http://www.marketwatch.com/news/story/british-government-seeks-power-buy/story.aspx?guid={65E1A63E Northern Rock, the bank that had that run on it, is in trouble, big trouble. Now it looks to be nationalized, but even more interesting to me, is the fact that provisions in this new bill look to grant permission to do this in other cases in the future. there is no doubt that a global credit crunch with first the sub-prime CDO's then onto more prime borrowers has hit home. Big banks in america and in europe (the latest was swiss-based UBS) have been writing off losses by the billions, with billions more predicted to come...yes, that was billions with a B . Is this a sign that these CDO's and MBS's and other acronyms have been a much bigger problem, and a possible millstone around the uk-us banks (as well as others of course)? To me, this tells me that the uk officials are expecting more of these write-downs and possibly even some medium-sized to large failures. I think in the us this is also the case, if you look at the TAF of the Fed (negative reserves for the first time in 20 years, iirc), and the grinding halt the credit market went into and has continued to be in (for example, in america some Municipal auctions have been having trouble getting done at over 20% when the norm was 4%, and that is why officials are talking about breaking up the monoline insurers and separating munis from the other toxic CDO's). Is this a big news item in the uk??? It would seem to be a big deal to me. what are some of you guys/gals thoughts?
All you need to know is that NR had something like 85% self-cert mortgages, and these were people who couldn't get mortgages anywhere else. You had cab drivers claiming to make 100K a year. It was a house of cards.
i thought the main problem was not the debtors ledger, but the fact that NR couldn't access the funds on the wholesale market to continue to finance it. AFAIK there was no issue with defaults on the consumer end.
Link? TBH, I think you must be thinking of someone else. There was no problem with the Northern Rock loan-book which is, actually, of very high order. The problem was that they borrowed the money on the global credit markets which dried up due to the problems in the states so their main source of lending disappeared. It became one of those self-fulfilling prophecies that everyone thinks NR will have a problem so takes their money out... so NR has a problem... which is what everyone thought would happen. The truth is it could happen to any of the big banks or building societies. I had a chunk of change in NR which I withdrew but that was because I was funding a house purchase - not because I thought it was gonna go belly up because, frankly, I didn't. In any event, as I told various people at the time, if you take it out of NR where are you gonna put it because if THEY, (with a strong debt book), can go belly-up, where's more safe than that? That is, safe from the effects of an hysterical public.
Hmm, not really. Northern Rock had their feet in the riskiest end of the loan business, such as giving loans for up to 125% of a property's value. Works ok when prices are still going up rapidly, but when they don't, the shit hits the fan. So no surprise that when the credit crunch started, folks didn't want to lend to NR: http://www.thisismoney.co.uk/mortgages/article.html?in_article_id=430180&in_page_id=8 Poorly structured deposit insurance was a big part of the problem, imo. The UK had a relatively low limit as to what was covered 100%, and then a much higher limit for 90% coverage. This has been changed since the NR mess to have a considerably higher amount of 100% coverage. Had that been in effect back in August, I don't think so many people would have withdrawn money. With only 90% coverage, they made a rational financial decision to do so.
yeah, what i thought was more interesting, though, was this story in conjunction with the government's actions (putting provisions for this to be used in the future), added to the fact that we just hear about "models being adjusted" from S&P a few weeks ago to some of the banks the last few days. I think that all points to a lot more trouble for the monolines and banks that maybe people thought just a few weeks ago.
You can't take the 'thisismoney' website seriously with economic analysis because it's published by the same people that publish the 'Dailt (hate)Mail', one of the worst newspapers in Europe. The analysis about the matter at the time from the BBC, the Financial Times and other, serious news media said that NR's debt book was of very high quality and they hadn't lent to people who weren't likely to pay the money back. The plain truth is that house prices in the UK most definitely had NOT gone down, (certainly not in September of last year), and the problem was that NR borrowed a lot of it's money on the money markets. TBH, most other UK banks were in a far worse position but they were banks... not building societies, so people thought they were OK for some inexplicable reason. Well, I say 'inexplicable'... nothing surprises me about the great unwashed It was 100% of the first £2000 and 90% of the rest up to £35,000 but you're right. That was the big problem. Like I said, I left my money in because, IMO, there was absolutely no way the government was going to let it go belly-up because it would have created a domino effect. First NR, then, who's next?
Hopefully, with the new guarantees in place, there won't be a problem now but we'll see I suppose. The other point about NR, (apart from their susceptibility to the money markets), was that they lent money out specifically to buy houses. People like RBS are also banks so there would have to be a more general decline in the economy for them to be effected. As M and I have discussed, the biggest single factor, (apart from the level of hysteria some people seem to suffer from ), was the lack of a 100% guarantee for depositors. If that had been put in place immediately the queues started, there wouldn't have been a problem.
possibly, though some of these IBs have so much toxic CDO and MBS junk on their balance sheets and still haven't been marked to market, not to mention some of their balance sheet value is tied to AAA rating of their "insurers," If the bond insurers get downgraded, the stuff the insured does as well. as you said, we'll see i guess.
If you're going to offer a 100% guarantee for depositors, you might as well nationalize the thing cause you're on the hook for everything anyway, which the government did. Frankly, any depositor wanting a 100% guarantee should stick with "My Bed Mattress Bank".
Agreed. They still had a fab balance book. The problem was that the enormous amount of money they had borrowed to then lend out was constantly turning over. Then credit crunch hits and no bank is lending money to any other bank, because they have all lost their shirts and cash is tight. So NR was in a position where despite having a great balance sheet and a profitable business, they are unable to refinance their own borrowing - so hence a liquidity problem. The customer run on the bank once that came to light was hardly surprising - but also not really that significant compared to their inability to pay the big dogs. Cashflow is always the killer!
The difference between NR and those banks is that RBS and co have actual money. NR was just trading on a margin using everyone elses money. There's always a lot of BS talked whenever the govt nationalises something. The fact is NR is probably quite a nice business if you don't have the cash financing worries. Secondly - why let a vulture like branson snaffle it on the cheap? In NZ we had to nationalise the airline after privatisation ran it into insolvency. Turned out to be a sweet little investment. Finally though - I don't agree it couldn't have been left to go to the wall. Fact is it still had a very nice mortgage portfolio, choice income streams, and assets exceeded liabilities. Nice pickings for someone. But obviously that would have had a catastrophic impact on the housing market which is generating a huge part of Britains growth right now
Lending 125% of a house's value is a risky business regardless of who is reporting it. How many lenders do this in the UK? Very few, afaik. I wasn't arguing that house prices have gone down, but that in any downturn loans for more than a property's value are typically the ones that go sour first. When property values decline, people - even those who are a good credit risk - often no longer see the point of paying a mortgage when they are so under water. Such high loan to value mortgages are an inherently risky business as I suspect the British taxpayer will discover in the next few years. Banks are more diversified in their lending, whereas NR was essentially a one trick pony.
The 125% is an interesting one but I doubt it ads up to 1 or 2% of NR's business. What it is, effectively, is a mortgage and a tied loan that didn't need collateral when you took out the loan. It was typically used for house improvements and suchlike and would likely only been given to people with the best credit scores. I accept the basic principle of what you're saying but I think it's only a very, very small element in the problems they had. Frankly, it was almost completely irrelevant although that won't stop the 'meeja' short-stroking over the fact that they offered this product. I doubt it will ever become a factor in those terms for the simple reason that the bulk of the mortgages that NR had given are, by definition, already partly paid off. I don't know the figures but I'd guess it's, maybe, 25% of the value of the housing stock it was lent against... if that! We'd have to have a house price collapse far, far worse then even some of the US levels to suffer any real long-term losses. Well, that was certainly a factor in that it started some of the hysteria but, as I mentioned, I left some cash in there because I was convinced there wouldn't be a problem and, like I said, where could I put it that was noticeably safer? Even at this stage we don't know the full extent of the US sub-prime hole. I'd have hated to have taken it out of NR and put it into some other organisation only to see that disappear beneath the waves. My view was that NR had a reasonable debt book and was at least as good as any other UK building society in that its lending was backed by the UK housing market which was still pretty robust. The ones who are going to lose are the shareholders but I wouldn't invest in someone else's business in that manner anyway. Business is risky enough as it is when I'M in charge... but when some other bugger's got the reins?
I disagree. It would take price declines similar to what the US has seen in some areas to see a repeat of what's happened in the US. House prices are determined by what happens at the margins, i.e. by owners that are "forced" to sell or who are foreclosed on - in terms of prices, it's really uninteresting that most people aren't likely to get into difficulties. Most people who have taken out mortgages over the last two or three years will have paid off little if anything of the balance. It is those folks' houses that are at risk if prices decline. If you look at the pattern of foreclosures in the US, they are overwhelmingly of people who took out loans post 2004. Not saying the situation will repeat itself in the UK, but all the ingedients are there imo: huge runup in prices (much higher than the US, btw), ratio of prices out of kilter with historic norms against income/rents, tightening credit standards...
Hey! If prices drop 50% there will be a problem... no question. I don't think that's gonna happen though. We'll see I suppose.
The median in the US has dropped approximately 5% in the last year. Of course, that hides regional disparities, but it would take a drop of far far less than 50% to cause problems to the UK market. A 50% drop would be cataclysmic. Edit: link suggesting that NR wrote more of these 125% mortgages than anyone else: http://www.guardian.co.uk/money/2008/feb/20/mortgages.property
My understanding is that they were offering them for longer than the others so that's quite likely but, as I said, I doubt it adds up to more than half of one per cent of their total lending... as much as anything because the rates were very high as the article also mentioned. It would probably be cheaper to just borrow, say, 90% on the mortgage and get an unsecured loan for the 35% which, if you're earning enough and have a good credit score, should be possible. Note, I'm not saying it's advisable... just possible. TBH, I think they offered them as a headline grabber more than anything else. As I mentioned, the real problem was the lack of a 100% guarantee to depositors. That's what caused the run on them. Well... that and people's hysteria about these matters.
Sorry - you are right. What i meant was that the business still had excellent Assets to Liability, and Excellent Profitability. They just had a massive cash flow black hole.
http://ukhousebubble.blogspot.com/2007/12/blog-post.html not this matters, but it is kind of an interesting unofficial metric. like how people look at sales of cheap lipstick and kraft dinners to gauge recession, the "bubble" of real-estate shows in the uk. A Place By the Sea A Place in Greece A Place in the Sun A Place in the Sun: Home or Away Build a New Life in the Country Build, Buy or Restore Changing Rooms Did They Pay Off The Mortgage In 2 Years? DIY SOS Escape to the Country Extreme Makeover Grand Designs Grand Designs Abroad Home Home From Home Homes Under the Hammer Honey I Ruined the House Hot Property House Auction House Busters House Chain: Under Offer House Doctor House Hunters in the Sun House Invaders House Price Challenge House Race Houses Behaving Badly How Not to Decorate How To Be a Property Developer How to Rescue a House I Want That House I Want That House Revisited Living in the Sun Living etc Location Location Making Space Moving Day My Place in the Sun Nice House… Shame About the Garden Other People's Houses Our Home Pay Off Your Mortgage in 2 Years Property Dreams Property Ladder Put Your Money Where Your House Is Relocation, Relocation Restored to Glory Room For Improvement Selling Houses Staying Put Streets Ahead Super Agents Superhomes Through the Keyhole To Buy or Not to Buy Trading Up Uncharted Territory Up Your Street Would You Buy a House with a Stranger? http://www.propertysnake.co.uk/site/location/101 here is an interesting site as well.
I wish I could comment more, but my firm is heavily involved on way too many aspects of Northern Rock. Suffice it to say that RBS and other big UK banks (BarCap, HSBC, etc.) are in absolutely NO danger from a similar type disaster. Northern Rock was different because it relied so much on short term market funding to turn over its liabilities. In actual fact, its assets were not particularly poor - the UK hasn't actually been hit with defaults. What happened is that the market raised prices of new debt to Northern Rock beyond its ability to finance that debt. (This is what has happened to so many of the SIVs.) Northern Rock's problem has little to do with the default rate of assets or their drop in value - its a very simple matter of no one buying Northern Rock's commercial paper at the previous rates and no one wanting to buy RMBS at the previous rates. Its not a credit problem, its a funding problem. (That being said, Northern Rock did make some terrible investments in certain asset classes that effectively created a double or nothing bet on housing prices.) Northern Rock and SIVs were both being run under the assumption that a CP disruption could not happen. Now that it has, its been shown that Northern Rock's business model of how to fund itself is not diversified enough. It doesn't speak to their assets in particular, but rather the market's fear of those types of assets in general. Incidentally, I should add that all those write-downs that the big banks have taken aren't actual losses. Nothing is crystallized. Those assets continue to pay and the cashflow keeps churning. Those assets will likely be written up next year, because ultimately its an accounting matter not a cash flow matter. The big clearing banks remain solvent - that's not an issue. Some of the investment banks, meanwhile, are doing fine because they were so well hedged (see: Lehman Brothers). Yeah, the market really sucks now, but memories are short. In two years many of these alphabet soup products (other than perhaps SIVs and CPDOs) will be back at 70% of their issuance levels of 2006.
That's not true. Northern Rock relied far too heavily on the financial markets for its funding - vastly more than clearing banks like RBS, Citi or BarCap. RBS can easily survive a rise in CP/ABS pricing (and they did just fine, actually) because they're not dependent on it - Northern Rock was. Also, I wouldn't say Northern Rock's debt book was of the highest quality.