What a difference 18 months and a credit crunch makes! A year and a half ago the City was on a high while Wall Street was bracing itself for the effect of the sub prime mortgage crisis and the failing US competitiveness in financial services.
Now both financial centres are suffering through thousands of job losses and a high profile collapse – the UK’s Northern Rock and Bear Sterns in the US.
But it appears that London has had more to lose;
"The brand of London has taken a hammering because of Northern Rock," says Tim Linacre, chief executive of Panmure Gordon. "I don't think it is terminal, but London needs to be absolutely on its toes."
Players on Wall Street are promoting the pros of tight regulation, saying that many investors value watchful regulators, tight listing standards and the right to sue.
"What Northern Rock demonstrates is that a business-friendly regulatory system may have its disadvantages as well," says Kathryn Wylde, president of the Partnership for New York City, a business group.
Trading on the London Stock Exchange dropped 29 per cent to £4,000bn, according to the World Federation of Exchanges.
Saturday 30 August 2008
Friday 29 August 2008
Between a Rock and hard place
By Chris Hulme
Unless someone was personally affected by the events surrounding Northern Rock, they might have little sympathy for its investors and shareholders. After all, from what has been reported nationwide the affairs of the company were it would seem, hardly handled well. The company was widely criticised for its lending and borrowing policies, and development of products that provided 125% mortgages certainly raised an eyebrow or two. Accusations of greed and unacceptable risk taking fanned the flames of anti Northern Rock rhetoric.
Unless someone was personally affected by the events surrounding Northern Rock, they might have little sympathy for its investors and shareholders. After all, from what has been reported nationwide the affairs of the company were it would seem, hardly handled well. The company was widely criticised for its lending and borrowing policies, and development of products that provided 125% mortgages certainly raised an eyebrow or two. Accusations of greed and unacceptable risk taking fanned the flames of anti Northern Rock rhetoric.
But in the wider context of the mortgage-lending arena, was Northern Rock so really out of step? Did the reality match a widely held perception that Northern rock possibly got what it deserved?
A closer look at Northern Rock shows things might not have been what had been portrayed. For example, the company was not alone in offering mortgages that exceeded property values. In fact 125% is quite misleading. Northern Rock’s widely publicised ‘Together Mortgage’ capped the maximum unsecured amount above the secured 95% to £30,000 which meant that on a house price of say £170,000 the maximum percentage loan would have been 113%, or to put it in monetary terms, £191,500. Other lenders, whilst limiting lending to 120%, appear to have been far more generous in handing out such mortgages whatever the value of the property, or again in monetary terms a mortgage of £204,000 on our £170,000 property.
There are those who suggest that Northern Rock’s lending policies were cavalier and irresponsible. The decision making process at Northern Rock which determined who could and who couldn’t borrow on the ‘Together Mortgage’ carried much tighter controls and checks than some lenders providing similar products. Perhaps Northern Rock’s lending policies should have been more fairly described as selective and cautious.
Would it also be reasonable to consider the risk element lower for the borrower on Northern Rock’s ‘Together Mortgage’ when compared to similar offerings from its peers? Take account that the secured element of the borrowing is restricted to 95% on the ‘Together’ product and it would be reasonable to assume the risk is lower compared to the whole amount being secured with other lenders.
We can see the results of Northern Rock’s ‘risky’ lending strategy published in its 2007 accounts, which clearly shows its mortgages in arrears measured against the Residential Average published by the Council of Mortgage Lenders. A direct comparison sees Northern Rock’s mortgage accounts in arrears at almost half of the national average, with the ‘Together’ product arrears at similar levels to the national average.
Turning to more esoteric matters, the FSA had apparently rubber stamped Northern Rock’s credentials in terms of its Basel II Capital Adequacy requirement only months before Northern Rock’s approach to the Bank of England for liquidity support. During that period lenders across the board were coming to realise that borrowing climate was becoming much more difficult as funding from the wholesale money markets dried up. Given this was an issue facing all lenders was it not to Northern Rock’s credit that they recognised the problem and proactively sought to resolve it with support from the Bank?
Would it therefore be more realistic and accurate to consider that the failings are not necessarily with the company itself and that perhaps questions should be asked of those who monitored its activities and of those who were asked to provide banking support? Should the accusation levied at the company actually be levied at the Tripartite Authorities?
It’s very easy to see Northern Rock as a corporate failure with investment institutions paying the price. But the Northern Rock saga is about ordinary people – homeowners, investors in pensions and endowments, small savers and of course staff employed by the company. Whilst we all feel the effects from the Northern Rock fallout, is it not time for sound reflection on previous and current events surrounding Northern Rock in the hope of finding a path that gives the real victims a better deal?
Chris Hulme is a Director of a mortgage broker practice based in south
Wednesday 27 August 2008
Granite Crumbling
It has been reported that Northern Rock has been experiencing severely high default rates raising further fears of a higher bill for taxpayers.
According to financial service company, Standard & Poor’s, Northern Rock borrowers who have fallen more than 90 days behind mortgage payments were rising at faster rates than the rest of the mortgage market, soaring by two thirds between this year's first and second quarters.
In addition, repossession of Northern Rock mortgagees were also rising at a far higher rate from 134 a month in the first quarter to 353 a month in the second.
This problem was identified to have stemmed from in Granite, the £40bn offshore trust that is holding many of Rock’s mortgages. The Granite book is down from £46 billion at the start of the year and it is reported that it was performing much worse than similar bodies set up by other banks such as Barclays, HBOS, Abbey, Alliance & Leicester and Standard life.
Andrew South, S&P's senior director for structured finance, said that any financial difficulty resulting from the defaults would be shared between Granite bondholders and Northern Rock.
“The deteriorating book increases the chances that taxpayers, ultimately, might have to shoulder some of the cost,” he said.
In addition, S&P has also highlighted further potential risk of mortgages in Granite. Average loan-to-value ratios (LTVs) were 77 % for Granite, as against 60 % typically in other trusts. Slightly less than 30 % of Granite loans were at LTVs of 90 per cent or more, meaning that a large proportion of borrowers would be in negative equity if house prices fall further.
Granite's performance on credit quality is poor even after taking into consideration that it was shrinking its book as mortgages matured or borrowers were taking their business elsewhere.
A Northern Rock spokesman stated however: “At this stage Granite is performing within its parameters. Investors are well aware of this and are protected by the reserve fund.” The spokesman said that the arrears figures in Granite were consistent with figures issued by Rock with its half-year results on August 5. At the time, Rock said that arrears levels, including Granite loans, had doubled since the start of the year to 1.18 per cent of the total residential mortgage book. Repossessions were up from 2,215 at the start of the year to 3,710.
At the weekend it was revealed that at the time of the nationalisation, in February, when the Government was assuring voters that Rock could ultimately be sold back to the private sector for a profit, it was being advised by Goldman Sachs that the situation was likely to lead to a loss of between £450 million and £1.28 billion. Since nationalisation, Rock has repaid £9.4 billion of government loans, reducing its outstanding debt to £17.5 billion. Negotiations with the Treasury are underway to swap up to £3 billion of government loans for fresh equity to strengthen its balance sheet.
What is Granite?
— Granite is a vehicle established in 1999 by Northern Rock in Jersey, used by Northern Rock to make extra funds from the mortgages that the bank had sold to homeowners
— Northern Rock transferred mortgages to Granite, which packaged them together. Investors bought these securities, which provided them with regular interest payments
— Rock does not own or run Granite, it is a separate legal entity
— As mentioned in the piece, many other banks have these vehicles, including Halifax, Bank of Scotland and Barclays. They are particularly common in the United States, where almost all mortgages are held within special-purpose vehicles.
According to financial service company, Standard & Poor’s, Northern Rock borrowers who have fallen more than 90 days behind mortgage payments were rising at faster rates than the rest of the mortgage market, soaring by two thirds between this year's first and second quarters.
In addition, repossession of Northern Rock mortgagees were also rising at a far higher rate from 134 a month in the first quarter to 353 a month in the second.
This problem was identified to have stemmed from in Granite, the £40bn offshore trust that is holding many of Rock’s mortgages. The Granite book is down from £46 billion at the start of the year and it is reported that it was performing much worse than similar bodies set up by other banks such as Barclays, HBOS, Abbey, Alliance & Leicester and Standard life.
Andrew South, S&P's senior director for structured finance, said that any financial difficulty resulting from the defaults would be shared between Granite bondholders and Northern Rock.
“The deteriorating book increases the chances that taxpayers, ultimately, might have to shoulder some of the cost,” he said.
In addition, S&P has also highlighted further potential risk of mortgages in Granite. Average loan-to-value ratios (LTVs) were 77 % for Granite, as against 60 % typically in other trusts. Slightly less than 30 % of Granite loans were at LTVs of 90 per cent or more, meaning that a large proportion of borrowers would be in negative equity if house prices fall further.
Granite's performance on credit quality is poor even after taking into consideration that it was shrinking its book as mortgages matured or borrowers were taking their business elsewhere.
A Northern Rock spokesman stated however: “At this stage Granite is performing within its parameters. Investors are well aware of this and are protected by the reserve fund.” The spokesman said that the arrears figures in Granite were consistent with figures issued by Rock with its half-year results on August 5. At the time, Rock said that arrears levels, including Granite loans, had doubled since the start of the year to 1.18 per cent of the total residential mortgage book. Repossessions were up from 2,215 at the start of the year to 3,710.
At the weekend it was revealed that at the time of the nationalisation, in February, when the Government was assuring voters that Rock could ultimately be sold back to the private sector for a profit, it was being advised by Goldman Sachs that the situation was likely to lead to a loss of between £450 million and £1.28 billion. Since nationalisation, Rock has repaid £9.4 billion of government loans, reducing its outstanding debt to £17.5 billion. Negotiations with the Treasury are underway to swap up to £3 billion of government loans for fresh equity to strengthen its balance sheet.
What is Granite?
— Granite is a vehicle established in 1999 by Northern Rock in Jersey, used by Northern Rock to make extra funds from the mortgages that the bank had sold to homeowners
— Northern Rock transferred mortgages to Granite, which packaged them together. Investors bought these securities, which provided them with regular interest payments
— Rock does not own or run Granite, it is a separate legal entity
— As mentioned in the piece, many other banks have these vehicles, including Halifax, Bank of Scotland and Barclays. They are particularly common in the United States, where almost all mortgages are held within special-purpose vehicles.
Friday 15 August 2008
Mervyn King gets a bit turned around in Westminster
A few days ago, Private Eye (no. 1216, 8th-21st August), ran a story talking about Mervyn King managing to land himself in hot water in front of the Treasury Select Committee. Here, for your amusement and edification, is the full transcript from Hansard of what transpired in those few minutes:
Jim Cousins: We are now getting a picture of quite a complex process and you yourself have referred this morning and on other occasions to the importance of communication, and you have made it clear that you do not think this amber state, if we are going to use your terminology, should be communicated, but has there ever been any formal inquiry as to how the leak which caused the run on Northern Rock ever took place? Has there been any formal inquiry into that at any stage by anyone?
Mr King: As far as I know no institution has instigated a formal inquiry, no.
Jim Cousins: Governor, do you not accept that there is a certain moral hazard, if I can use that term, in not carrying out such an inquiry into how that happened because in the absence of such an inquiry how do we know that all these discussions that will be going on in the amber phase between a whole variety of different people in your two organisations, involving the Financial Stability Committee, will not be leaked?
Mr King: All I can say is that if you would like to hold your own inquiry into what happened you would be very welcome to. I do not think any leak inquiry has ever produced a very productive result, and I think it is pretty clear where leaks tend to come from.
Jim Cousins: But, Governor, this Committee is not the appropriate agency to do that, as you know perfectly well, and you must also appreciate, Governor, because you yourself used the term "moral hazard" on a regular basis, quite properly, that if significant leaks occur and no inquiry is made into those there is an element of moral hazard that results.
Mr King: I am absolutely convinced that no leak emanated from the Bank of England. I have no idea where the leak came from. Others can ask themselves that question if they want to.
Chairman: Governor, I thought you said it was pretty clear, you thought, where the leak came from. Did I hear you wrong?
Mr King: No, I did not say that.
Chairman: What did you say was pretty clear then?
Mr King: I said leaks in general are those things which you are more expert in than those of us in public bodies. I think you are much more expert in where these things originate from and how they come out.
Jim Cousins: I am sorry, Governor, this is a serious issue.
Mr King: It is a serious issue.
Jim Cousins: It is too important for that kind of by-play. You know perfectly well the credibility of this system will depend on an absence of leaks.
Mr King: I have given you an assurance that no leak came from the Bank of England in any respect of any issue in the last year that has come up. There are a number of issues where leaks have occurred, where things have reached broadcasting authorities. None of it came from the Bank of England. I cannot carry out any investigation into a leak from any other authorities.
Jim Cousins: But, Governor, what are we on this Committee and in Parliament when we consider this legislation to make of a system where there are inquiries into bottom feeders' leaks, young men at computer terminals, but there are no inquiries into top people's leaks?
Mr King: What top people's leaks are you thinking of?
Jim Cousins: What occurred last September.
Mr King: I suggest you ask the other authorities involved what they have done about it.
Jim Cousins: Thank you.
Jim Cousins: We are now getting a picture of quite a complex process and you yourself have referred this morning and on other occasions to the importance of communication, and you have made it clear that you do not think this amber state, if we are going to use your terminology, should be communicated, but has there ever been any formal inquiry as to how the leak which caused the run on Northern Rock ever took place? Has there been any formal inquiry into that at any stage by anyone?
Mr King: As far as I know no institution has instigated a formal inquiry, no.
Jim Cousins: Governor, do you not accept that there is a certain moral hazard, if I can use that term, in not carrying out such an inquiry into how that happened because in the absence of such an inquiry how do we know that all these discussions that will be going on in the amber phase between a whole variety of different people in your two organisations, involving the Financial Stability Committee, will not be leaked?
Mr King: All I can say is that if you would like to hold your own inquiry into what happened you would be very welcome to. I do not think any leak inquiry has ever produced a very productive result, and I think it is pretty clear where leaks tend to come from.
Jim Cousins: But, Governor, this Committee is not the appropriate agency to do that, as you know perfectly well, and you must also appreciate, Governor, because you yourself used the term "moral hazard" on a regular basis, quite properly, that if significant leaks occur and no inquiry is made into those there is an element of moral hazard that results.
Mr King: I am absolutely convinced that no leak emanated from the Bank of England. I have no idea where the leak came from. Others can ask themselves that question if they want to.
Chairman: Governor, I thought you said it was pretty clear, you thought, where the leak came from. Did I hear you wrong?
Mr King: No, I did not say that.
Chairman: What did you say was pretty clear then?
Mr King: I said leaks in general are those things which you are more expert in than those of us in public bodies. I think you are much more expert in where these things originate from and how they come out.
Jim Cousins: I am sorry, Governor, this is a serious issue.
Mr King: It is a serious issue.
Jim Cousins: It is too important for that kind of by-play. You know perfectly well the credibility of this system will depend on an absence of leaks.
Mr King: I have given you an assurance that no leak came from the Bank of England in any respect of any issue in the last year that has come up. There are a number of issues where leaks have occurred, where things have reached broadcasting authorities. None of it came from the Bank of England. I cannot carry out any investigation into a leak from any other authorities.
Jim Cousins: But, Governor, what are we on this Committee and in Parliament when we consider this legislation to make of a system where there are inquiries into bottom feeders' leaks, young men at computer terminals, but there are no inquiries into top people's leaks?
Mr King: What top people's leaks are you thinking of?
Jim Cousins: What occurred last September.
Mr King: I suggest you ask the other authorities involved what they have done about it.
Jim Cousins: Thank you.
Lib Dems blast PwC's Northern Rock audit
From the Financial Director Website article by David Jeduah
Lib Dems' shadow chancellor Vince Cable and Treasury spokesman Lord Oakeshott urge ministers to ‘go after’ PwC, and even suggest that the firm should step down as auditors
The Lib Dems have turned up the heat on PwC, making calls for MPs to haul the firm over the coals for its audit of Northern Rock.
The party’s shadow chancellor Vince Cable and Treasury spokesman Lord Oakeshott criticised the firm, urging ministers to ‘go after’ PwC, and even suggested that the firm should step down as auditors.
Cable pushed for ministers to ‘go after the auditors who failed to spot glaring problems and mounting bad debt,’ on the day Northern Rock released its half-year numbers.
But, in the interim report, the firm has taken a tougher stance with its client.
It warned that there was a ‘material uncertainty’ Northern Rock could continue as a going concern because the bank still needs to secure European Commission approval on its government loans.
Cable added that the government should now ‘go after the former directors who have managed to shift the bank’s losses on to the taxpayer.’
In communications with the City, Northern Rock’s chairman Ron Sandler said former FD Dave Jones was no longer a main board member but is still an employee of the bank.
A Northern Rock spokesperson said: ‘PricewaterhouseCoopers were re-appointed as Northern Rock auditors in May 2008 and as far as we are concerned there is nothing further to say.’
PwC refused to comment citing client confidentiality.
Michael Fallon, a member of the Treasury committee backed the call for PwC to drop its auditor role. ‘I think [PwC] are conflicted,’ he said, referring to the help the firm also gave the bank in selling on its loans.
Lib Dems' shadow chancellor Vince Cable and Treasury spokesman Lord Oakeshott urge ministers to ‘go after’ PwC, and even suggest that the firm should step down as auditors
The Lib Dems have turned up the heat on PwC, making calls for MPs to haul the firm over the coals for its audit of Northern Rock.
The party’s shadow chancellor Vince Cable and Treasury spokesman Lord Oakeshott criticised the firm, urging ministers to ‘go after’ PwC, and even suggested that the firm should step down as auditors.
Cable pushed for ministers to ‘go after the auditors who failed to spot glaring problems and mounting bad debt,’ on the day Northern Rock released its half-year numbers.
But, in the interim report, the firm has taken a tougher stance with its client.
It warned that there was a ‘material uncertainty’ Northern Rock could continue as a going concern because the bank still needs to secure European Commission approval on its government loans.
Cable added that the government should now ‘go after the former directors who have managed to shift the bank’s losses on to the taxpayer.’
In communications with the City, Northern Rock’s chairman Ron Sandler said former FD Dave Jones was no longer a main board member but is still an employee of the bank.
A Northern Rock spokesperson said: ‘PricewaterhouseCoopers were re-appointed as Northern Rock auditors in May 2008 and as far as we are concerned there is nothing further to say.’
PwC refused to comment citing client confidentiality.
Michael Fallon, a member of the Treasury committee backed the call for PwC to drop its auditor role. ‘I think [PwC] are conflicted,’ he said, referring to the help the firm also gave the bank in selling on its loans.
Thursday 14 August 2008
All aboard the gravy train
By Adam Douglas, Wallsend
Recently, the Journal up here in Newcastle highlighted the Treasury’s mushrooming bill for consultants, which has jumped to £17m on the back of the ongoing Northern Rock debacle. The Rock, nationalised at great cost to the ordinary shareholder, seems doomed to languish under government control for the foreseeable future. Yet, for all the lack of compensation on offer to you and me, Mr Darling can somehow find the money to pay out a fair whack of cash to finance mandarins and the bank’s senior management, who (for reasons which seem pretty unfathomable) are still getting their bonuses.
Let’s crunch the numbers. Disclosure so far runs to:
- £3.6m paid to PricewaterhouseCoopers to investigate the loss of personal records
- £540,000+ for an IPCC inquiry into this little event and a police investigation
- £2.25m to send out apology letters to folks affected by aforesaid data loss
- £139,000 (at least – this figure dates from January) in fees to Slaughter and May
- £642,000 paid to Clive Briault as a golden goodbye after being shoed out of the FSA
This all out of the Treasury’s pocket, of course – the same one that was empty a few months ago. Yes, when I got into this shareholder game I accepted the line “the value of shares can go up as well as down”, but no-one mentioned the small print, “the value of shares can be wiped out because the government can’t get it’s a*** into gear when a bunch of idiots in top management land the bank in deep water”.
From Northern Rock itself, we have £2.3m in “confidential” retention payouts to 173 “key people” at the Rock. Surprisingly enough, there will almost an outright mutiny over in Gosforth when this news got out. When they were passing around the news of their latest trip on the gravy train, they even had the cheek to say that their cash, “will not be offered to the generality of staff and, as such, must remain absolutely confidential to yourself and not be discussed with others”.
Thankfully for the cause of truth and transparency, that particular information pipeline was leakier than a fifty-year-old metal bucket. However, Andrew Kirkland is now being hauled through the courts for the ‘crime’ of helping us all out on that one, with the Rock using London-based legal heavy-hitters Schillings to try to skewer the poor bloke, at a cost of at least £130,000 and counting.
There was also a question put to Parliament at the end of March by Michael Fallon, of which Angela Eagle said, “Northern Rock has indemnified the Treasury in respect of certain costs and expenses, including adviser costs.” Now, what exactly the cost of this policy has been to Northern Rock remains a bit of a mystery, but judging by the money paid to Slaughter and May outside the bounds of this agreement, it can’t be small change. In particular, Goldman Sachs is getting a big slice of the pie somewhere along the line, though what exactly it’s done to deserve its wages puzzles me (and probably lots more people too).
And I really shouldn’t mention the £750,000 pay-off that went to Applegarth, who, the broad consensus of opinion goes, really deserves to be shot at dawn.
What’s more, they can still find enough money to guarantee an annual income of £15m a year over the next three years to the Northern Rock Foundation. OK, it’s a good cause and it should be supported, but doesn’t anyone see a discrepancy here?
So, why can’t the Treasury, or the Rock, find enough money to give us all something resembling fair value?
After all, it’s not as though we’re all looking for a free upgrade to First Class. But we did pay for Standard, so we’ve got a right to demand that they don’t just pack us all into the mail wagon. Maybe the guys in the top hats are just too busy enjoying the champagne and caviar to care.
Editorial Note: Posting of comments and editorials by members of NRSSG is provided as a service to members. Comments made by individual members should not be construed as representing the opinion of Northern Rock Small Small Shareholders Group or the editors of this blog.
Recently, the Journal up here in Newcastle highlighted the Treasury’s mushrooming bill for consultants, which has jumped to £17m on the back of the ongoing Northern Rock debacle. The Rock, nationalised at great cost to the ordinary shareholder, seems doomed to languish under government control for the foreseeable future. Yet, for all the lack of compensation on offer to you and me, Mr Darling can somehow find the money to pay out a fair whack of cash to finance mandarins and the bank’s senior management, who (for reasons which seem pretty unfathomable) are still getting their bonuses.
Let’s crunch the numbers. Disclosure so far runs to:
- £3.6m paid to PricewaterhouseCoopers to investigate the loss of personal records
- £540,000+ for an IPCC inquiry into this little event and a police investigation
- £2.25m to send out apology letters to folks affected by aforesaid data loss
- £139,000 (at least – this figure dates from January) in fees to Slaughter and May
- £642,000 paid to Clive Briault as a golden goodbye after being shoed out of the FSA
This all out of the Treasury’s pocket, of course – the same one that was empty a few months ago. Yes, when I got into this shareholder game I accepted the line “the value of shares can go up as well as down”, but no-one mentioned the small print, “the value of shares can be wiped out because the government can’t get it’s a*** into gear when a bunch of idiots in top management land the bank in deep water”.
From Northern Rock itself, we have £2.3m in “confidential” retention payouts to 173 “key people” at the Rock. Surprisingly enough, there will almost an outright mutiny over in Gosforth when this news got out. When they were passing around the news of their latest trip on the gravy train, they even had the cheek to say that their cash, “will not be offered to the generality of staff and, as such, must remain absolutely confidential to yourself and not be discussed with others”.
Thankfully for the cause of truth and transparency, that particular information pipeline was leakier than a fifty-year-old metal bucket. However, Andrew Kirkland is now being hauled through the courts for the ‘crime’ of helping us all out on that one, with the Rock using London-based legal heavy-hitters Schillings to try to skewer the poor bloke, at a cost of at least £130,000 and counting.
There was also a question put to Parliament at the end of March by Michael Fallon, of which Angela Eagle said, “Northern Rock has indemnified the Treasury in respect of certain costs and expenses, including adviser costs.” Now, what exactly the cost of this policy has been to Northern Rock remains a bit of a mystery, but judging by the money paid to Slaughter and May outside the bounds of this agreement, it can’t be small change. In particular, Goldman Sachs is getting a big slice of the pie somewhere along the line, though what exactly it’s done to deserve its wages puzzles me (and probably lots more people too).
And I really shouldn’t mention the £750,000 pay-off that went to Applegarth, who, the broad consensus of opinion goes, really deserves to be shot at dawn.
What’s more, they can still find enough money to guarantee an annual income of £15m a year over the next three years to the Northern Rock Foundation. OK, it’s a good cause and it should be supported, but doesn’t anyone see a discrepancy here?
So, why can’t the Treasury, or the Rock, find enough money to give us all something resembling fair value?
After all, it’s not as though we’re all looking for a free upgrade to First Class. But we did pay for Standard, so we’ve got a right to demand that they don’t just pack us all into the mail wagon. Maybe the guys in the top hats are just too busy enjoying the champagne and caviar to care.
Editorial Note: Posting of comments and editorials by members of NRSSG is provided as a service to members. Comments made by individual members should not be construed as representing the opinion of Northern Rock Small Small Shareholders Group or the editors of this blog.
Freedom of Information?
The Treasury, it seems, is still intent on playing their cards close to their chest about what Ministers are being told to do about Northern Rock. Witness the following letter, a response to an FOI request put in back in July which has had a response yesterday (the footnotes were on the letter from the Treasury, with the formatting edited to make them easier to read here):
Freedom of Information Act 2000: Northern Rock
Thank you for your two enquiries dated 10 July, which we received on 16 July, requesting information under the Freedom of Information Act 2000 (‘the Act’).
2. You asked for information covering –
- the final advice to Ministers on the potential job losses at Northern Rock following its restructuring, and any prospects to ameliorate the effect of job losses on the north east economy.
- the final advice to Ministers on the timing and potential valuation of Northern Rock’s return to the private sector following restructuring and the repayment of Government/Bank of England support.
3. Regarding your second request, the timing and potential valuation of Northern Rock’s return to the private sector following restructuring and the repayment of Government/Bank of England support is something that would need to be addressed in the circumstances of the time at which a return to the private sector was considered and no final advice has been given. Therefore we do not hold information regarding this request.
4. The Treasury does hold information falling within the scope of your first request. Regarding this request, in the period of temporary public ownership the company is being run at arms length from Government and on a commercial basis. The day-to-day relationship between the Treasury, as the shareholder, and the company is set out the Northern Rock Shareholder Relationship Framework document [see note 1]. This states that Government as shareholder:
“determines the high level objectives that the [business] Plan is designed to achieve and agrees the [business] Plan with the Board”
5. Ministers have been provided with advice on and approved the Northern Rock Board’s plan. An executive summary of the Provisional Northern Rock Restructuring Plan was published on 31 March 2008 [see note 2]. The plan sets out the basis for the removal of financial support provided by HM Treasury and the Bank of England through the creation of a smaller, more focused and financially viable mortgage and savings bank that will be returned in due course to the private sector. The plan addressed the specific question you raise regarding potential job losses. It envisaged:
“about a one-third reduction in staff levels over the next three years based on projected business volumes with the majority of the reduction occurring in the first year. The timing and nature of the proposed downsizing, including any redundancy arrangements, will be subject to consultation with representatives of Unite and other employee representatives;”
and stated:
“Northern Rock is committed to open communication with staff and to providing them with substantial support during the restructuring. The Bank will continue to work closely with Unite, One NorthEast and other agencies and stakeholders to minimise the impact of the proposed downsizing on staff and local communities; this includes providing outplacement services to help staff obtain alternative employment in the region”.
6. The Treasury judges that the remaining information it holds that falls within your request falls under the exemption in Section 35 (1)(a) of the Act, which covers information related to the formulation and development of government policy. This is a qualified exemption and requires us to consider the balance of public interest for and against release of the information.
7. We recognise that there is a broad public interest in knowing the advice given to Ministers in relation to Northern Rock whilst it is in temporary public ownership. However there is also a strong public interest in effective policy-making. In order to develop government policy it is necessary that officials have the space to freely give full and frank advice to Ministers on Northern Rock’s plans and performance during its period of temporary public ownership. Our judgement is that it is not in the public interest to release the information we hold at this time.
8. If you have any queries about this letter, please contact me. It will be helpful to us if you remember to quote the reference number above in any future communications.
Ashley Britten
Information Rights Unit
1 Some details on a Treasury website
2 Some details on the Northern Rock Website
Freedom of Information Act 2000: Northern Rock
Thank you for your two enquiries dated 10 July, which we received on 16 July, requesting information under the Freedom of Information Act 2000 (‘the Act’).
2. You asked for information covering –
- the final advice to Ministers on the potential job losses at Northern Rock following its restructuring, and any prospects to ameliorate the effect of job losses on the north east economy.
- the final advice to Ministers on the timing and potential valuation of Northern Rock’s return to the private sector following restructuring and the repayment of Government/Bank of England support.
3. Regarding your second request, the timing and potential valuation of Northern Rock’s return to the private sector following restructuring and the repayment of Government/Bank of England support is something that would need to be addressed in the circumstances of the time at which a return to the private sector was considered and no final advice has been given. Therefore we do not hold information regarding this request.
4. The Treasury does hold information falling within the scope of your first request. Regarding this request, in the period of temporary public ownership the company is being run at arms length from Government and on a commercial basis. The day-to-day relationship between the Treasury, as the shareholder, and the company is set out the Northern Rock Shareholder Relationship Framework document [see note 1]. This states that Government as shareholder:
“determines the high level objectives that the [business] Plan is designed to achieve and agrees the [business] Plan with the Board”
5. Ministers have been provided with advice on and approved the Northern Rock Board’s plan. An executive summary of the Provisional Northern Rock Restructuring Plan was published on 31 March 2008 [see note 2]. The plan sets out the basis for the removal of financial support provided by HM Treasury and the Bank of England through the creation of a smaller, more focused and financially viable mortgage and savings bank that will be returned in due course to the private sector. The plan addressed the specific question you raise regarding potential job losses. It envisaged:
“about a one-third reduction in staff levels over the next three years based on projected business volumes with the majority of the reduction occurring in the first year. The timing and nature of the proposed downsizing, including any redundancy arrangements, will be subject to consultation with representatives of Unite and other employee representatives;”
and stated:
“Northern Rock is committed to open communication with staff and to providing them with substantial support during the restructuring. The Bank will continue to work closely with Unite, One NorthEast and other agencies and stakeholders to minimise the impact of the proposed downsizing on staff and local communities; this includes providing outplacement services to help staff obtain alternative employment in the region”.
6. The Treasury judges that the remaining information it holds that falls within your request falls under the exemption in Section 35 (1)(a) of the Act, which covers information related to the formulation and development of government policy. This is a qualified exemption and requires us to consider the balance of public interest for and against release of the information.
7. We recognise that there is a broad public interest in knowing the advice given to Ministers in relation to Northern Rock whilst it is in temporary public ownership. However there is also a strong public interest in effective policy-making. In order to develop government policy it is necessary that officials have the space to freely give full and frank advice to Ministers on Northern Rock’s plans and performance during its period of temporary public ownership. Our judgement is that it is not in the public interest to release the information we hold at this time.
8. If you have any queries about this letter, please contact me. It will be helpful to us if you remember to quote the reference number above in any future communications.
Ashley Britten
Information Rights Unit
1 Some details on a Treasury website
2 Some details on the Northern Rock Website
Wednesday 13 August 2008
Northern Rock Shareholders' Action Group - Update 41
Northern Rock has published its financial figures for the half year to the end of June. Here are some brief comments (as former Northern Rock shareholders no longer have a financial interest in the company, these are more for the general interest of taxpayers):
1. Former shareholders will be glad to see that the company is well on the way to recovery, but will be even more dismayed that the Government has stolen this valuable property from them, and plans to pay nothing for it.
2. Government loans are being repaid as shareholders expected (even faster than the company planned), and retail depositors are returning giving the lie to former allegations that the brand was irreparably damaged (so much for the wisdom of Branson et al). The borrowings from the Bank of England have been reduced by £9.4 billion leaving only £17.5 billion outstanding while retail deposits have risen to £14.2 billion from £10.5 at the end of last year.
3. Mortgage arrears are rising, partly due to the poor state of the housing market, which has not helped the financial figures, but they are still better than the UK average! We continue to see grossly misleading articles in the press about the quality of the Northern Rock mortgage book.
4. There are a lot of exceptional write-offs again, with about £45m of advisors fees, including £11m charged by the Tripartite Authorities (on top of the £12.5m charged in the last financial year) - clearly the Government is stuffing the company with all the fees it can, and the company is obviously keen to make the figures look as bad as possible by taking a pessimistic view with lots of provisions so they can show better numbers in a year or twos time.
5. There is a proposed debt for equity swap which seems to be a way to improve the appearance of the balance sheet, possibly to meet regulatory capital requirements. That includes £3bn of Bank of England loans and £400m of preference shares which will be converted to equity. But of course it does mean that the debt will not be repaid by the company so the only way the Government, and hence the taxpayer, can get their money back is from future dividends on the new equity, or from a future sale of the business.
Of course, one could say that this should have been anticipated when the company was nationalised. After all the private sector solutions included substantial rights issues to shore up the balance sheet for the very same reason - it needed strengthening. But now as the sole shareholder, only the Government/taxpayer can come up with the money. That £3.4bn is about £100 for every taxpayer. We hope you all consider that a good use of your money!
IMPORTANT: This destroys the claim made at the time of nationalisation that it offered better value for the taxpayers than the private sector solutions, which has been repeated only recently in the Government's response to our application for a judicial review.
One amusing comment from Alistair Darling on the BBC was: "It needs more shareholder capital, it does not have shareholders so it has to come from us". Yes but of course it has no shareholders because Darling chose to nationalise the company, so this is a self-inflicted handicap!
This additional investment in equity may well be viewed as "state assistance" to the company which has been something the Government has consistently tried to avoid. How they will justify this to the European Commission is not known, as unlike the loans this is clearly not going to be of a temporary nature.
6. The rate of recovery may have been hindered by political interference, ie. smaller redundancies than planned in the original Sandler business plan, continued expenditure on non-essential items like local football club support, etc. Of course that's what happens when you have the Government in charge of a commercial business.
7. One oddity in the debt/equity swap is that according to a Northern Rock spokesman "the debt-for-equity swap would have no cash benefit because the bank would pay a higher interest rate for the remaining loans". So the company is going to be handicapped by an even more penal rate of interest on the outstanding loans, with no justification at all. But the claim is still nonsense because clearly the loans will not be repaid in cash, as originally intended.
8. When is a good time for the Government to announce bad news? The first week of August when many people and most of the business press are on holiday, and so this disclosure of the interim results and the associated information got less critical comment than it deserved.
The full interim results announcement is present at: http://companyinfo.northernrock.co.uk
Court Date Fixed
As most shareholders should be aware, an application for a judicial review on behalf of a representative group of private shareholders was filed some weeks ago, and SRM Global and RAB Capital filed similar actions. These will be heard as one case and we have been advised that the case will get into court on January 13th 2009 and will last several days. You may want to note that date in your diary as we are likely to plan some public demonstration to take place at the same time.
Government's Response
The Government has also produced a response to the judicial review application via their lawyers which does not say a lot new.
The main thrust of their argument is that they should not have to compensate shareholders for the value they brought to the company by "rescuing" it with loans from the Bank of England and providing guarantees to depositors. But the loans were provided at penal rates of interest, and the guarantees were also paid for, and the company never defaulted on its obligations. They seem unable to differentiate between loans made on commercial terms to a business, and the injection of equity and we argue that the Government did not positively affect the shareholders equity interest in the business.
The Government seems to be arguing that because it lent funds to the company, that it automatically had a resulting claim on the equity in the business. Again this is nonsense. If loans are made to someone, whether it is a business or an individual, and they adhere to the terms of the loan (as did Northern Rock), then there is no claim established over the equity.
A simple analogy is this. If someone lent you money via a mortgage for 25% of the value of your house (and 25% is about the amount of the total assets of Northern Rock which were funded by the Government at one point), then if you wanted to sell the house, would you accept that such a lender had the right to acquire the equity in the house, i.e. the full ownership and title, for nothing? Obviously not, and neither would they have the moral right to force you to sell it to them.
The other part of the response from the Government is to try and justify that nationalization offered "better value", and was less expensive for the taxpayer than the private solutions that had been proposed, whereas we claim they nationalised it because they could make more profit that way, at the expense of the shareholders. Their explanation is questionable and is even more undermined by the latest news given above about the required debt/equity swap.
We will reserve more detailed comments until our lawyers put them to the court hearing.
Government's Appointment of Independent Valuer
The Government has not yet appointed an independent valuer, although as we have said before, shareholders may not be too concerned about this process as the likely answer from any such valuation is zero because of the rigged compensation terms. The only way you are going to get fair compensation is if the legal actions are successful, or the Government has a change of heart.
However, the Sunday Times has reported that at least three possible valuers are on a short-list and the favourite is Houlihan Lokey, an American investment bank.
Removal From Our Mailing List
Some shareholders have asked to be removed from our mailing list even though they have made donations to our campaign. This particularly seems to apply to those who do not have an email address and suggests they are either trying to save us money or do not wish to be bothered with more letters from us. However, we do prefer to keep supporters on our mailing list because the more registered supporters we have the better. Also if we have any surplus funds left over at the end of this campaign, any donations made by people who have been removed from our mailing list will be treated as "anonymous" ones and we will not be able to return those funds. Please bear that in mind.
Campaign Status
We now have some 32,000 registered supporters and contributions to date have been over £150,000. These numbers are still growing, but we still need more donations, particularly from those who have not contributed as yet. Donations to the cost of our campaign and to support the legal action can be made from this page of our web site: www.uksa.org.uk/Appeal.htm . Donations can be made by cheque sent in the post, or on-line via a debit or credit card. We currently cannot accept telephone or postal credit card donations but we hope to able to support those soon. If you wish to donate via direct bank transfer we can also accept those but please contact me for bank account information in that case (please do not send us cheques drawn on foreign banks).
We continue to get quite a lot of media coverage (for example I did three radio and TV interviews on the day of the interim results announcement) and a lot of effort is put into PR activities generally. Much of this may not be noticed by supporters but you should bear in mind that we are putting in substantial effort in this area. Supporters are reminded that all the efforts put in by your committee are provided free of charge and our main expenditure so far has been the cost of printing and postage to write to shareholders.
New Newsletter Format
This newsletter has been produced using a new service called Constant Contact and this change has been necessary primarily because of the volumes of emails we are now sending out. But it has enabled us to improve the format and we hope you like it.
All previous newsletters are present on our web site at www.uksa.org.uk/NorthernRock.htm
Roger Lawson
Chairman, Northern Rock Shareholders Action Group
1. Former shareholders will be glad to see that the company is well on the way to recovery, but will be even more dismayed that the Government has stolen this valuable property from them, and plans to pay nothing for it.
2. Government loans are being repaid as shareholders expected (even faster than the company planned), and retail depositors are returning giving the lie to former allegations that the brand was irreparably damaged (so much for the wisdom of Branson et al). The borrowings from the Bank of England have been reduced by £9.4 billion leaving only £17.5 billion outstanding while retail deposits have risen to £14.2 billion from £10.5 at the end of last year.
3. Mortgage arrears are rising, partly due to the poor state of the housing market, which has not helped the financial figures, but they are still better than the UK average! We continue to see grossly misleading articles in the press about the quality of the Northern Rock mortgage book.
4. There are a lot of exceptional write-offs again, with about £45m of advisors fees, including £11m charged by the Tripartite Authorities (on top of the £12.5m charged in the last financial year) - clearly the Government is stuffing the company with all the fees it can, and the company is obviously keen to make the figures look as bad as possible by taking a pessimistic view with lots of provisions so they can show better numbers in a year or twos time.
5. There is a proposed debt for equity swap which seems to be a way to improve the appearance of the balance sheet, possibly to meet regulatory capital requirements. That includes £3bn of Bank of England loans and £400m of preference shares which will be converted to equity. But of course it does mean that the debt will not be repaid by the company so the only way the Government, and hence the taxpayer, can get their money back is from future dividends on the new equity, or from a future sale of the business.
Of course, one could say that this should have been anticipated when the company was nationalised. After all the private sector solutions included substantial rights issues to shore up the balance sheet for the very same reason - it needed strengthening. But now as the sole shareholder, only the Government/taxpayer can come up with the money. That £3.4bn is about £100 for every taxpayer. We hope you all consider that a good use of your money!
IMPORTANT: This destroys the claim made at the time of nationalisation that it offered better value for the taxpayers than the private sector solutions, which has been repeated only recently in the Government's response to our application for a judicial review.
One amusing comment from Alistair Darling on the BBC was: "It needs more shareholder capital, it does not have shareholders so it has to come from us". Yes but of course it has no shareholders because Darling chose to nationalise the company, so this is a self-inflicted handicap!
This additional investment in equity may well be viewed as "state assistance" to the company which has been something the Government has consistently tried to avoid. How they will justify this to the European Commission is not known, as unlike the loans this is clearly not going to be of a temporary nature.
6. The rate of recovery may have been hindered by political interference, ie. smaller redundancies than planned in the original Sandler business plan, continued expenditure on non-essential items like local football club support, etc. Of course that's what happens when you have the Government in charge of a commercial business.
7. One oddity in the debt/equity swap is that according to a Northern Rock spokesman "the debt-for-equity swap would have no cash benefit because the bank would pay a higher interest rate for the remaining loans". So the company is going to be handicapped by an even more penal rate of interest on the outstanding loans, with no justification at all. But the claim is still nonsense because clearly the loans will not be repaid in cash, as originally intended.
8. When is a good time for the Government to announce bad news? The first week of August when many people and most of the business press are on holiday, and so this disclosure of the interim results and the associated information got less critical comment than it deserved.
The full interim results announcement is present at: http://companyinfo.northernrock.co.uk
Court Date Fixed
As most shareholders should be aware, an application for a judicial review on behalf of a representative group of private shareholders was filed some weeks ago, and SRM Global and RAB Capital filed similar actions. These will be heard as one case and we have been advised that the case will get into court on January 13th 2009 and will last several days. You may want to note that date in your diary as we are likely to plan some public demonstration to take place at the same time.
Government's Response
The Government has also produced a response to the judicial review application via their lawyers which does not say a lot new.
The main thrust of their argument is that they should not have to compensate shareholders for the value they brought to the company by "rescuing" it with loans from the Bank of England and providing guarantees to depositors. But the loans were provided at penal rates of interest, and the guarantees were also paid for, and the company never defaulted on its obligations. They seem unable to differentiate between loans made on commercial terms to a business, and the injection of equity and we argue that the Government did not positively affect the shareholders equity interest in the business.
The Government seems to be arguing that because it lent funds to the company, that it automatically had a resulting claim on the equity in the business. Again this is nonsense. If loans are made to someone, whether it is a business or an individual, and they adhere to the terms of the loan (as did Northern Rock), then there is no claim established over the equity.
A simple analogy is this. If someone lent you money via a mortgage for 25% of the value of your house (and 25% is about the amount of the total assets of Northern Rock which were funded by the Government at one point), then if you wanted to sell the house, would you accept that such a lender had the right to acquire the equity in the house, i.e. the full ownership and title, for nothing? Obviously not, and neither would they have the moral right to force you to sell it to them.
The other part of the response from the Government is to try and justify that nationalization offered "better value", and was less expensive for the taxpayer than the private solutions that had been proposed, whereas we claim they nationalised it because they could make more profit that way, at the expense of the shareholders. Their explanation is questionable and is even more undermined by the latest news given above about the required debt/equity swap.
We will reserve more detailed comments until our lawyers put them to the court hearing.
Government's Appointment of Independent Valuer
The Government has not yet appointed an independent valuer, although as we have said before, shareholders may not be too concerned about this process as the likely answer from any such valuation is zero because of the rigged compensation terms. The only way you are going to get fair compensation is if the legal actions are successful, or the Government has a change of heart.
However, the Sunday Times has reported that at least three possible valuers are on a short-list and the favourite is Houlihan Lokey, an American investment bank.
Removal From Our Mailing List
Some shareholders have asked to be removed from our mailing list even though they have made donations to our campaign. This particularly seems to apply to those who do not have an email address and suggests they are either trying to save us money or do not wish to be bothered with more letters from us. However, we do prefer to keep supporters on our mailing list because the more registered supporters we have the better. Also if we have any surplus funds left over at the end of this campaign, any donations made by people who have been removed from our mailing list will be treated as "anonymous" ones and we will not be able to return those funds. Please bear that in mind.
Campaign Status
We now have some 32,000 registered supporters and contributions to date have been over £150,000. These numbers are still growing, but we still need more donations, particularly from those who have not contributed as yet. Donations to the cost of our campaign and to support the legal action can be made from this page of our web site: www.uksa.org.uk/Appeal.htm . Donations can be made by cheque sent in the post, or on-line via a debit or credit card. We currently cannot accept telephone or postal credit card donations but we hope to able to support those soon. If you wish to donate via direct bank transfer we can also accept those but please contact me for bank account information in that case (please do not send us cheques drawn on foreign banks).
We continue to get quite a lot of media coverage (for example I did three radio and TV interviews on the day of the interim results announcement) and a lot of effort is put into PR activities generally. Much of this may not be noticed by supporters but you should bear in mind that we are putting in substantial effort in this area. Supporters are reminded that all the efforts put in by your committee are provided free of charge and our main expenditure so far has been the cost of printing and postage to write to shareholders.
New Newsletter Format
This newsletter has been produced using a new service called Constant Contact and this change has been necessary primarily because of the volumes of emails we are now sending out. But it has enabled us to improve the format and we hope you like it.
All previous newsletters are present on our web site at www.uksa.org.uk/NorthernRock.htm
Roger Lawson
Chairman, Northern Rock Shareholders Action Group
Economic Update - Interest rate unchanged this month
By Chris Hulme
Recently, the latest meeting of the MPC took place and inflationary pressures have put paid to a cut in the rates. We should, perhaps, bear in mind that the economic environment counterbalances these pressures and is limiting any option to increase the rates at this time.
July's MPC meeting saw an even split in the voting by the nine members, seven voting to keep rates at 5%, one voting for a 0.25% cut and one for a 0.25% increase. As such, this month’s decision raises no eyebrows and pretty much meets the expectations of many commentators. I would expect to see a similar voting pattern emerge when the minutes of the meeting are released on August 20th.
This morning’s news sees inflation break through the 4% mark, now standing at 4.4%, a significant increase from July. Still driven by the recent high costs of fuel and energy, inflation shows no sign of slowing and recent announcements from other utilities suppliers of costs increasing above inflation over the next 5 years could add to these woes.
The cries from Mr Darling and Mr King for us all to be 'reserved' in our quest for higher incomes and inflationary based pay rises to combat increases in our own personal expenditure provides no comfort for the British public and demonstrates a severe loss of control of the economy by the Treasury and the Bank of England.
The trade union strike actions by Unison for inflationary based pay rises for its members in the public sector puts pressure on the public purse and on the mantra of resisting such pay awards - it will be interesting to see the results unfold through the balance of 2008.
We could therefore see inflation escalate further and I would not be surprised to see a rate increase in September, although I feel the economy could hold out until later in the year before such action would be needed.
Alistair Darling’s recent 'leak' about his potential plans for the temporary removal or deferment of Stamp Duty payments to stimulate the housing market has (until he makes a decision) stifled the housing market even further, causing many sales to fall through since the weekend.
The route issue here is that whilst there is a glimmer of hope of a saving or deferment of Stamp Duty payment (£9,000 on a £300,000 property purchase) buyers quite rightly want to find out whether they will qualify for this 'support' and are either pulling out from buying or delaying completion of their purchase. My concern here is that Mr Darling is not known for being a 'decisive' Chancellor and we could be waiting for some months before a decision is made. By that time, it could be all too late, as the void between economic growth and controlled inflation grows ever deeper.
As discussed previously, whilst we do not expect the Bank of England base rate to fall, the disparity between the pricing of mortgage products and the Bank of England base rate still remains. However, we are starting to see this reduce, with many lenders reducing their product pricing across the board as the money available to them on the Swap markets now starts to fall.
Where we see increases in rate from the Bank of England of up to 25 basis points, I would still expect that lenders could absorb this increase naturally and would price mortgages accordingly - at least for a short time.
A year ago, a good 2 year Tracker product would be tracking at, or a little below, the Bank of England's base rate. Recently we have seen these products at a margin in excess of 1% above the base rate. Yet, as I write today, lending at below 75% of the property value is dipping towards 5.75%. Interestingly enough, Northern Rock are one of the front runners in this product pricing, being one of the most competitive lenders on 2 year Tracker and 2 year Fixed rate products.
The official press release from the Bank of England is available via the link below.
http://www.bankofengland.co.uk/publications/news/2008/044.htm
Recently, the latest meeting of the MPC took place and inflationary pressures have put paid to a cut in the rates. We should, perhaps, bear in mind that the economic environment counterbalances these pressures and is limiting any option to increase the rates at this time.
July's MPC meeting saw an even split in the voting by the nine members, seven voting to keep rates at 5%, one voting for a 0.25% cut and one for a 0.25% increase. As such, this month’s decision raises no eyebrows and pretty much meets the expectations of many commentators. I would expect to see a similar voting pattern emerge when the minutes of the meeting are released on August 20th.
This morning’s news sees inflation break through the 4% mark, now standing at 4.4%, a significant increase from July. Still driven by the recent high costs of fuel and energy, inflation shows no sign of slowing and recent announcements from other utilities suppliers of costs increasing above inflation over the next 5 years could add to these woes.
The cries from Mr Darling and Mr King for us all to be 'reserved' in our quest for higher incomes and inflationary based pay rises to combat increases in our own personal expenditure provides no comfort for the British public and demonstrates a severe loss of control of the economy by the Treasury and the Bank of England.
The trade union strike actions by Unison for inflationary based pay rises for its members in the public sector puts pressure on the public purse and on the mantra of resisting such pay awards - it will be interesting to see the results unfold through the balance of 2008.
We could therefore see inflation escalate further and I would not be surprised to see a rate increase in September, although I feel the economy could hold out until later in the year before such action would be needed.
Alistair Darling’s recent 'leak' about his potential plans for the temporary removal or deferment of Stamp Duty payments to stimulate the housing market has (until he makes a decision) stifled the housing market even further, causing many sales to fall through since the weekend.
The route issue here is that whilst there is a glimmer of hope of a saving or deferment of Stamp Duty payment (£9,000 on a £300,000 property purchase) buyers quite rightly want to find out whether they will qualify for this 'support' and are either pulling out from buying or delaying completion of their purchase. My concern here is that Mr Darling is not known for being a 'decisive' Chancellor and we could be waiting for some months before a decision is made. By that time, it could be all too late, as the void between economic growth and controlled inflation grows ever deeper.
As discussed previously, whilst we do not expect the Bank of England base rate to fall, the disparity between the pricing of mortgage products and the Bank of England base rate still remains. However, we are starting to see this reduce, with many lenders reducing their product pricing across the board as the money available to them on the Swap markets now starts to fall.
Where we see increases in rate from the Bank of England of up to 25 basis points, I would still expect that lenders could absorb this increase naturally and would price mortgages accordingly - at least for a short time.
A year ago, a good 2 year Tracker product would be tracking at, or a little below, the Bank of England's base rate. Recently we have seen these products at a margin in excess of 1% above the base rate. Yet, as I write today, lending at below 75% of the property value is dipping towards 5.75%. Interestingly enough, Northern Rock are one of the front runners in this product pricing, being one of the most competitive lenders on 2 year Tracker and 2 year Fixed rate products.
The official press release from the Bank of England is available via the link below.
http://www.bankofengland.co.uk/publications/news/2008/044.htm
Monday 4 August 2008
Northern Rock 2008 Half Year results
Northern Rock 2008 Half Year results - from www.northernrock.com
Northern Rock plc (the “Company”) today issued its Half Year Results for the six months ended 30 June 2008.
Highlights
Bank of England loan
* Net borrowings provided by the Bank of England have reduced by £9.4 billion to £17.5 billion from £26.9 billion at the end of December 2007, representing a 35% reduction (net of balances held with the Bank of England for liquidity purposes of £3.5bn)
* Loan repayment is well ahead of the business plan
* Bank of England loan to be transferred to HM Treasury during second half of 2008
Retail funding
* Net inflow of £3.7 billion in retail deposits in the first half of 2008
* Retail balances of £14.2 billion at 30 June 2008 (compared with £10.5 billion at 31 December 2007), although these remain substantially below the level at 30 June 2007
Redemptions
* Cash inflows from redemptions of loans are ahead of the Plan
* Total redemptions of £16.2 billion in the first six months of 2008 (including £2.2 billion asset disposal)
* The Plan is not without challenges, given external market factors, but the experience so far is encouraging
Balance sheet reduction
* Total assets have reduced to £99.0 billion at 30 June 2008, compared with £109.3 billion at 31 December 2007
* Loans and advances to customers have reduced by £14.5 billion in the first half of the year to £84.4 billion
Earnings
* Under the Plan, the Group is expected to be significantly loss-making in 2008
* Loss before tax for six months to 30 June 2008 of £585.4 million – including various exceptional charges
* Underlying loss before tax of £176.3 million reflecting loan loss provisions, lower interest margins and reduced volumes of new business
Arrears
* Residential arrears over three months have more than doubled since the start of the year to 1.18% (0.45% at the end of 2007)
* CML average of 1.21% at 31 March 2008
Capital
* The deterioration in market conditions, particularly the downturn in the housing market, has led to the need to strengthen the capital position of the Company to meet regulatory capital requirements
* HM Treasury has committed to reinforce the Company’s capital base through conversion into Ordinary shares of both its holding of £400 million of Preference shares and swapping up to £3 billion of the outstanding debt into equity (following transfer of the Bank of England loan to HM Treasury)
* This capital restructuring will not involve any cash transfer and will be finalised following a review of the Plan and will be implemented subsequent to State aid approval
* With this balance sheet strengthening, Northern Rock is well placed to press ahead with delivery of the Plan
Organisation
* Strengthening of leadership team with appointments of Gary Hoffman as Chief Executive Officer, Rick Hunkin as Chief Risk Officer, Richard Smelt as Human Resources Director and Andy Tate as Director of Debt Management
* 90 day collective consultation period with staff concluded and individual consultations are underway – downsizing likely to be achieved with around 800 compulsory redundancies
* Focus on strengthening of the risk and control environment and upgrade of debt management capabilities
* Steps have been taken to strengthen the Board with the appointment of Kent Atkinson and Richard Coates as Non-Executive Directors
Northern Rock Foundation
* Donation to The Northern Rock Foundation of £7.5 million in the first half of 2008
Ron Sandler, Executive Chairman said:
“Significant progress has been made on all of the key priorities of the business plan since it was approved in March.
“On a net basis the Government debt has reduced by £9.4 billion since the start of the year, which is considerably ahead of Plan. Operational restructuring is well advanced and both the Board and management team have been bolstered by key new appointments. We have also substantially overhauled the risk procedures in the Company.
"I am delighted with the appointment of Gary Hoffman who will take over as Chief Executive from 1 October. His appointment is complemented by further outstanding new recruits into key executive positions in the Company: Rick Hunkin as Chief Risk Officer, Richard Smelt as HR Director and Andy Tate as Director of Debt Management. These appointments serve to strengthen considerably the senior management team of Northern Rock.
"However, the external environment has deteriorated and the consequences of this for Northern Rock are increased credit losses. Following a review in July of the Company’s ongoing regulatory capital requirements, HM Treasury has committed to a significant strengthening of the Company’s capital base. This will not involve any cash transfer to Northern Rock and will be provided by HM Treasury through conversion into Ordinary shares of both its holding of £400 million of Preference shares as well as up to £3 billion of the outstanding debt following transfer of the Bank of England loan to HM Treasury. This capital restructuring will be finalised following a review of the Plan and will be implemented subsequent to State aid approval.
"Finally, I wish to thank all members of staff and applaud their maintenance of the highest levels of customer service and professionalism in what has undoubtedly been a most difficult time for Northern Rock’s employees."
Note
* The full version of the 2008 Half Year Results for Northern Rock plc is available on the Company’s website at www.northernrock.co.uk
Northern Rock plc (the “Company”) today issued its Half Year Results for the six months ended 30 June 2008.
Highlights
Bank of England loan
* Net borrowings provided by the Bank of England have reduced by £9.4 billion to £17.5 billion from £26.9 billion at the end of December 2007, representing a 35% reduction (net of balances held with the Bank of England for liquidity purposes of £3.5bn)
* Loan repayment is well ahead of the business plan
* Bank of England loan to be transferred to HM Treasury during second half of 2008
Retail funding
* Net inflow of £3.7 billion in retail deposits in the first half of 2008
* Retail balances of £14.2 billion at 30 June 2008 (compared with £10.5 billion at 31 December 2007), although these remain substantially below the level at 30 June 2007
Redemptions
* Cash inflows from redemptions of loans are ahead of the Plan
* Total redemptions of £16.2 billion in the first six months of 2008 (including £2.2 billion asset disposal)
* The Plan is not without challenges, given external market factors, but the experience so far is encouraging
Balance sheet reduction
* Total assets have reduced to £99.0 billion at 30 June 2008, compared with £109.3 billion at 31 December 2007
* Loans and advances to customers have reduced by £14.5 billion in the first half of the year to £84.4 billion
Earnings
* Under the Plan, the Group is expected to be significantly loss-making in 2008
* Loss before tax for six months to 30 June 2008 of £585.4 million – including various exceptional charges
* Underlying loss before tax of £176.3 million reflecting loan loss provisions, lower interest margins and reduced volumes of new business
Arrears
* Residential arrears over three months have more than doubled since the start of the year to 1.18% (0.45% at the end of 2007)
* CML average of 1.21% at 31 March 2008
Capital
* The deterioration in market conditions, particularly the downturn in the housing market, has led to the need to strengthen the capital position of the Company to meet regulatory capital requirements
* HM Treasury has committed to reinforce the Company’s capital base through conversion into Ordinary shares of both its holding of £400 million of Preference shares and swapping up to £3 billion of the outstanding debt into equity (following transfer of the Bank of England loan to HM Treasury)
* This capital restructuring will not involve any cash transfer and will be finalised following a review of the Plan and will be implemented subsequent to State aid approval
* With this balance sheet strengthening, Northern Rock is well placed to press ahead with delivery of the Plan
Organisation
* Strengthening of leadership team with appointments of Gary Hoffman as Chief Executive Officer, Rick Hunkin as Chief Risk Officer, Richard Smelt as Human Resources Director and Andy Tate as Director of Debt Management
* 90 day collective consultation period with staff concluded and individual consultations are underway – downsizing likely to be achieved with around 800 compulsory redundancies
* Focus on strengthening of the risk and control environment and upgrade of debt management capabilities
* Steps have been taken to strengthen the Board with the appointment of Kent Atkinson and Richard Coates as Non-Executive Directors
Northern Rock Foundation
* Donation to The Northern Rock Foundation of £7.5 million in the first half of 2008
Ron Sandler, Executive Chairman said:
“Significant progress has been made on all of the key priorities of the business plan since it was approved in March.
“On a net basis the Government debt has reduced by £9.4 billion since the start of the year, which is considerably ahead of Plan. Operational restructuring is well advanced and both the Board and management team have been bolstered by key new appointments. We have also substantially overhauled the risk procedures in the Company.
"I am delighted with the appointment of Gary Hoffman who will take over as Chief Executive from 1 October. His appointment is complemented by further outstanding new recruits into key executive positions in the Company: Rick Hunkin as Chief Risk Officer, Richard Smelt as HR Director and Andy Tate as Director of Debt Management. These appointments serve to strengthen considerably the senior management team of Northern Rock.
"However, the external environment has deteriorated and the consequences of this for Northern Rock are increased credit losses. Following a review in July of the Company’s ongoing regulatory capital requirements, HM Treasury has committed to a significant strengthening of the Company’s capital base. This will not involve any cash transfer to Northern Rock and will be provided by HM Treasury through conversion into Ordinary shares of both its holding of £400 million of Preference shares as well as up to £3 billion of the outstanding debt following transfer of the Bank of England loan to HM Treasury. This capital restructuring will be finalised following a review of the Plan and will be implemented subsequent to State aid approval.
"Finally, I wish to thank all members of staff and applaud their maintenance of the highest levels of customer service and professionalism in what has undoubtedly been a most difficult time for Northern Rock’s employees."
Note
* The full version of the 2008 Half Year Results for Northern Rock plc is available on the Company’s website at www.northernrock.co.uk
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