Monday, September 17, 2007

Northern Rock: Why was it saved?

Well, that is assuming it is saved. It seems there is plenty of doubt about that.

Mervin King said that the Bank of England would not be the lender of last resort except in very special circumstances, that being a systematic failure of the financial system.

To be fair to Northern Rock, Barclay's have also dipped into the Bank of England's fund, but only once, and not for a revolving line of credit.

As Guido notes here, the city has been aware that the Northern Rock was nothing like as solid as its share price suggested for some time before the USA sub prime crisis hit.

Guido then goes on to question whether the loan extended was not because of the traditional support for Labour that the Northern Rock has been. It seems they were generous to miners during the miners strike of 1984.

The bigger issue however is the wisdom of the loan.

The die has been cast. If a bank that has a book that looks good but no other bank wants to touch, apparently the tax payer has to bail them out.

Surely we should be asking why it is that the Northern Rock is in such a hard place, whilst other banks are not?

As the Financial Times says this damages the reputation of the Bank of England. We should remember that banks have failed before, like for example, Barrings. Their bond holders and shareholders lost their shirts but their depositors did not as the bank was taken over.

Why would Labour prop up one of its favourite bank?


Anonymous said...

BCCI deposit holders lost.
B of E wound it up.
Deposit holders sued.
B of E spent 25m plus defending through courts.
If you want to see political corruption at its best examine BCCI.
The entire country is still dealing with the aftermath of that clusterfuck.
Intelligence services, - corrupt as shiite.
Bankers, polititians, civil servants, judiciary, - all the same.
Northern Rock? Bullshit.

Elliott said...

Not sure there's a conspiracy angle to this! Few details have emerged as to the terms of the Bank's loan, but we do know it was advanced at a penal rate. The issue for all our banks at present is not the price at which they borrow, however, but how long they can borrow for. This is why 3 month interbank rates are above the Bank's penalty overnight lending rate (base rate plus 1%, or 6.75%, as against 3 month LIBOR at about 6.90%).

There are three scenarios for Northern Rock: acquisition, failure or independent survival, in decreasing order of probability.

My personal view is that a takeover should be arranged in the next few days, when an acquirer could pick up NR's assets at bargain basement levels, to prevent the crisis in confidence spreading to the rest of the banking system.

Letters From A Tory said...

The whole situation stinks of Gordon Brown pressuring people in a desperate attempt to save himself. If this crisis was left to play itself out without interference from the government, Gordon Brown would be out of a job.