Northern Rock - Legal Challenge

To make it a more apt analogy.

You borrow the 10GBP secured on the bet to make the bet. Prior to the bet being decided, the debt becomes repayable and you don't have the money to repay it. The best price you can get for your bet at the time is 8GBP. But because the government believes there is a public interest in you continuing trading it lends you the 10GBP. Still later, and still before the bet has come up the government decides that there's no prospect of you actually getting 10GBP for your bet and so takes over the bet. How much compensation should you get from the government?

Tim.

wrote

OK, that's because the house is in your name and the mortgage loan is also in your name. It is *you* who owes the mortgage lender... [...and you secured the loan on the house.]

wrote

Eh? Of course they can! They've been doing that whenever any of NR's shares have been traded (which you've shown yourself below)...

Of course, they *can* do that because it's the *company* who owes on the loans, *not* the shareholders themselves.

wrote

wrote

I think you're getting confused between the *company* and the *shareholders* again. I was talking about the shareholders.

But if the *company* " ... borrow[ed] the 10GBP secured on the bet to make the bet..." etc, then that's a totally different story!

Nor are they obliged to, and nor could the government reasonably expect that they should.

All you're saying is that the government had the power to block the sale. We already know that. So what? That doesn't mean the shares weren't worth anything. It simply means that the government used its force majeure to prevent the shareholders selling them. And it doesn't absolve the government from its duty to compensate shareholders for compulsory acquisition.

snip

What makes you think that? If NR had been liquidated, all its assets (principally mortgages) would have been sold to other banks and BSs, the cash thereby raised used to pay off its debts, and the residue divided among shareholders. AIUI its assets were far larger than its liabilities, so there would have been a substantial winding-up dividend, although naturally far less than the share price in its heyday.

Once again, though, the government couldn't allow this. A major retail bank going into liquidation! No, it had to be stopped: not to protect NR shareholders, but to protect the financial sector (and the government which had allowed all this in the first place). And now the government wants NR shareholders to carry the entire can.

And right there you have as succinct a summary as you'll ever see regarding the dynamics of a burst credit bubble and why it causes debt-deflation.

Expect further examples.

FoFP

BTW: I take it we're all finally on the same page as regards the credit bubble or housing bubble argument?

Since they were sold off at below their market value, it was an overall bad deal for tax payers.

M.

"Mark" wrote

Not if those taxpayers bought some of the shares! That's what they were aiming to encourage...

The bank does not have vast net assets. If it received anything less than about 95p/£ for its mortgage book, then shareholders would get nothing, and creditors would not be paid in full.

I don't have up to date figures, but at the time of the bank run, the mortgage book was yielding 6% and banks with the best credit rating, such as Lloyds were paying 6.9% for interbank loans. Based purely on income yields, and assuming that Northern Rock customers were as financially sound as Lloyds TSB, that would mean they would get 87p/£ for their mortgage book.

Jonathan Bryce posted

Sorry, you'll need to make your calculations a lot more explicit than that if you are to convince anyone.

The calculation is easy: (6%/6.9%) = (87p/£1)

To illustrate: Suppose the mortgage book contains £10bn worth of loans, generating 6% interest income per annum, i.e. £600m. But the bank has to pay back the short term loans it used to make those long-term mortgage loans, and the only way they can re-borrow the money is to pay 6.9% for it, i.e. they would make an ongoing loss of 0.9%pa. In order to break even, the most they could afford to borrow at 6.9% using the £600m pa is £8.7bn. So that is what the mortgage book is in effect worth.

If someone stole something off you and offered to sell it back to you for less than its market value would you buy it?

M.

Three people own an asset in equal shares. It's stolen from then and then offered back at half it's market value.

Only one of them can afford to buy it back - should they?

Even better, the incentive the government used to get the rich to partake of this immoral scheme was that the government would use the money they raised to disproportionately reduce taxes for the rich.

Tim.

But the Northern Rock share price multiplied by the number of shares in issue is nothing to do with the value of assets. The shares only reflect the value and future value of the profits from the assets they are managing, they are more day to day working capital and a top slicing bonus from managing the mortgage pool than something intrinsic such as the value of their mortgage customers property assets.

With a huge chunk of "secure" mortgages being off book in Granite the remaining mortgages carry higher risk, with less opportunity for top slicing and thus they depress the share price further.

As NR are now servicing a £100bn loan at the commercial rates charged by the BoE then shares value will be depressed, to zero or even beyond. Shareholders are IMHO lucky that NR aren't proposing a rights issue, as it is their shares are realistically worth three fifths of one quarter of bugger all, that they were worth much more a year ago is a sad reflection on the management of NR who got themselves in this s*it in the first place. It's absolutely bugger all to do with HM Government and their approach to the problem. Personally I would have let NR go to the wall months ago, that would have been less painful all round.

"Ronald Raygun" wrote

That calculation maybe easy, but it doesn't really mean anything...

"Ronald Raygun" wrote

You're assuming that the business continues as a going concern. In a liquidation, they'd be selling off the assets, not keeping them ongoing.

"Ronald Raygun" wrote

Don't be silly. The *current* value of the mortgage book (in a sale scenario) is clearly the sum of the outstanding mortgage loans, less an allowance for defaults.

"Mark" wrote

I think to keep the analogy equivalent, I would've had to own the item jointly with a group of other people, and the "thief" would have to distribute the proceeds of the sale back amongst us (in proportion to our original ownership).

"Mark" wrote

Of course I would! I'd even try to buy back more than I owned originally...

If we all just buy back our original shares, then we'll all receive the same money back as we pay out, and still own the same proportion of the asset. But if I buy more than my previous share, then I'll be buying the extra part at **below market price**. Good, eh? ;-)

You'd be willing to buy

Tim.

wrote

No, of course not...

wrote

... OK, we'll accept that...

wrote

But that face value isn't payable until maturity, on 07/06/2032 !!

An outstanding mortgage loan amount is payable *now*, if the lender calls it in.

Yes, that's a more accurate analogy but it doesn't alter the nature of the "crime" committed.

I wouldn't and I didn't. I would be an accessory to the crime to have done this.

But that didn't happen.

Not for the people that did not buy the "shares".

M.

"Mark" wrote

What "crime"?

"Mark" wrote

That was your choice.

"Mark" wrote

There wasn't any crime. The reason I added quotes around "thief" when I wrote it before, was because they weren't really a thief. To fully explain the analogy, it was the manager of the Company which us owners had put in place to manage the asset that we "owned". He was fully entitled to do as he did, as long as the proceeds fed back to us.

"Mark" wrote

Only because some people decided not to subscribe for the shares. That was their choice.

"Mark" wrote

That's their problem. They had the chance to buy the shares and decided not to.