FT: Northern Rock sells mortgages

Northern Rock sells mortgages

Financial Times Published: January 11 2008 09:35 | Last updated: January 11 2008 19:58

There are plenty of distractions around Northern Rock ­ a Monaco-based hedge fund invoking human rights laws to defend its position in the stricken lender, and Goldman Sachs¹ non-essential plan to securitise the government¹s £26bn rescue loan.

But the facts have not changed. Northern Rock¹s book of mortgages yields in the order of 6 per cent. No-one will lend the bank serious money at less than 6 per cent, or probably even close to it. As a result Northern Rock must use an expensive Bank of England facility, thought to cost about 7 per cent. Funded entirely at this rate, the bank would pay out more in interest than its assets bring in.

The entry of Richard Branson¹s bid vehicle did not change these facts; nor did the rival approach from Olivant, led by a veteran banking executive. Talk of rebranding and operational excellence is totally irrelevant if a bank cannot generate a positive net interest spread. Even the decline in interbank rates, with three-month Libor at 5.7 per cent, has not helped: it is unclear how much lending is being done at advertised rates, and anyway, why would any bank lend to the Rock at market prices?

The government has two options. Assuming it can bypass state aid rules, it could cut its loan rate towards 6 per cent to restore net interest margins. Shareholders would get an entirely free option on any drop in wholesale funding costs which might eventually allow equity value to recover. The alternative is nationalisation. To avoid litigation the state might have to pay a premium to shareholders, whose equity is worth just 0.3 per cent of assets. Distasteful and regrettable as that may be, it is also the grown-up choice. A few tens of millions are irrelevant in the context of a clean solution for a bank with over £100bn of assets ­ as the hedge funds know only too well.

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Reply to
Faubillaud
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Paying off the shareholders is not just distasteful - it is absolutely obscene. If shareholders do not have to carry risk then who does?

The only grown up solution is to recall the loan, forcing liquidation then offer a pound (a fiver if feeling generous) for the whole shooting match.

Neb

Reply to
Nebulous

That could well happen after the shareholders' meeting on Tuesday - if the shareholders decide to 'tough it out' and reject the commercial bids.

John

Reply to
John E

Why? If the existing mortgages are yielding 6% then just continue the existing loans and 'live off' the 6% yield. Just do not start any new loans. What has happened to the (probably now old-fashioned) idea of financing new loans from saver's deposits and the interest payments from existing loans?

Reply to
Graham Murray

Because NR have the loans matched with short term money which they have to refinance every one or two years. It was the approach of this refinancing date for a tranch of money, that caused the problem.

Because as a regional player it was too hard to grow the company this way. NR has a loan book about 50 times the size of its deposit base. There's no way it could fix this imbalance in a reasonable time frame. (Whether it should have been allowed to get this big, is another issue)

tim

Reply to
tim (not at home)

I would imagine that most prime (the ones that would be first to leave) variable rate mortgages are valued higher than the outstanding debt. So this would effectively lose value. Much better to sell such mortgages on to another bank.

Obviously. If this needs to be done there is something wrong with the law and regulations but we have to deal with the existing rules.

Yes it sounds good but I suspect it is slightly more complicated than that. Liquidation may have some particularly unpleasant contractual implications. So it might just be cheaper to pay the shareholders off.

If you feel unhappy about this take it up with Gordon Brown he has been in charge for the last 10 years. However we have to be careful about condemning people for a small set back, if we take risks we have to expect to lose occasionally.

But as its Gordon... Off with his head ;o)

Reply to
Nick

"Nebulous" wrote

I'd pay a tenner for it. Any advance on that?

Reply to
Tim

11
Reply to
Fergus O'Rourke

Well the two savings rates that jump out at me when I visit their website are 6.49% - for their Tracker Online and Silver Savings Online. How do you finance that from a loan book that yields 6%?

Reply to
Jonathan Bryce

So where would you get the 25 billion capital to keep it going?

Neb

Reply to
Nebulous

"Fergus O'Rourke" wrote

I thought so! - looks like Nebulous's offer of "a fiver if feeling generous", isn't really that generous after all...

Reply to
Tim

But they are far from alone in having this problem. I am currently looking at making investments for 6.7% and yet, at the same time, moneyfacts tells me the best normal mortgage I can expect to get (were I to want one) is

6.1%. Quite how this works, I don't know.

tim

Reply to
tim (not at home)

You don't - but it's losing money at half the rate of paying the B of E. 7%. It's just another example of how silly this whole affair has become. What was the phrase in every article in the early days of this?

Moral Hazard

Why has everyone lost sight of that?

Neb

Reply to
Nebulous

"Nebulous" wrote

If I told you that, you might nick my idea! ;-)

Seriously, it would have to be worth a "punt" at a tenner -- downside just ten quid, upside potentially much, much more (even if not that likely). But I reckon the odds oughtta beat a lottery ticket!

Reply to
Tim

The fiver from the B of E would take it as they are the only people who could afford to do anything with it. It would be the only viable going offer - otherwise the liquidator might as well break it up themselves.

That's the main problem with all the current offers, no-one can raise the

25 billion +

If you can maybe you should contact the current board!!

Neb

Reply to
Nebulous

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