Rock HQ: up for rent

It may be the ‘finest building in the North’ but The Tower, (pictured left) the 10- storey office block building commissioned by Northern Rock at Gosforth in Newcastle is very much empty these days.

At NRSSG, we’ve learnt that The Tower is being marketed by two Newcastle agents asking for rent totalling at least £2.25m a year, with a view to leasing offices for 10 – 15 years.

Northern Rock said at the end of August that it would dispose of both The Tower, designed by Red Box Architects, and its new building at Rainton Bridge in Sunderland, though details of arrangements for the latter have not yet been announced.



Property consultants Gavin Black and GVA Lamb & Edge said they were seeking tenants for the Tower, at rates of at least £18 per sq ft. Northern Rock is also seeking tenants for space in other Regent Centre buildings – Bulman House, Horsley House and Eldon House.

Gavin Black said: “The views from the building are absolutely stunning, to the Sage headquarters and on to the Cheviots.

“I think it is the finest office in the North. There has been a lot of thought gone into it, as it was designed for owner occupiers. It’s excellent, without being ostentatious.

“The design is excellent in ‘green’ terms too – there is zonal control of the heating and lighting. We believe we are offering a broad range of high quality space for occupiers, much of it with work stations in situ and therefore ready for immediate use, and in a very good location. We are optimistic that this will lead to many new occupiers coming to Regent Centre.”

GVA Lamb & Edge director Tony Wordsworth said:

“The Tower is a fine office building. It provides grade A space with stunning views and is unquestionably a landmark building with open plan floorplates of around 12,500sq ft, with the benefit of onsite car parking. It has been finished to a high standard, providing excellent space with an emphasis on sustainability.”

Annual Report on EU banking structures

The European Central Bank (ECB) publishes today its annual report on EU banking structures. The report, which has been published every year since 2002, reviews the main structural developments in the EU banking sector in 2007 and the first half of 2008. It also contains two special features on the incentive structure of the 'originate and distribute' model of financial intermediation and the on a survey of EU banks on major risks on the year ahead (covering the period from spring 2008 -spring 2009.

Treasury statement: financial support to the banking industry - 8th October

HM Treasury made the following statement to the House of Commons on 8th Oct.

After consultation with the Bank of England and the Financial Services Authority, the Government announces that it is bringing forward specific and comprehensive measures to ensure the stability of the financial system and to protect ordinary savers, depositors, businesses and borrowers.

In summary the proposals announced today are intended to:

* Provide sufficient liquidity in the short term;
* Make available new capital to UK banks and building societies to strengthen their resources permitting them to restructure their finances, while maintaining their support for the real economy; and
* Ensure that the banking system has the funds necessary to maintain lending in the medium term.

In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity. In its provision of short term liquidity the Bank will extend and widen its facilities in whatever way is necessary to ensure the stability of the system. At least £200 billion will be made available to banks under the Special Liquidity Scheme. Until markets stabilise, the Bank will continue to conduct auctions to lend sterling for three months, and also US dollars for one week, against extended collateral. It will review the size and frequency of those operations as necessary. Bank debt that is guaranteed under the Government's guarantee scheme will be eligible in all of the Bank's extended-collateral operations. The Bank next week will bring forward its plans for a permanent regime underpinning banking system liquidity, including a Discount Window facility.

In addition the Government is establishing a facility, which will make available Tier 1 capital in appropriate form (expected to be preference shares or PIBS) to “eligible institutions”. Eligible institutions are UK incorporated banks (including UK subsidiaries of foreign institutions) which have a substantial business in the UK and building societies. However applications are invited for inclusion as an eligible institution from any other UK incorporated bank (including UK subsidiaries of foreign institutions). In reviewing these applications the Government will give due regard to an institution’s role in the UK banking system and the overall economy.

Following discussions convened by HM Treasury, the following major UK banks and the largest building society have confirmed their participation in a Government-supported recapitalisation scheme. These institutions comprise:

* Abbey
* Barclays
* HBOS
* HSBC Bank plc
* Lloyds TSB
* Nationwide Building Society
* Royal Bank of Scotland
* Standard Chartered

These institutions have committed to the Government that they will increase their total Tier 1 capital by £25bn. This is an aggregate increase and individual increases will vary from institution to institution. In order to facilitate this process the Government is making available £25bn to be drawn on by these institutions if desired to assist in this process as preference share capital or PIBS and is also willing to assist in the raising of ordinary equity if requested to do so. The above institutions have committed to the Government that this will be concluded by the end of the year.

In addition to this, the Government stands ready to provide an incremental minimum of £25bn of further support for all eligible institutions, in the form of preference shares, PIBS or, at the request of an eligible institution, as assistance to an ordinary equity fund-raising.

The amount to be issued per institution will be finalised following detailed discussions. If the Government is to provide the capital, the issue will carry terms and conditions that appropriately reflect the financial commitment being made by the taxpayer. In reaching agreement on capital investment the Government will need to take into account dividend policies and executive compensation practices and will require a full commitment to support lending to small businesses and home buyers.

The Government will take decisive action to reopen the market for medium term funding for eligible institutions that raise appropriate amounts of Tier 1 capital.

Specifically the Government will make available to eligible institutions for an interim period as agreed and on appropriate commercial terms, a Government guarantee of new short and medium term debt issuance to assist in refinancing maturing, wholesale funding obligations as they fall due. Subject to further discussion with eligible institutions, the proposal envisages the issue of senior unsecured debt instruments of varying terms of up to 36 months, in any of sterling, US dollars or Euros. The current expectation is that the guarantee would be issued out of a specifically designated Government-backed English incorporated company. The Government expects the take-up of the guarantee to be of the order of £250bn, and will keep this under review alongside ongoing monitoring of capital positions and lending volumes.

To qualify for this support the relevant institution must raise Tier 1 capital by the amount and in the form the Government considers appropriate whether by Government subscription or from other sources. It is being made available immediately to the eight institutions named above in recognition of their commitment to strengthen their aggregate capital position.

The Government has informed the European Commission of these proposals and is actively talking to other countries about extending these proposals and has committed to work together with them to strengthen the international system.

The Government is moving ahead immediately with the internationally agreed proposal for colleges of supervision and other measures to improve supervision of the system. At discussions with the major economies at the G7 meeting this Friday, the Government hopes to secure agreement on the need for a meeting at heads of Government level.

No legal case for Rock bosses

The BBC reported yesterday that Northern Rock has said it will not take legal action for negligence against the executives in charge of the bank before its collapse.
A review by lawyers and accountants into the management led by chief executive Adam Applegarth found "insufficient grounds" to proceed. It also concluded the firm's auditors should also avoid any action.

Ron Sandler, the firm's non-executive chairman, said he was "pleased" with the progress but said the Rock was still "significantly loss-making" and that returning it to profit and back to private ownership was "some years away".

Mr Sandler said it was "too early to say" how the part-nationalisation of Royal Bank of Scotland, Lloyds TSB, and HBOS would change the UK's banking industry.

Having been brought in to run the bank after its nationalisation, Mr Sandler was replaced as chief executive by Gary Hoffman on 1 October.

Rock has repaid more than half its £27bn loan

The Journal is reporting today that the Rock has repaid more than half of the £27bn loan from the taxpayers. Revealed by the Chancellor yesterday, Alistair Darling also defended the decision to take the lender into public ownership earlier this year.

This news comes shortly after it was reported that customers had already deposited £4bn in the bank as of last month as confidence grew.

The repayments have been as a result of redemption of mortgages and are happily ahead of schedule.

The statement comes after Gordon Brown’s so called economic ‘War Cabinet’ named the National Economic Council which brings together senior ministers to co-ordinate the response to the current crisis.

Furthermore, Mr Darling confirmed that the Financial Services Authority is increasing from £35,000 to £50,000 the size of bank deposit the Government will guarantee. This will cover 98% of accounts.

The measure does not compare with blanket guarantees the German, Irish and other EU governments have given to depositors. The measure also did not impress the markets, as the plummeting FTSE showed.

Mr Darling also refused to be drawn on opposition calls for a government-backed recapitalisation of the banks, primly declining to provide a "running commentary" on his deliberations.

The problem with bailouts.....

From the FT:

If you owe the bank $10, it’s your problem. If you owe the bank $10m, it’s the bank’s problem.

If you and a million others owe the bank $10 each, it’s still your problem – but now it’s also the bank’s problem.

If the bank then sells to an investor the $10 you owe, it ought to be the investor’s problem. But if you have a problem repaying the $10 and the bank insured the investor against your problem, then it’s both the investor’s problem and the bank’s problem.

Your problems and your neighbours’ problems and the investor’s problems mean the bank now owes another bank $10bn. That is both banks’ problem. But if banks can’t or won’t pay the $10bn they owe to other banks, it’s very quickly a $700bn systemic problem.

And if the government then owes the banking system $700bn, it’s your problem.

Crediting from the Crunch

His wife, the vivacious Nichola Pease, was recently ranked the UK's 20th richest woman in the Sunday Times Rich List - leading to the couple being dubbed the Posh and Becks of the City.

A year before the first cracks appeared in the global financial system, he spotted the gathering storm that was the 'sub prime' credit crisis in the United States.
Since then, his company Odey Asset Management which he has ran since 1991 has been gambling on bank shares falling - and fall they have.

Mr Odey's helped his firm record an annual profit of £64.6million, out of which he has paid himself £28million.

This will help the household income greatly it seems considering that his wife recently lost one of her jobs as a non-executive director of non-other than Northern Rock.

Not that they were poor beforehand it is thought that the couple, operating out of a Georgian office in Mayfair, have built a fortune of more than £300million.
Her family are banking royalty and have been financial big hitters since the 19th century, when they had a hand in building the Stockton to Darlington railway.
It was her role as a non-executive director at Northern Rock that brought the headlines.

Mr Odey's firm was never associated with Northern Rock because of the obvious conflict of interest. But his profiteering from other failing banks is painfully ironic to the shareholders of Northern Rock.

His winning tactic was called 'short selling', which effectively meant betting against 900,000 shareholders. As the Northern Rock saga rumbled on, questions were asked about why his wife did not do more. She stated that the events were 'unprecedented' and could not be foreseen. Then, along with all the other non-executive directors, she resigned.

UPDATE: The Sunday Sun reported this story with comments from Robin Ashby, spokesman for the Northern Rock Small Shareholders’ Group, who said: “I have long been concerned about the performance of the non-executive directors of Northern Rock, prior to the crash, in their role of holding the executive to account on behalf of the shareholders.

“What did they do to earn the fat fees they received? Did they do much except warm chairs? They were supposed to be industry experts. Clearly, Ms Pease has money-making skills.

“It’s a pity they were not more evident in preventing the catastrophic losses suffered by shareholders and employees.”

Northern Rock Shareholders Action Group - Update No. 43

Please Vote in the Journal's Poll Today!

The Newcastle Journal is conducting a poll on what caused the problems at Northern Rock and who people think were to blame. Please click on the link from this web page: www.nebusiness.co.uk to vote. My answers were as follows: Question 1: The Government, Question 2: Yes, Question 3: No, Question 4: Very poor, Question 5, No, Question 6: Yes, Question 7: no comment: Question 8: Yes, Question 9: still in operation on a smaller scale. The poll will close today apparently so please vote as soon as possible (the results will be available on Monday).

Valuer Appointed

The Treasury has announced the appointment of Andrew Caldwell, a partner in BDO Stoy Hayward, as the valuer for your shares in Northern Rock. However, if you are expecting "fair compensation" as promised by the Chancellor when announcing the nationalisation of the company, think again. The terms of reference of the valuation which are set in the Nationalisation Act and associated Compensation Order will almost certainly mean little or no value is attributed to your shares.

The only way you are going to get fair compensation is if the legal action that is being pursued by private shareholders, and by the two largest institutional shareholders, is successful.

No doubt the valuer will need to go through the normal processes though which could take some months, and he will collect a fee of £4.5 million for his work. Members of your committee did a number of TV interviews on the subject of the appointment of the valuer and the status of Northern Rock one year after the "run on the bank". We were also quoted at length in several national and local newspapers.

Status of Legal Action

For those who have only recently joined this campaign (and we have had a lot of new supporters of late), the position is that the three groups mentioned above have all filed for a judicial review of the terms of the nationalization which should get into court on January 13th next year. We are asking for the Act and the Compensation Order to be set aside on the basis that it breaches the European Convention on Human Rights. In essence our claim is that the compensation terms have been set totally artificially by the Government to ensure that no or very little compensation is paid.

Alistair Darling's Background

One of the most outrageous aspects of the Northern Rock affair has been the consistent failure to recognize shareholders as having an interest in the company and to accept that they were "stakeholders" alongside depositors, lenders to the company (such as the Government) and employees. Statements issued by the Treasury made it clear that shareholders interests were to be ignored, and comments in Parliament by MPs portrayed shareholders as simple speculators who deserved to lose everything.

An interesting slant on why Mr Darling might not be sympathetic to shareholders rights was given recently in Private Eye. It commented on an interview he gave to the Guardian on his early life and suggested that it was somewhat distorted. Old Edinburgh comrades were reported as remembering Darling as a keen supporter of the International Marxist Group, British section of the Trotskyist Fourth International. It also claims he was a typical local-government leftie on Lothian regional council, and even denounced George Galloway as a "reformist" after the latter pointed out that Darling's opposition to the rate-capping laws would be disastrous and might land him in jail.

Fannie & Freddie

It is worth noting that the US rescues of Fannie Mae and Freddie Mac that were announced recently were conducted in a far more shareholder-friendly manner than the Northern Rock nationalisation.

One of our committee members identified the following differences between these two takeovers:

US treatment of Fannie/Freddie versus UK treatment of Northern Rock


1. US - Conservatorship (i.e., shareholders retain rights to residual profits as per normal, however, management control temporarily passed to the government authorities) UK - Nationalisation with strenuous attempts made to pay shareholders close to nothing in compensation with complete deprivation of shareholders' basic rights to corporate profits made in the interim.

2. US - Dividends forcibly suspended in order to conserve capital as part of conservatorship plan. UK - Confiscation of shares after dividends were voluntarily suspended.

3. US - Intended 10% p.a., wind-down in Mortgage backed security book through natural attrition with the aim of emerging as a more robust business in several years' time. UK - Intended complete payback of government lending within three years to the exclusion of all else. Competitors permitted to "cherry-pick" best quality assets at low prices in order to achieve this goal more quickly at the expense of long-term stability.

4. US - Co-operation and co-ordination between Federal Treasury and FHFA. UK - Very little co-ordination between the Tripartite authorities.

5. US - Government support payments recognised as "senior preferred stock" with warrants issued to provide taxpayer protection. Government authorities recognise that this entails that the returns to the taxpayer will be strongly linked to the health of the business. UK - Government payments recognised as debt facilities. Government authorities fail to recognise this fact and are presently attempting to gain both equity-holders' upside gains and debt-holders downside protection simultaneously.

6. US - Outgoing management recognised as being in no way responsible for the credit conditions that have precipitated these problems. UK - Outgoing management used as scapegoats.

It's A Wonderful Life

It's a Wonderful Life - that may not be the view of many Northern Rock shareholders recently, but it is the title of a well known film (Star: James Stewart, Director Frank Capra). It's worth mentioning because at a seminar this week on Northern Rock, hosted by Andrew Neil, the panel were asked "would they have saved Bailey's Savings & Loan" and most of them seemed stumped by the question.

The film is the story of a bank that experiences a run of depositors after some dodgy accounting. The bank is about to crash into insolvency, Stewart is in despair and gives up hope. But an angel shows him what life would be like in the town without the mortgage and other lending by the bank - homeless and jobless people in essence. So he is encouraged to save it with a happy ending resulting. Certainly a film worth seeing by every banking regulator and those who think that solvent banks should be left to go bust due to temporary cash flow difficulties. It's readily available on DVD.

Other Points to Note

Several shareholders have contacted me concerning telephone calls from an organization named AMG. They seem to be contacting shareholders simply because your name is on the share register of the company (anyone can obtain a copy of this, as we did, and please note that we have not passed your personal details onto anyone). We are not aware of any official role granted to this company and calling anyone out of the blue for the purposes of promoting financial services to someone is not permitted in the UK. Such calls by anyone should be treated with deep suspicion.

Several people have pointed out that there are possible solutions to the problem reported in our last newsletter of an inheritance tax liability on Northern Rock shares arising on the former death of a shareholder. You should consult a lawyer or tax accountant for further advice if you have experienced this problem.

Roger Lawson
Chairman, Northern Rock Shareholders Action Group

Government to pay £4.5 million to Rock valuer

The Government appointed an independent valuer for Northern Rock and agreed to foot the bill for £4.5million.

Chosen from a list of ten applicants, Andrew Caldwell, Valuations Partner at BDO Stoy Hayward, will determine how much, if anything, is paid to the bank's 180,000 shareholders.

He will also decide whether he works full or part time on the job – as no concrete timetable for valuation has even been agreed. And he will be paid regardless of how long the job takes him.

This comes after the news that the Government racked up a £17 million bill for consultants in the year 2007-2008.

The bill will be paid by the taxpayer but will be reclaimed from Northern Rock once it has been resold or refloated.

Although the Treasury said that Mr Caldwell had extensive experience of valuing companies, his appointment has been described as "rigged" by shareholders. Roger Lawson, of the UK Shareholders' Association (UKSA), said: "By rigging the valuation in this way, the Government will ensure that the value put on the shares by the valuer will be negligible."

Some estimates have placed a price as high as 400p a share for the Rock holders whilst many are suggesting that the Government will offer close to nothing. On this math, Mr Caldwell will be earning more than the estimated total share price he is in fact valuating.

Telling times….

Northern Rock Numbers

£1.1m Pay and pensions top-up for Adam Applegarth, the former chief

£167.6m Northern Rock’s pre-tax losses for the year to December 31, 2007

£100bn Maximum estimated liability for taxpayers

£4.5m One-off fee to Andrew Caldwell, Rock’s independent valuer

US Conservatorship vs UK Nationalisation; Fannie and Freddie - by Shum Ghumman

A commonly believed fallacy that the press seems to have propagated is that the UK government had no choice but to nationalise Northern Rock, however, it was worth noting that the US takeover of Fannie Mae and Freddie Mac that was announced over the weekend was conducted in a far more shareholder-friendly manner than the Northern Rock nationalisation that provided plenty of security for the US taxpayer.

The US economy is only five times the size of the UK economy yet Fannie and Freddie have $5,400,000,000,000 in mortgage backed securities (representing 80% of the US mortgage market) on issue that the US government is now officially backing (as opposed to NRK's mortgage book which was approximately one twenty-seventh of that amount).

I spotted the following differences between these two takeovers:

	US treatment of GSEs	UK treatment of NRK
1.	Conservatorship (i.e., shareholders retain rights to residual profits as per normal, however, management control temporarily passed to the government authorities)	Nationalisation with strenuous attempts made to pay shareholders close to nothing in compensation with complete deprivation of shareholders’ basic rights to corporate profits made in the interim.
2.	Dividends forcibly suspended in order to conserve capital as part of conservatorship plan.	Confiscation of shares after dividends were voluntarily suspended.
3.	Intended 10% p.a., wind-down in Mortgage backed security book through natural attrition with the aim of emerging as a more robust business in several years’ time.	Intended complete payback of government lending within three years to the exclusion of all else. Competitors permitted to “cherry-pick” best quality assets at low prices in order to achieve this goal more quickly at the expense of long-term stability.
4.	Co-operation and co-ordination between Federal Treasury and FHFA.	Very little co-ordination between the Tripartite authorities.
5.	Government support payments recognised as “senior preferred stock” with warrants issued to provide taxpayer protection. Government authorities recognise that this entails that the returns to the taxpayer will be strongly linked to the health of the business.	Government payments recognised as debt facilities. Government authorities fail to recognise this fact and are presently attempting to gain both equity-holders’ upside gains and debt-holders downside protection simultaneously.
6.	Cancellation of all GSE political activities (i.e., lobby-groups, political donations etc.) and likely cancellation of all corporate philanthropy to further assist in the conservation of capital.	Maintenance and extension of corporate philanthropy and sponsorship of sporting teams indicate dysfunctional populist decision-making.
7.	Outgoing management recognised as being in no way responsible for the credit conditions that have precipitated these problems.	Outgoing management used as scapegoats.

More Money Matters

by Chris Hulme

Good afternoon all,

As we had thought in previous bulletins, this mornings meeting of the MPC has brought no surprises in leaving the rate unchanged at 5.0%, although the persistency of increasing inflation still bears heavily on these decisions.

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 and we see the same voting structure in the August meeting as per my prediction from our last bulletin - 'I would expect to see a similar voting pattern emerge when the minutes of this months meeting are released on August 20th'.

As inflation continues to weigh heavy on the British public' expenditure, the pressures from Unions representing their members still fight on for inflation linked pay structures despite the pleas from Mr Darling and Mr King for restraint.

This weeks reports from the Organisation for Economic Co-operation and Development (OECD) that the UK economy will officially slip into recession in the last 2 quarters of this year, pressures the MPC to reduce rates to stimulate the economy, but again I would reiterate my expectation for the MPC to retain the rate at 5.0% for the balance of this year.

Recently we have seen Oil prices fall to as low as $108 a barrel from its near $150 a barrel high a few months ago which is some relief to those who directly rely heavily on this commodity which ultimately feeds through to the costs of goods in supermarkets and shops and affects us all.

Alistair Darling and the Treasury made an announcement on Tuesday this week that Stamp Duty Land Tax threshold is increased on the lower band taking the threshold up from £125,000 to £175,000 on property purchases for a 12 months period from the 3rd of September. Stamp Duty will therefore not be payable on such transactions at or below £175,000 but will still be payable at 1% of the chargeable consideration above £175,000 up to and including £250,000.

Whilst this will encourage some buyers back into the market place, the higher limits of £250,000 and £500,000 at which Stamp Duty is charged at 3% and 4% respectively should perhaps also have been reviewed and increased accordingly to encourage buyers at these levels to further their house purchase goals.

The new level will assist those buyers (especially First Time Buyers) wanting to purchase properties below this new level, but unless the sellers of those properties have some incentive to make their onward move, potentially into these higher bands, it is unlikely to have much of an impact.

The estimated cost of this increase is £600 million and in conjunction with this announcement, the Communities Secretary has announced a £1 billion fund to assist 6,000 families under threat of repossession and assistance to 10,000 First Time Buyers with loans of up to 30% of their property purchase. Eligibility is understood to be clients with incomes of below £60,000 which I would hazard a guess includes almost all First Time Buyers.

Mortgage products have continued to reduce in price with some lenders relaxing slightly on the loan to values at which they are willing to lend. We do see however that the reductions mainly benefit those borrowing less than 75% of their property's value with those wishing to borrow at the higher levels still paying the price of high mortgage product rates and arrangement fees.

I would expect these product reductions to level off in the next couple of weeks and as such September could well be the time to secure that remortgage product you have been waiting all summer for.

Borrowers who took out 95% or 100% mortgages in recent years will still continue to find difficulty in obtaining lending from the market leaving their options limited at what the existing lender will provide. Many are finding that their existing lender is unwilling to accommodate requests for 'new products' and worse still where there are options to choose a new lender we have seen the Valuation reports for properties come in at below market value.

I have written a letter to the Royal Institute of Chartered Surveyors (RICS), the governing body for surveyors, in order to get a handle on this practice and will let you know in due course what RICS stance is.
The official press release from the Bank of England is available via the link below.
http://www.bankofengland.co.uk/publications/news/2008/045.htm

I have continued to be active in my role on the Committee of the Northern Rock Shareholders Action Group.

We have had a tremendous response from the private individual shareholders who support our case and have suffered personal losses in this respect but the legal case is expensive and we are urging former shareholders to support this financially with nominal contributions based on their former shareholding.

Every Northern Rock shareholder whose shares were confiscated on the day of nationalisation, whether they be a private investor, windfall shareholder, pension fund or institutional investor will receive the same level of compensation whether they contribute or not, but we do need the donations.

The UKSA has given some guidance on the likely donations but any donation would be welcome, which can be made via the following link http://www.uksapay.org.uk/donation.cfm

A court date has now been set for the case to be heard. The three separate actions being taken by the Plaintiffs for the private shareholder (UKSA), SRM Global and RAB are to be heard as one case over 4 days from the 13th of January 2009.

More information on this is on our website and the recent update from the UK Shareholders Association detailing this further can be found at www.uksa.org.uk/NorthernRock.htm

Again, I trust you find this monthly update timely and useful. I am looking to enhance the level of information provided and would welcome any suggestions on the content or news items you would like to be kept abreast of. As ever, should you not wish to receive these bulletins, please let me know.

Kind regards

Chris Hulme

Director , The Clayton Hulme Partnership

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

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