91Èȱ¬

As soon as I heard Northern Rock and bonuses on the news this morning, I absolutely knew you'd be doing a blog on it Robert!

Banks and and bonuses-that's almost all you ever write about!

Not bothering to read it-do more pieces on business, especially SME's, please. After all, you are supposed to be BUSINESS editor, not BANKING editor.

'making it one of the most prudently financed banks in the world'

If this is true why can't we taxpayers keep it?

Privatise the profits, socialise the losses?

Nice to see the decision to nationalise the Rock vindicated; there are some of us that believed it the best thing to do...

And the Tories condemned the move...

#1 Tigerjayj

Peston used to be a banker, he doesn't know anything about other businesses.

Occasionally he blogs about football clubs but then again it is usually how said clubs are related to banking!

Repetition is the mother of all propaganda. Repetition is the mother of all propaganda. Repetition is the mother of all propaganda. Repetition is the mother of all propaganda. Repetition is the mother of all propaganda. Repetition is the mother of all propaganda. Repetition is the mother of all propaganda. Repetition is the mother of all propaganda. Repetition is the mother of all propaganda. Repetition is the mother of all propaganda. Repetition is the mother of all propaganda.

This is very much "only time will tell" situation. However, with all the uncertainty that will continue to weigh down on The Rock, one again and again has to ask how did this mess ever happen in the first place? When a lending institution starts promoting 125% mortgages when it was even obvious to the general public that the housing market was at or near its peak, what was the FSA doing? The answer would seem to be not a lot.

Well I think I heard this on my way in this morning.

However Robert there is one piece which seems to have been ommitted. There was a claim (I presume by a NR spokesman) that the taxpayer would see a profit barring some unforseen collapse in the mortgage market

...well interest rates above 6% is highly likely - is that technically 'unforseen'?

I mean if we lost 90,000 mortgage holders in 2008 / 2009 (apologies for any inaccuracy) - whilst rates were at a all time record low - then how many will we lose once rates rise?

I haven't even talked about the job loses which continue - and the additional repo's they bring. I am talking about the working people who will simply not be able to cope. They will be seeing pay cuts and mortgage rates rising - beyond what most of them have ever paid before

How many current homeowners (with sizeable debt) experienced a mortgage in the 90's? - I bet it's not many.....I did, but that is why I have cut my mortgage debt as fast and as hard as I can. My memory extends beyond 'last weeks X-factor result' - this is a trap for the unaware and inexperienced.

"All the bidders - including the Rock's own management team - seriously under-estimated the difficulties that the Rock's borrowers would face in keeping up the payments"

You don't say......so when do these 'experts in the mortgage market' get the sack then - because most 'non-experts' foresaw this as a wildy optimistic estimate a long time ago.

This isn't Kansas - and simply tapping your shoes together and repeating "we will make a profit, we will make a profit" - isn't going to make it happen!

Robert,

Pre-election anyone can claim that Northern Rock's future income stream will be good and a magical profit made.

But isn't there a strong possibility that after the election, when taxes increase and interest rates eventually rise, Northern Rock's mortgage book will be correctly valued as a smidgeon above worthless and we can accurately value the company as a whopping loss to the tax payer ?

It is the valuing accountants that got us into this mess - some would call their behaviour criminal neglect - and it seems that like bankers massive bonuses, fantasy evaluation is back in fashion again.

...and as for those bonuses - well as Northern Rock don't really go in for speculative investment banking, I suspect these are spread across the retail staff.

To clarify, there are 2 distinct types of banking bonus.

1) Bonus related to the 'funny money you make' - these are the huge ones which are paid out to individuals - which encourage them to take risks. Prevalent in investment banking, and totally unconnected with true wealth creation.

2) Bonuses paid to frontline staff, as a way to subsidise their declining wages (in line with the declining profit experienced by all business)

The first is the one we should hang people for - but the second is a clever method of paying your staff less overall - by encouraging the few who 'get lucky' they will be rewarded with the wages they should have had anyway!
...as for the others - well better luck next year.

Anyone who works at a low level and has either been on this type of scheme, or who has had to manage people who are - will know that the distribution of bonuses has got nothing to do with achievement or ability. It's a calculated pot which is distributed to those who are 'most likely to leave the company'.

I believed this when I was a recipient, but since then it's been confirmed when I was made part of the process to hand them out.

Bob, everyone seems to be assuming we are past the worst. Every debate you hear on TV or blog you read seems to be talking about the worst being over. The "asset manager" i.e. us the taxpayers holding the can aren't in anyway the good mortgages. If I remember correctly the good stuff was flogged off early on and what we currently hold is the toxic stuff.

Come spring/summer next year when the million odd public sector workers loose their jobs the brown stuff will hit the fan. It is only then we'll know that true scale of the problem. All the falls we have had over the last two years in the housing market was due to lack of credit. The real stress test will start in the winter of 2011/summer of 2012.

Sorry for being a bit thick, but if the bad bits have already been taken out, how did it still make a loss?

Robert writes:

"So, for example, the Rock's management team put together a bid for the bank in early 2008 based on a forecast that there would be losses of just under £200m in 2008 and then a return to profit.

In the event, the Rock has suffered losses on mortgages and loans going bad in excess of £2bn over the past couple of years - or five times more than the Rock's management and other bidders for the bank expected."

There's clearly something wrong with th arithmetic here.

I add that the expression "five times more than ..." is not one to use if you want to be clear. By all means use, for instance "more than five (or, actually, ten) times that expected by the Rock's management". Adding "more than" is unnecessary (and inaccurate).

1 & 4 I totally concur m'ducks. I only skim the blog nowadays to see when Guy Croft will comment or some other wag on his behalf. I think the problem is that Mr Peston has no contacts outside of Canary Wharf and maybe has no intention of making any in industry. Don't get me wrong I think the banks and finance are important but we do appear to have plenty of our little eggs in one basket.

I did suggest that the LBC could save on the salary of one economics editor as it appears to have two at the mo. Not sure what RP will do if the news team got moved from London...work from home? Oh well, always tomorrow...what about if James Dyson grouped with the Dragons and helped run Virgin's business banking loan arm.

By the way anyone know how BA are going & if they're going to strike between now and Easter?

7 writingsonthewall

I totally agree with what you say on this one. We have had billions of printed money propping up the property prices so they did not have to go into the balance sheet as writedowns. So what is the next move from Brown. Further printing of money for this year and more of the same?

He relies on growth but one banker I listened to said that the growth we thought we saw was an illusion. So do we want Brown to carry on with an illusion until any savings we may have have been wiped out interest rates go sky high and income has become so depressed with higher taxes that we all end up with nothing.

I'm afraid the recession we are are told is over has just been a trial run.

Northern Rock shunned its customers, who faithfully put small amounts of savings away each week, and tried to be a super power in the banking world.....lo and behold its banking experts were the same as all other banks experts and they failed.
They sold off the small local offices that they had , and which gave them an advantage as they now saw themselves in a different league and didnt need the small depositors any more ,they could afterall just print money.
The only way they could ever get depositors back is to mutualise, but they would have to offer better rates than that which are at present offered...they cant do that.

It would be interesting to see if the smaller building societies that didnt follow the Governments guidelines are fairing any better at this time with people depositing more with them.....IMO its too late for Northern Rock they are finished and the tax payers money will be lost.

The housing market is still way over priced in the current climate and it will be years before a recovery can take place,you need people in employment for that to happen and at the moment there are no signs of any upward trend in jobs.

Northern Rock was badly run before, and still has the same staff.
I was always told to have a accurate idea of the finances of any business, and never really trust accountants to run a business.
Old fashioned advice, the people who told me were self made millionaires by 21 and died still with a large fortune. Maybe these bankers who put themselves and the banks into this mess should try to risk their own cash and start a bank today?

Oh and Hurrah for the tax payer getting some cash back. Is this the start of the economic recovery??

Dear Breweries of the UK (esp micro), having just got back from my hols in Oz (Singapore Airlines & QANTAS due to fears over BA) can I suggest you set up export markets as a beer cost $9-$10 a pint (draught) in Perth, this is close to 6 quid. Come on Burton, Devizies, Skegness, Masham and the likes. Is tourism in the UK doing well 'cause I read 500,000 Aussies left for overseas in Jan, they can't all have gone to Vancouver & Bali, so did we get any? There we go RP two more topics. What about bird seed, surely the snow must have seen growth at Wilkos, pet stores the RSPB and farmers diverging?

Bryn The Cat wrote:

"Nice to see the decision to nationalise the Rock vindicated; there are some of us that believed it the best thing to do...

And the Tories condemned the move..."

If the Labour government had not been asleep on the job resulting in a failure to regulate the recklessness of Northern Rock,(e.g. not allowing applicants to self-certify and receive 125% mortgages), nationalisation would not have been needed, saving many Northern Rock customers from repossession.

If some one runs a business badly and it has huge losses, its assets are decreasing in value, are likely to fall further, would you invest in it?
Would you expect to get your money back and then some more?
As tax payers you just have invested hugely in failing companies and allowed poor business off the hook.
Most of the money will have gone down the proverbial plug hole.
Tax payers will see that money going out to whoever lent the Government the money to throw at these companies.
It is the people who lent the government the money to do this who will benefit not the tax payer.

This comment was removed because the moderators found it broke the house rules. Explain.

I guess any monies recovered for the tax payers would be a notional amount that gets swallowed up with no real reimbursements or zero amount / cash refunds paid back to individual taxpayers.

Bored of people posting comments on here bemoaning the focus in Finance and Banking rather than the real economy. I agree it would be excellent to have more comment on other regions and issues around the country but there is little point blaming Robert. The 91Èȱ¬ allign their budget to stories which will get exposure and are based in London (where RP is located). If there was any further budget I'm sure they would employ someone to be based out of Manchester etc

Stop moaning

As the worlds most widespread asset property/land will always be the true measure of wealth. Money is an abstract concept, it matters not whether an orange costs £1 or £100, what really matters is what that orange costs with respect to property. The price of money will always catch up with the price of property. This is a long hand way of saying that under the current circumstances inflation is inevitable and those £2Bn writedowns of Northern Rock will soon be written up as a consequence of inflation and hence asset price appreciation regardless and what happens to economic growth in real terms.

anyone want to run a book on when we get a non banking story!

similar to what wotw has already highlighted, the fact that the existing management team and all bidders (with their accountants, advisers etc) seemed to underestimate losses on mortgages and loans going bad at £400m instead of £2,000m, so far, says it all to me about how much (the very clever) management teams actually understand about their banks activities.

My back of the envelope calculations is that this is over £3k written off bad debt from every customer. We know 1/3rd of the people Northern Rocks lent mortgages to were very soon in negative equity.

Being synical maybe the potential bidders were hopeing for the Govt to underwrite the bad debt to them, something along the lines of Thatchers guarentee of BT pensions.

I accept the heading says profit, but surely a bigger issue is the benefit / cost had The Govt not bailed out Northern Rock or actively carried out the programme of quantative easing. We of course can never be definative on this, but personally judging that a c 15% decine in house prices lead one bank (albeit with one of the most stupid business plans) to lose £2bn in bad debt, i shudder to think where the what if scenario would place the uk and world economies now.

IMO if the uk economy is going to reverse its decline, its not going to be from the banks, how about a look at UK manufacturing or ,SME's they still play some part of UK business!

Mr Peston your piece avoids mentioning some pertinent details which together encourage the perception that NR will be profit making going forward - I am sure your reporting remains entirely politically independent and it is pure coincidnce that your analysis supports the govt position.

1) The costs of funds for NR as a govt enterprise is no doubt considerably lower than for NR as a private sector company - even with such a conservative capital structure. Funds from the money market were risk free and funds from savers could be obtained much more cheaply given there was no 50k cap on savers compensation. Look at Newcastle BS last year having to offer 5% to savers to attract funds last year.

2) NR with its uncompetitive lending rates will continue to suffer adverse selection in its mortgage customers - those in financially better shape will move elsewhere leaving those struggling and more likely to default. Part of the reason NRs mortgage book has gone bad more than other lenders is because of adverse self selection in applications - those borrowing more than 100% have not demonstrated any ability to spend less than they earn by saving a deposit and the further a borrower is in in negative equity the greater the perceived costs of paying off the loan is compared to the cost of default and bankruptcy.

3) Theoretically for a financial institution to be profitable with a savings book twice the size of the loan book the average interest rate payable on the savings would have to be half that payable on the loans (assuming a zero default rate) - given this restriction it would seem to be impossible for the organisation to offer competitive rates for eithe rproduct?

This comment was removed because the moderators found it broke the house rules. Explain.

Ponzi schemes operate on "the rob Peter to pay Paul" principle.

A promise of large returns, the fraudster takes in money from investors and uses it to pay off earlier investors until no more new recruits can be found and the whole scheme collapses, the investors who are left lose everything.

Seem familiar?

14. At 11:12am on 10 Mar 2010, virtualsilverlady

When Gordon dusted off the book on economic crisis management (last opened by John Major) - he saw one simpe chapter.

INFLATE YOUR WAY OUT OF TROUBLE.

Sadly the page which succeeded it (titled Wiemar republic + Hyperinflation) had been ripped out by the previous reader....

#22

Valid point, however:

1) I get know choice over whether I pay my licence fee or not if I wish to watch any channel, though I'd pay it for the radio.
2) The beeb manage to get out of London for stuff such as football coverage, surely they can do it for business news or utilise regional journalists fast losing their jobs at local newspapers (Rossy leaving should finance that)
3) The vast majority of licence payers live outside the M25.
4) He's the business editor of the British Broadcating Company - if he can't be British (ie cover Regional England, NI, Wales and Scotland) then he should explain that to is boss and do regional work - if not please refund a large part of my fee!
5) He should also be impartial (and I don't vote Tory, I'm waiting to see what Liberals or Independents stand as my local labour guy is a good local MP)

11. At 10:55am on 10 Mar 2010, superseasideman wrote:

"Sorry for being a bit thick, but if the bad bits have already been taken out, how did it still make a loss?"

Please don't ask sensible questions!!

Didn't you know we're all living in fantasy finance land where profits and losses are one and the same.

I'm sure over the course of the next 100 years it will all even itself out...

This comment was removed because the moderators found it broke the house rules. Explain.

18. At 11:27am on 10 Mar 2010, LythamStAnnesClaret wrote:

"If the Labour government had not been asleep on the job resulting in a failure to regulate the recklessness of Northern Rock,(e.g. not allowing applicants to self-certify and receive 125% mortgages), nationalisation would not have been needed, saving many Northern Rock customers from repossession. "


...and that is different to the fundamental Economic liberal principle the Tories hold because........?

The reason the world went wrong is because Labour foolishley adopted the same Economic policy of the Conservatives.

It's no good trying to state that 'things would have been different under the Tories' - because unless they changed their guiding principles - it would have been an identical result.

Don't forget the Tories advocated the 'politicising' of the BoE base rate - i.e. the Politicians decided on the rate.
If that had continued then Gordon would be able to fiddle the base rate to suit his election prospects - just as Thatcher did during her term.

Here's a question for the 'non-bailout' free market supporters.

Northern Rock lost £1.6 Bn in 2 years
Lloyds have lost about £4 Bn
RBS has lost a few billion (I can't keep track)

....so if these fellas hadn't of been bailed out - who would be covering those losses now?
Ok the institutions in question would have folded, but their assets don't cover their debts - so who would be footing that bill?

The answer is the rest of banking, the customer and the savers who had over £25k in these banks.

...and how long could HSBC, Standard charter, Barclays and the other banks who have 'skillfully traversed the market' - contained those losses?

Mmmmm? - it appears that the numbers are coming through to demonstrate there is no way we would have a banking system (ruined though it is) if these puppies had been allowed to fail.

What would be the knock on effect of a saver who has some money in NR ad some in HSBC (for example) - would they leave their money in HSBC after seeing their NR savings disappear?

You cannot argue 'rationality' in markets and then expect the general public to act irrationally to support your argument for free markets.

This comment was removed because the moderators found it broke the house rules. Explain.

Afternoon Robert,
so there we have it, unlimited liquidity, zero interest money and still the banks/ nationalised building societies can't make money!
Doesn't bode well when the liquidity is withdrawn (normalised) and bank rates have to be increased to counter the massive inflation (which is coming).
Keep calm and carry on indeed.

#33 If banks had been put into administration there are a huge amount of creditors lower down in priority who would have absorbed the losses before retail depositors lost out. Northern Rock's liabilities side of the balance sheet comprised of about 25% retail deposits in 2007, so for depositors to loose any money the value of assets(i.e. loans and mortgages) would have to be written down by more than 75%, increadibly unlikey even in these times. It was the holders of subordinated debt, wholesale debt and securitised debt which were protected by the intervention to prevent administration. Administration would have brought huge losses to those institutions who provide this wholesale funding and as a consequence significantly raised the cost of borrowing. The government actions to keep Northern Rock a going concern were carried out to bail themselves out of a situation they had largely created and to try and prevent a complete systemic meltdown. They like to be painted as the saviours of the world, it's like a surgeon claiming saving the patients life by sewing their leg back on after being the one who mistakenly removed it in the first place.

it might be interesting to know how much of the "improvement" in reducing loss is down to completely ripping off the people they offered "125% mortgages" to. These peple had little or no option to switch providers and were effectvely forced into the 7.5% base rates Norther Rock set for itself

Northern Rock de-mutualises. Pay out time
Some years down the line it is screwed. Bail out time
Later... tax payer loses out from mutualisation.
It'd be interesting to audit the cash-flows over the years... as it would with all the other banks that needed bail-outs.
Some people must have banked tidy sums before it all went belly up - after all we're talking zero sum gains, right?

When the state controls the interest rates and money supply and, as many governments did, actively encourage risky lending how can anyone call it a free market?
When Lehman Brothers was allowed to fail with assets of $639billion, what was good and worth preserving found other homes. What was not worth preserving disappeared. That is what happens when bankruptcy is declared. The world did not end.
No institution (empire)is ever to big to fail.
Nobody wishes for bankruptcies. If they can be avoided by sound financing people would be for such measures.
When bad investment and over-indebtedness pass a certain point, measures which postpone liquidation only make matters worse.
Economic history of boom bust cycles show that attempts at short term gain by massive intervention delays, prolongs and deepens crisis for the future.

#23

Suprised WOTW hasn't leapt on this already - but are you implying that the only store of value is land? And that therefore house prices are the only reliable way of reflecting total value in an economy?

Surely not...

What seems more likely is that they have been inflated by govts printing of money - and will soon fall back to a more sustainable level, based on the actual amount of economic activity in the market, in which case 75% write downs may not totally riduculous...

# 27. At 12:50pm on 10 Mar 2010, Dillers wrote:

> Ponzi schemes operate on "the rob Peter to pay Paul" principle.

> A promise of large returns, the fraudster takes in money from investors and
> uses it to pay off earlier investors until no more new recruits can be found
> and the whole scheme collapses, the investors who are left lose
> everything. Seem familiar?

Lots of schemes depend on Ponzi. The pension system is Ponzi, because the people who receive pensions get thier money from current taxes, not the ones they paid in (they're already gone). The same is true for NHS - the elderly (who take the most from the system) are not using thier own taxes, but current ones (thier taxes have been spent on thier own parents). Basically, banks are doing the same thing. They havn't actually got much of the money you put in there - they spend it on high wages and loans to other people.

In fact, "bank" is a really bad word for a bank, because it implies a pile of something tangible, like land or soil. But banks are, in the main, quite hollow vessels, like governments. They depend on "flow" to keep going. When the flow dries up, that's a credit crunch.

Mr Peston,
According to what you say, £1.6 bn in, £1.6 bn out (after many years), equals return. Have you heard of cost of capital and opportunity costs???

There is a strange view of things. Will the taxpayer make money on any of these banking bailout deals? The answer is absolutely..no. First of all, these are bad debts that taxpayers had no say in aquiring, very much like the banking scheme that lost all the personal wealth of depositors. We as taxpayers assume the bad loans of the banks, secured with future tax revenues and now we are told if the bad loans break even or even generate some additional income that somehow that means the taxpayers are making money. This is Alice in Wonderland thinking and the kind of economic modeling that created the mess to begin with. The reduction of a future tax burden is not the same as "making a profit." Now if the money gained was somehow awarded to the personal accounts and retirement accounts to cover the individual losses, that would be a benefit to the taxpayer, but anything else is just a reduction in the national debt. When most people think of financial benefit it is in real money and not a potential reduction in future taxes. I hope the government does not decide to count this as income and tax it as well. Economists need to get out more.

#36

can't really agree with this synopsis.

the fact that only 23% of northern rocks funding was from retail deposits was its weekness. The balace of its funding came from commecial money which Northern rock needed to provide commerical paper to obtain. To do this the majority of its mortgage assets were placed into a seperate legal trust and used to back this paper ( despite the balance sheet being consolidated). Retail depositors money was not covered back in 2007, certainly not by a 4 times multiple
This was far from unique accounting, it was estimate up to 80% of all banks assets were off the balance sheet at this time

Its also silly (imo) to blame Gordon Brown as "largely resonsible" for this brekdown. It was an inability to sell this paper which forced Northern Rock to go to the B of E. A very major reason noboby wanted to buy paper at this time is that PNB Parabis overtly pulled out of the US sub prime market. The former Govenment initialted relaxation into the banking sector
To me the problem is clearly the banks. It may be frustrating that they are not regulated but they won't be while accountants are financially better off finding ways around the regulation and the FSA dosen't really understand the system

Blair profited from Northern Rock, but he isn't a taxpayer.

36. At 2:29pm on 10 Mar 2010, FearandLoathing wrote:

"Administration would have brought huge losses to those institutions who provide this wholesale funding and as a consequence significantly raised the cost of borrowing."

...which would have fed back into....

"so for depositors to loose any money the value of assets(i.e. loans and mortgages) would have to be written down by more than 75%"

You had the answer yourself - it was merely disguised...

40. At 2:54pm on 10 Mar 2010, MisterGC

Very good.

We all know the only true value is labour. For when the land runs out - it will be labour that gets us to the moon (or mars) to build real estate!

Still I presume that #23 think houses merely 'appeared on the earth' in some form of God like creationism.

39. At 2:42pm on 10 Mar 2010, Dillers wrote:

"When the state controls the interest rates and money supply and, as many governments did, actively encourage risky lending how can anyone call it a free market?"

True - but then the free market failed many years ago - when the first Government found itself bailing out the failed companies in order to prevent total economic wipeout.

"When Lehman Brothers was allowed to fail with assets of $639billion, what was good and worth preserving found other homes. What was not worth preserving disappeared. "

...except the millions of dollars of CDS's issued against Lehmans which had to be left as they couldn't be paid. It also had the effect of creating US ghost towns of empty and worthless properties - is that what you mean by 'disappeared'?

"No institution (empire)is ever to big to fail. "

Does that include the world?

"Economic history of boom bust cycles show that attempts at short term gain by massive intervention delays, prolongs and deepens crisis for the future."

True - so why not choose a system that doesn't boom and bust? I mean do you resolve the recurring fault on your car by changing your mechanic every time - or just change the faulty car?

42. At 3:12pm on 10 Mar 2010, Stodoc wrote:

"Mr Peston,
According to what you say, £1.6 bn in, £1.6 bn out (after many years), equals return. Have you heard of cost of capital and opportunity costs???"

Oh classic - this is how the public will be fooled in the end - just to make it look like a profit....

45. At 3:30pm on 10 Mar 2010, bill wrote:

"Blair profited from Northern Rock, but he isn't a taxpayer."

Blair profitted from the Iraq war (In my opinion moderators) - and he wasn't a soldier or a taxpayer.

I have to admit a lot of our problems today were the fault of this 'once great leader' - who is now nothing more than a 'great loser' (apart from all the money he's made since)

Still, he doesn't realise yet that money won't get you into heaven - heaven will be closed to Tony I'm afraid...

At the time the media summary and some Tory blogs did ridicule how Northern Rock nationalisation was a worse political catrastrophe than Black Wednesday, the death of Dr Kelly and 9/11 rolled into one.
Unfortunately, NR has still suffered massive losses on mortgages and will not end up making the Government that much money (if any) but it was still the right decision because private bids would have undervalued NR!

So have I got this right. NR parks all its debts and losses on the taxpayer. Then claims to have a great profitable company. And sells it for a massive profit.

Can anybody do that?

Robert:

I hope that Northern Rock can make some profits to return to the Taxpayers in the United Kingdom....

(Dennis Junior)

#44 I think you misunderstand, the point I was making is that if NR had been put into administartion because of it's disproportionate reliance on wholesale funding(about 75%) then retail depositors were guaranteed to get their money back. NR had a balance sheet that was coincidently about £100Bn of assets and liabilities. There were £25Bn of retail deposits, if the bank had been wound up and it's assets sold these assets may have lost worst case 15% of their value. That means in total the bank would have lost £15Bn, this loss would have been absorbed firstly by the shareholders equity, say £5Bn, then the next losses would have been absorbed by the subordinated bond holders and the wholesale lenders etc. In other words unless house prices had fallen by about 80% then the retail depositers would not have lost any money, the providers of this wholesale funding would. The government intervention didn't really protect the retail depositors they would have always received their deposits back eventually, the intervention was to protect the wholesale lenders from any losses and it could be argued that this is where the most significant damage to the system has been caused. If the providers of this wholesale lending, the subordinated debt and securitisation, had had their fingers burnt then the market would more acurately price in risk and the we wouldn't have the question over moral hazard.

8. At 4:35pm on 10 Mar 2010, writingsonthewall wrote:

True - but then the free market failed many years ago - when the first Government found itself bailing out the failed companies in order to prevent total economic wipeout.

And the evidence that there would have been total economic wipe out is?
Examples please

...except the millions of dollars of CDS's issued against Lehmans which had to be left as they couldn't be paid. It also had the effect of creating US ghost towns of empty and worthless properties - is that what you mean by 'disappeared'?

Recessions around the world America Japan Britain show us that by propping up bad economic decision making by state or private industry only delays the inevitable and makes it more unpleasant. You can not buy your way out of trouble with even more borrowed money. Investing in overvalued assets that will only depreciate will only waste more money that could be used more usefully in the economy.

True - so why not choose a system that doesn't boom and bust? I mean do you resolve the recurring fault on your car by changing your mechanic every time - or just change the faulty car?

Good idea with a system that does not boom or bust.
With the car it can be duff and so can the mechanic. Goodness knows I've bought them and found rubbish mechanics. Now have a naff car maintained by a good mechanic.

Define profit.
In 2006 Northern Rock were planning a nice big new building housing 1000 staff at a brand new development close to Sunderland.
The development was that big that the Highway Agency were concerned enough to place a Section 14 order that effectively stopped the development until the funding of work required to arrange access to a major trunk road was in place.
The Rock was to pay its share.
The development went ahead - and NR went bust.
NR has never occupied the building.
Who has paid for the access road? Taxpayers?
Just how much has actually been poured into the gaping hole?
Will we ever know just how much in the way of sundries has been picked up by you and me?
Big opportunity for some of course. At our expense of course..

Robert
The NR Annual Report for 2006 showed assets of £100bn. Your report now shows this as £10bn plus £50bn.

I know that a fair number of mortgages left NR but £40bn?
I am suspicious, where have they all gone?

Just thought I'd post a reminder at this point-

I'll start by qualifying the following comment with the fact that I was not a Northern Rock shareholder and have no connections with Northern Rock whatsoever.
The £2Bn losses you sight are mark to market valuations of the loans that Northern Rock holds, they are not actual losses being caused by loan defaults, they are an accounting anomaly which misrepresents the actual state of a bank's balance sheet. As time proceeds through rising asset prices and inflation these writedowns should be written up and will show on year end results as profits.
Northern Rocks 'liquidity' problems were no different to most of the major financial institutions in this country, created in most part by failings of macro economic policy and financial regulation. The reason Northern Rock became the first to experience the acute inability to refinance short term wholesale lending is because it was not too big to fail and therefore the loss of confidence brought about to a large part by media reporting was inevitably going to lead to a bank run and an inability to continue as a business. What people need to realise is that this was not a business that had more liabilities than assets, it had more than sufficient assets to cover the liabilities, the problem it had which all banks are susceptible to is that the PR assassination meant that it could no longer find anyone to borrow from to roll over short term debt, this was not a unique business model to Northern Rock all banks do this, but as soon as a sufficient hatchet job is done on it's reputation a bank run becomes inevitable.
This crisis eventually became a bank run on the whole financial system, finance was withdrawn from a lot of financial institutions not because of actual losses caused by significant loan defaults as a consequence of a significant asset price depreciation, but because of the FEAR that these losses would arise because asset prices(mostly property) would fall by 30-40%. This environment of fear then became self-reinforcing and asset prices inevitably fell leading to more panic and so on and so on. Eventually the authorities got it but it was too late and panic measures had to be invoked. The governments around the world were not the saviours you continually portray them as, they created the conditions in the first place. As long as we have the disparities created by differing currencies and individual governments have the power to set the price of money they will always be responsible for macro economic stability both nationally and internationally. We do not have a truly free market and therefore an inefficient and flawed pseudo capitalist economic model. The reason that this is important to understand is that this crisis has been spun into a failing of the free market economic model and greedy capitalist bankers when the actual failings lie within the respective political authorities across the world. Unfortunately Governments play an intrinsic role in the global economic structure, when you have a systemic failure of the nature we have just experienced it can only be attributed to their actions.
With respect to Northern Rock, they were not a uniquely poor business within the financial sector, they were just the first to be sent over the top, aided in no small part by media sensationalism.