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.