Thursday, September 13, 2007

Bank of England To Rescue Northern Rock / Stock Tanking / BOE A Paper Tiger ?

No wonder the housing & mortgage market is more and more dominating headlines even in the yellow press...... And you know worse the situation in the UK is when Bekham; Kate Moss etc are not dominating page one in the yellow press...... ;-)

Bei der Marktlage ist es kein Wunder das es der Immobilienmarkt es sogar im Boulevard immer öfter auf die Titelseiten schafft...... Und wenn es weder Beckham, Moss, usw auf Platz 1 der Yellow Press schaffen muß schon ungewöhnliches passieren..... ;-)

Tomorrows headline will be including Northern Rock ( wich had an 18.9% share of UK net mortgage lending ) and the bank run ....... Make sure you read the updates in the comment section. This story has some extra large legs......

Die nächste Überschrift enthält sicher schon Northern Rock (die immerhin knapp 19% Marktanteil innehaben oder sollte ich besser sagen hatten) und den"Bankensturm"..... Bitte lest zum Thema auch die Updates in den Kommentaren.... Diese Geschichte wird uns noch längere Zeit verfolgen...

What happend to the "Virtuous Circle" from Northern Rock...... ? Looks it is now more a "Vicious Cirlce"

Was ist bloß aus dem gerühmten "Virtuous Circle" von Northern Rock geworden.....?

FT The Bank of England will on Friday provide emergeny funding to rescue Northern Rock, a leading UK mortgage lender that has fallen victim to the credit squeeze triggered by the US subprime meltdown.
Northern Rock, which had more than $200bn in assets at the end of June, is the first UK financial institution to be propped up since the BoE in 1998 revised the rules under which it would act as a lender of last resort.
14. In exceptional circumstances, there may be a need for an operation which goes beyond the Bank’s published framework for operations in the money market. Such a support operation is expected to happen very rarely and would normally only be undertaken in the case of a genuine threat to the stability of the financial system to avoid a serious disturbance to the UK economy.”

>Just a few days ago Mervyn King, the governor of the Bank of England said this

>Vor ein paar Tagen hatte Mervyn King, the governor of the Bank of England folgendes zu sagen

In an unusual public display of discord, the British central bank criticized other central banks yesterday for injecting cash into the financial system to help stabilize credit markets, saying that such a policy amounted to a bailout of investors who made bad decisions.

The main thrust of his written testimony to Parliament, however, was a sharp warning about “moral hazard” — a term used to describe the downside of policies that effectively rescue investors when their bets turn out wrong.

“The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior,” Mr. King wrote. “That encourages excessive risk-taking and sows the seeds of a future crisis.”

> Look at the next chart and watch what the housing bubble has done since they tapped the "lender of last resort" rule the last time in 1998.... Got gold....?

> Guckt Euch an was der Immobilienmakt seit dem letzten Eingreifen der BOE im Jahr 1998 performed hat...... Got gold...?

The Bank is expected to say on Friday that a similar facility is available to any other institution facing short-term difficulties.

> When i look at this chart they should worry about the longer term problems....

> Wenn ich mir diesen Chart ansehe glaube ich zudem das die wirkliche Problematik eher langfristiger Natur ist......


Bloomberg is reporting this
The Bank of England is confident about the quality of Northern Rock's mortgage book, the FT said. The lender has struggled with refinancing obligations, including mortgage- backed securities, the report said.

> Confidence in a bank that is offering products like this ?

> Vertrauen in die Kreditbücher einer Bank die Produkte wie dieses begeben ?

Say the value of your property is £100,000. You could get a secured mortgage of up to £95,000. And have the facility to borrow up to £30,000 unsecured loan for anything else.

You can draw on this £30,000 as it suits you. So, you might need £10,000 now and hold £20,000 in reserve.

> Too bad that they didn´t include the above 100% financing in the following chart... ;-)

> Schade das Northern im Chart nicht ebenfalls die 100% plus Finanzierung aufführt..... ;-)

> On top of this they seem to very optmisitic about the quality of their books...

> Zudem erscheint mir die Bank doch recht optimistisch was die Qualität Ihres Kreditbuches angeht......

The charge for loan loss impairment amounted to £56.8 million for the first half (2006 first half - £44.5million) representing 0.12% of mean advances to customers (2006 first half - 0.12%).

The combination of high quality lending, low interest rates, low early arrears and continued strong average LTV of the portfolio have continued to contain the levels of loan loss impairment provisions required for residential mortgages. Write offs in the first half amounted to £8 million representing only 0.01% of outstanding residential mortgage balances.

We do not expect to see a higher impairment charge in the second half than in the first half of 2007

> When i look at the growth rate it it clear that have been offering very agressive products.... I´m not sure if they deserve the help......"Moral Hazard" Mr. King?

> Wenn ich mir die Wachstumsraten ansehe ist klar zu erkennen das gerade Northern Rock ganz besonders agressiv im Markt unterwegs gewesen sein muß. Warum gerade dieser Spieler die Hilfe verdient......

The loan will be made at a ``punitive rate of interest,'' the British Broadcasting Corp. said.

``If someone was struggling and had to go to the Bank of England for assistance, Northern Rock would be first in the queue because of the way they fund their mortgages,'' Ian Murrell, a director at Wills & Co. stockbrokers in London, said on Thursday before the BBC report. ``It's all funded in the money markets,'' he said.

> No wonder that there is a good amount of mistrust between UK banks.....

> Wenig verwunderlich das es ein erheblichen Mißtrauen zwischen UK Banken gibt....

Northern Rock shares fell 4.9 percent to 639 pence yesterday, the lowest since March 2003. The stock has dropped by half this year, valuing the lender at 2.69 billion pounds ($5.45 billion) and making it an attractive acquisition target, MF Global Securities Ltd. analysts said Wednesday. The stock is the worst performer of the nine members on the FTSE ASX Banks Index.

You can add another 25% haicut......

Yesterday's action by the U.K. central bank was its first to help credit markets since the subprime market collapsed. Governor Mervyn King yesterday indicated the bank won't go as far as the European Central Bank and the Federal Reserve in helping banks cope with the credit rout because policy makers can't afford to ``encourage excessive risk taking.''

Commercial banks, which agree to hold a specific amount of money at the Bank of England at the end of each month-long maintenance period, can now undershoot that target by 37.5 percent to free up cash if needed. That compares with the usual limit of 1 percent.

> After reading all this i have to admit that my respect for Mr. King and the BOE is deteriorating significantly.......But as long as this comment is true "Northern Rock collateral to be similar to euro-zone banks" he is not worse than Trichet ( but this should be no compliment)....Too bad that nobody knows the exact details. The official BOE release does not provide further information ...... And the BOE should not complain about the fact that after their "U-Turn" the speculations are rampant...

> Alles in allem bleibt festzuhalten das mein Respekt für Herrn King und die BOE erheblich gelitten hat.....Aber solange diese Aussage zutreffend ist "Northern Rock collateral to be similar to euro-zone banks" ist er zumindest nicht schlechter als Trichet ( was aber kaum als Kompliment aufzufassen ist).... Dumm nur das keinerlei weitere Details bekanntgegeben worden sind. Die offizielle BOE Mitteiling hüllt sich dazu in Schweigen. Und nachdem die BOE eine solch dramatische Kehtwende binnen weniger Tage hingelegt hat darf man sich nicht beschweren wenn die Spekulationen ins Kraut schießen......

Disclosure: Short Pound vs €, long Gold, Goldmines/Hui, NAK

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24 Comments:

Blogger jmf said...


Northern Rock warns, says it needs Bank of England funding


Northern Rock said Friday it's going to seek out Bank of England funding, because global credit and liquidity markets have not recovered in the early part of September, and that there continues to be a severe liquidity squeeze. Volumes and pricing for senior unsecured or asset-backed securities -- the heart of the bank's funding -- will be less favorable for the remainder of 2007 than for the last two years. Northern Rock has agreed with the Bank of England that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the Bank of England or entering into repurchase facilities. It also said its 2007 underlying profit before tax will drop to between 500 million pounds and 540 million pounds, down from 588 million pounds last year and below analyst estimates of 647 million pounds.

11:28 PM  
Blogger jmf said...

Northern Rock: Credit, liquidity markets haven't recovered

Northern Rock: Cleary an impact on 07 profits, as well on 08

Northern Rock: Suspends sale of capital ineff. assets

Northern Rock to enter into repos with Bank of England

Northern Rock to borrow on secured basis from BoE

Northern Rock: 3-mo plus arrears in residential book 0.47%

Northern Rock collateral to be similar to euro-zone banks

Northern Rock: Consensus 07 underlying pretax GBP647 mln

Northern Rock sees 2007 underlying pretax GBP500-540 mln

11:30 PM  
Blogger jmf said...


Rock slide imminent as Northern issues statement


No longer is this a subprime problem, a US problem, an ABCP problem, or a SIV or conduit problem. What was once held up as the darling of the UK banking scene, praised for its innovative approach and aggressive lending growth, is now in real danger - hit because it had a much smaller deposit base than other lenders.

12:53 AM  
Blogger jmf said...


Northern Rock: “The world changed on August 9″


In a conference call early on Friday morning, UK mortgage lender Northern Rock confirmed that it had arranged a “substantial” liquidity backstop from the Bank of England.

After emergency talks last night with the BoE, the FSA and with the permission of the Chancellor, Alistair Darling, Northern Rock was extended a repo facility by the Bank of England.

“There is effectively no cap on the facility,” said Northern Rock CEO Adam Applegarth. “It’s clearly a substantial amount.” The facility will be limited only against the collateral which can be provided by Northern Rock’s expansive mortgage portfolio, which has a current market value of around £100bn.

Applegarth confirmed that the loan had been arranged at a penalty rate, but had not yet been drawn upon. “We haven’t used it yet. It’s just in case… actually we have substantial cash in the bank. We’re looking forward to see when it’s going to be needed.

“Nobody could claim they saw it coming” said Applegarth, explaining that there was an expectation in the market that the credit freeze would ease in September. When that didn’t happen, Northern Rock approached the Bank of England.

Northern Rock started to suffer in early August. “The world changed on August 9,” said Applegarth.
“This problem isn’t Northern Rock specific. It must be difficult for other banks too.”

1:11 AM  
Blogger jmf said...


Northern Rock: What the papers say


"Rock has lent freely. It has been the first port of call for buy-to-let mortgages, for mortgages at five times a borrower’s income, and for mortgages representing 125% of a home’s market value"

1:17 AM  
Blogger jmf said...

No kidding.....

Rock slide? Not in Merrill’s view

"The stock is trading at 1.1x 2008e tangible book value for an expected RoE of 18%. Moreover, unlike US mortgage players where there remain doubts as to the book value from mark to market hits from revaluation of the sub-prime portfolios, Northern Rock is a prime lender with negligible intangible assets. If we were to consider Northern Rock as a closed book in run-off with a half-life of three years on its mortgage book/asset portfolio, this would suggest a fair present value of 872p on the stock, a 27% premium to the current share price. Our Price Objective is 913p, based on a target multiple of 9x 2008E.
The risks to our Price Objective are a more prolonged credit market closure than expected, and a macro downturn in the UK which would lead to higher provisions."

The risks to the author of this call, John-Paul Crutchley, have yet to crystallise

This guy will be soon an ex-analyst or should go to Wall Street where such brilliant insight is more common.... :-)

1:34 AM  
Blogger jmf said...

Comments from before the storm.....

Everything is fine.....


Northern Rock / Interim Results June 2007 PDF

2:12 AM  
Blogger jmf said...

Nice Rant!


Buiter: Northern Rock bail out was wrong; the BoE is a ‘paper tiger’


Following the bail out of Northern Rock, I can only conclude that the Bank of England is a paper tiger. It talks the ‘no bail out’ talk, but it does not walk the talk. It does not matter whether the decision to bail out Northern Rock was initiated and/or actively supported by the Bank, or whether the Bank was bullied into it by the Treasury and the FSA…
We will all pay the price in the years to come, when the next wave of reckless lending washes over us. Let’s hope that the collateral requirements and penalty rate charged on the credit line will be tough enough to limit the damage.

2:28 AM  
Blogger jmf said...


BOE release


The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book

In its role as lender of last resort, the Bank of England stands ready to make available facilities in comparable circumstances, where institutions face short-term liquidity difficulties.

2. The Governor of the Bank of England, in his letter to the Treasury Committee on 12 September 2007 said:

“Central banks, in their traditional lender of last resort (LOLR) role, can lend “against good collateral at a penalty rate” to an individual bank facing temporary liquidity problems, but that is otherwise regarded as solvent. The rationale would be that the failure of such a bank would lead to serious economic damage, including to the customers of the bank. The moral hazard of an increase in risk-taking resulting from the provision of LOLR lending is reduced by making liquidity available only at a penalty rate. Such operations in this country are covered by the tripartite arrangements set out in the MOU between the Treasury, Financial Services Authority and the Bank of England. Because they are made to individual institutions, they are flexible with respect to type of collateral and term of the facility. LOLR operations remain in the armoury of all central banks.”

2:31 AM  
Anonymous Anonymous said...

http://companyinfo.northernrock.co.uk/investorRelations/results/stockEx070725.asp

The implementation of Basle II results in our Pillar I risk weighted assets at 30 June 2007 falling from around £33.9 billion under Basle I to £18.9 billion under Basle II, a reduction of some 44%. The risk weighting for our residential mortgages reduces to mid-teens %, treasury assets to around half of Basle I requirements, also around mid teens %, reflecting the low risk nature of these portfolios and personal unsecured loans to slightly below Basle I requirements.

Under Pillar II, the Group is required to hold capital to cover risks other than credit and operational risk and for risks not wholly captured under Pillar I. Overall, Pillar II capital is expected to amount to around 40% of our total capital requirements, including the effect of transitional adjustments that place a floor on capital requirements in the first three years of implementation. This floor is calculated as 8% of Basle I risk weighted assets less collective provisions, multiplied by 95% in 2007, 90% in 2008 and 80% in 2009.

We continue to treat securitised assets as “off balance sheet” for regulatory capital purposes, resulting in deductions from both Tier 1 and Tier 2 capital for the first loss piece retained by Northern Rock. Deductions are also equally made from Tier 1 and Tier 2 capital in respect of the excess of expected losses over provisions, whereas under Basle I Tier 2 capital benefited from the add back of collective provisions.

The introduction of Basle II, together with the planned disposal of capital inefficient assets and continued capital management such as the Whinstone programme results in an anticipated regulatory capital surplus over the next 3 to 4 years. This surplus will enable the reduction of previously planned subordinated debt issues and permit capital repatriation of up to £300 to £400 million over this period. Such repatriation will follow the release of capital as a result of asset disposals and will ensure that available capital is sufficient to support existing rating agency credit ratings and maintain an appropriate mix of Tier 1 and Tier 2 capital.

During the first half of 2007 we issued $650 million (£328 million equivalent) of Upper Tier 2 subordinated debt.





"Dividends

The introduction of Basle II, which requires less capital to support new lending, also enables a review of the Company's dividend policy. It is proposed that for 2007 and beyond, dividends will be maintained at a payout ratio of around 50%. The interim dividend therefore increases by 30.3% to 14.2p (2006 - 10.9p) payable on 26 October 2007 to shareholders on the register on 28 September 2007."

I just do not see how they can justify going to BOE nor how BOE can say yes, maybe thay cannot say no, to a company that had many sources a few mnths ago.

2:32 AM  
Blogger jmf said...

Moin Anon,

i will made a post on Basel II next week.

I recommend to read the rant from Buiter (comment 8).

I think he has got it right

2:39 AM  
Blogger jmf said...


UK banks avoid BoE and get emergency credit on the sly from Europe


Four Spanish banks, said Applegarth, had secured an emergency repo facility very similar to Northern Rock’s from the ECB two days ago.

2:57 AM  
Blogger jmf said...


CDS report: Are financials Rock solid?


Traders so far appear to be judging the bank far less harshly than their equity market brethren. While the stock tumbled more than 20 per cent in early trade, Norther Rock’s credit default swaps - which provide a kind of insurance against non-payment of debt - were about 30 basis points wider at about 152.5bp by mid-morning.

This means the cost of protecting €10m of the bank’s debt against default is now about €30,000 per year higher over five years at about €152,500.

First thing Friday morning the cost had been pushed as high as €210,000, although one trader said few trades were done at that level.


This is indeed surprising that the spreads are not spiking more.....

3:26 AM  
Anonymous Anonymous said...

Whoops!

http://companyinfo.northernrock.co.uk/treasury/

3:28 AM  
Blogger jmf said...

Thanks for the link

I have added the "Virtuous Circle"
to the post

LOL

3:46 AM  
Anonymous Anonymous said...

Check out the Tier 1 vs. Market Cap error on the Circle page.... it may yet come true!!! LOL

5:21 AM  
Anonymous Anonymous said...

Out of the Treasury side...

Treasury Activities
Multi currency transactions swapped into 3 core portfolios
Sterling
Dollar
Euros
Short dated Instruments:
Cash, CDs, CP and Repo
Programmes
$15bn USCP Programme
$7.5bn ECP/ECD Programme
€4bn French CP/CD Programme
CAD$2bn Canadian CP Programme
Medium Term Instruments:
US and Euro Medium Term Notes and FRNs
Programmes
$20 bn USMTN
$15 bn EMTN
Aus$5 bn MTN

http://companyinfo.northernrock.co.uk/treasury/treasuryActivities.asp

Coud some of the problems lie here??

5:55 AM  
Anonymous Anonymous said...

The Virtuous Circle doesn't have "Go see the BOE" on it anywhere...

LOL

6:00 AM  
Blogger Edgar said...

I hate to say I told you so, but I have been predicting bail outs for some time. We must protect ourselves from monetary expansion. They will not allow the banks to fail. The same people who run the banking system now will always run the banking system. I buy what I need as soon as the money hits my hands, I buy extra too. If there's one thing I know, it's that food and energy prices will be higher tomorrow.

6:16 AM  
Blogger jmf said...

Moin Edgar,

this is one of the main reson i´m so bullish on gold & gold stocks.

It doesn´t matter which fiat currency is better than the $.

They are better only a a relative basis.....

6:36 AM  
Blogger jmf said...


Lex & Pretzlik: Northern Rock deserved to wreck


If Northern Rock is not bust it is only because of the Bank of England and the government don’t want it to be. Call it what you like, but this bank ran out of money and can no longer fund all its liabilities, let alone finance its aggressive business model…..it has had to be rescued because its strategy made it more vulnerable to those events than others’.

AMEN!

7:08 AM  
Blogger jmf said...


Keith´s / Housing Panic BOE Rant

7:43 AM  
Blogger jmf said...

No kidding....


Welcome to Northern Rock Specialist Lending.


We can now offer you and your clients a full range of sub-prime mortgage products from Niche Prime to Unlimited – a wide choice designed specifically to meet all of your needs.

NEW! Sub-Prime product range launched offering a free mortgage valuation complimenting our existing range of products.

Amazing!

I think they might have to take this kind of offer down very soon....

7:52 AM  
Blogger Edgar said...

Hi jmf, I guess you have seen the pictures over at CR too. Have a nice day

8:01 AM  

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