, or put it another way.

    Cash 1 - Illiquid Balance Sheets 0

    Is it any wonder that confidence is shredded. The Western Banks, collectively, have managed, in a few short years (after all it took them a decade or so to create the monsters of derivatives etc that have caused massive banking losses) to destroy real economic value in the West.

    The canny emerging markets have just played the game, and sold products and services for cash. The cash stayed put. Soon, it will be released and will be used to buy out Western interests in all industries. The 21st Century will be the rise of the Emerging and Asian economies.

    Moral of the Tale - Western banks have for too long told everyone how to run their businesses, but have failed to run their own competently.

    It is the ordinary person in the street that now pays the heavy price - rising costs, stagnating wages, tighter credit (as banks have limited cash available), falling personal asset values and good businesses decimated by a lack of liquidity.

    This is the norm for the next few years sadly.

  • Comment number 6.

    However it will also disclose that it is paying back the huge loan it received from the Bank of England, which is guaranteed by taxpayers, faster than it had expected to do.

    :

    The better news for taxpayers is that the Rock is making faster-than-expected progress in paying back the £26.9bn it owed to the Bank of England at the end of last year.

    The reason for the early repayment is that it has been applying pressure to borrowers to pay off their mortgages or take their business to other banks.


    Well what do you know? The strategy I was repeatedly suggesting as vociferously as possible back in December 2007 is actually working. Now, the question is why did we have to go through the whole farce of soliciting bids for the company and then the Government's total humiliation of resorting to nationalising it? All that was needed was for the BofE to continue to perform its duty as Lender of Last Resort and for Northern Rock to pursue the strategy demanded by the market: the reduction of its mortgage book. Instead, the Government - and especially Gordon Brown - finally revealed their incompetence and ineptitude (both political and financial), with a nice juicy lawsuit from the former shareholders lined up to sap even further limited Governmental resources. Great job.



    from http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/12/rock_and_nationalisation_2.html (14 Dec 2007):

    So why do they prefer a COMMERCIAL solution? Why do they not prefer a MARKET solution? In this allegedly free-market country of ours, capitalism should be allowed to deliver the solution: Northerh Rock needs to RAISE both its MORTGAGE and SAVINGS rates. Those with mortgages will be motivated to move them to other lenders, and those with cash assets will be motivated to deposit them at Northern Rock.

    It's really not that difficult, just do the sums:

    If the average mortgage is (say) £200,000, then it would only need 50,000 mortgages to be transfered for Northern Rock to gain £10bn cash with which to repay some Bank of England loans. And once NR start reducing their BofE emergency borrowing, I think even Robert Peston would be amazed at just how quickly this so-called "crisis" simply evaporated...

  • Comment number 7.

    Re: #5 PrisonerNumber6

    The canny emerging markets have just played the game, and sold products and services for cash. The cash stayed put. Soon, it will be released and will be used to buy out Western interests in all industries.

    This process has already started!

    (I agree with the remainder of your post)

    BTW are you really a number? I thought you were a free man 8-)

  • Comment number 8.

    Re: #5 PrisonerNumber6

    Got to agree with you wholeheartedly. The next few decades will see the economies of the West dictated by the Chinese, Russia, the middle east and India. These nations have huge, and I do mean HUGE surplus cash at their disposal to invest as they see fit.

    The "Sovereign wealth funds" have trillions saved up and are no able to blithely go out and buy up assets in some of the biggest names in the West and of course at come point in time, they will be a position to dictate policies that suit them and their long term plans.

    This should not necessarily be seen in a negative light, if common sense plays out on both sides, this could be a win-win situation for them and the West, providing leaders take note and stop being so belligerent.

    As to the poor people who lost jobs at Northern Rock, I feel very sorry for them and their families, but the fact that it is still a going concern is perhaps what should be remembered. I'm not sure if it was a good investment of public money, only time will tell, but I fail to see how the greedy and foolish people in charge are not being held to account for their failed strategies.

  • Comment number 9.

    1. At 9:49pm on 04 Aug 2008, antimediabias wrote:
    I feel sorry for all those losing there jobs thanks to the greedy fat cats at the top.


    That would be Gordon Brown and Alistair Darling then.....

  • Comment number 10.

    Bad Reporting,
    We want actual figures reported not silly satistics the like of : Repossesions have doubled in the last three months,by how many and of how many Mortgages in total Nortern Rock owns.
    £580 Million loss how much has been repaid to the Govt to produce this loss or not.We want good Commentators who ask and look for answers in these handouts from Companies etc.

  • Comment number 11.

    "The better news for taxpayers is that the Rock is making faster-than-expected progress in paying back the £26.9bn it owed to the Bank of England at the end of last year.

    The reason for the early repayment is that it has been applying pressure to borrowers to pay off their mortgages or take their business to other banks."

    Is this your own considered opinion, or is it straight out of the press release?

    Surely whether or not the faster-than-expected repayment progress is positive news depends on the effective cost to Northern Rock of the policies it has put in place in order to achieve this.

    For example, I shouldn't think it is particularly good news if the bulk of the early repayments were of good quality, well secured loans that have a discounted nett present value, even in today's climate, that is greater than the simple repayment of principal.

    Fair enough, we should be delighted if the real story is that Northern Rock has managed the conjuring trick of unloading some of it's dross without the new lender fully appreciating the real quality of what he's taking on. But come on! This is the real world we're living in. For the time being at least, the general mood is to classify rubbish as rubbish, and you won't find too many people willing to go against this. Just like up to 12 months ago, when the general mood was that rubbish was gold dust, you wouldn't find many people prepared to dispute that, either.

    Let's be clear about this. The Treasury/Bank of England may have felt that rescuing Northern Rock was the best of a whole series of bad options, and that in overall cost terms it was the least expensive. But cost it's going to have, very considerable cost, because the corner-stone of the entire NR project - that defaults would be costless due to rising collateral values covering any losses - has been blown out of the water with the fall in property prices.



  • Comment number 12.

    It is difficult for any to assess the effect of House prices at this stage, because House prices are not changing uniformly across the country.

    In some areas they are falling, in other areas they are stable, and in some they are still rising (the very fashionable areas).

    But house prices will only affect a bank where repossession has taken place.

    And the repossession rate although rising remains very low.

    And at the present time, most repossessions will still be covered by the Price of the house.

    So only a fraction of repossessions risk any loss to the Bank, and with new deals with private landlords etc, even though losses may be reduced.

    Northern Rocks losses are mainly to do with its disposal of dodgy Investment Vehicles if I am not much mistaken, and of course due to paying higher interest on its commercial funding.

    Britain is not in the same situation as America, in fact with the exception of Mortgage fraud, British Mortgages are generally of far better quality than anything from the USA.

    But this is because Britain has always had a different attitude towards Housing than America. British people tend to be more settled, they buy a house to live in (generally) and aren't bothered what its worth so long as they can make their mortgage payments.

    Afterall, in twenty years time, when one is ready to retire to the Seaside or to Spain, and the mortgage is paid off, what does it matter what price the house has been in between ?

    A House is still a House, whether it costs 1500, 30000, or 250000 pounds !

  • Comment number 13.

    I am still struggling to see what "Success" can ever realistically look like in the case of Northern Rock.

    All the money thrown into this company seems to be being spent on proppping up a hollow shell.

    I do see completely the "jobs" argument and the points about a "Local champion" in financial services.

    But if the single fundamental point of business advantage (tapping worldwide cheap credit for finance) has gone, and for good---- AND the Government owned bank will now effectively be restrained from being market leader in financial offers on either side of the mortgage/savings market (Either through fears of destablising the remainder of the market or EEC rules regarding government subsidies)......

    Because of this one has to expect the best and brightest are already going to be leaving , further debilitating the company, and new talent will simply not apply.

    By the time it is ready to be "Restored to the Private Sector" there will only be the remaining good loans to fold into the buyers book----and yet more cost "efficiencies", in taking out some more high street properties and back office call centres.

    On top, there will still probably be sweetners involved for the buyer(s) from...er....us.... even if only those which will be inextricably embedded within the balance sheet by then.

    While this all could already have been completed ......by the time it is, the next election will have been and long gone ---- which for the Government, if perhaps not the rest of us, will probably count as "Success" anyway.

  • Comment number 14.

    I have to agree with the well formed comments above.

    In response to #11 - I was in fact a NR customer and I'm afraid they really did write to us all to 'ask us kindly to leave'. They made it clear they were not offering products and offered to help in any way to move elsewhere.

    I also agree with the point above (re. jobs) - I think it's a hell of a lot of money to pump into something which only held 6000 jobs. I don't know what these people were paid but I'm sure we have covered their redundancy 5 times over already.

    It's all political, like everything else. If the jobs are lost - Labour take a beating in the North East, if the banking system is seen to fail, Labour loose all support in the South east.

    It shouldn't be allowed - political games being played with the peoples money. I don't think it will work anyway as Labour are too far gone now.


  • Comment number 15.

    How come they can still afford to sponsor Newcastle United?

  • Comment number 16.

    Doesn't Northern Rock have a separate charitable trust or something?

 

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