Selling Northern Rock
Posted on September 17, 2007 by Richard Beddard
Filed Under Companies, Markets |
Scott Moeller, ceo of executive education at Cass Business School and author of a book on mergers and acquisitions, thinks Northern Rock will attract a buyer:
Just because a bank is tainted doesn’t mean that there is no value…
…he says, although investors might not take comfort from the examples he sites. Bankers Trust sold for $10.1bn, and Barings £1…
…both those deals turned out to have been strategically critical to the current competitive positioning of the two acquirers.
Alphaville doubts Northern Rock can make much difference to a major high street bank, and imagines a more creative solution: a buyout from a group of investors with experiencing in turning around lame financial institutions.
The BBC’s Robert Peston declared the bank unsaleable yesterday, but has since back-tracked slightly. The sticking point in any deal, he says, is that although the Bank of England will transfer its emergency lending facility to a new owner there’s no guarantee it will extend it, when it expires. Mr Peston doesn’t know when that will be.
Other (NRK) views
The Knackered Hack says NRK is the victim of unlikely events. It’s failure to foresee they might happen though, is hardly a defense because unlikely events are, in fact much more common than we think. Everybody in finance, he says, should expect the unexpected.
Alphaville says Northern Rock’s update on 20 August, when it reassured investors that it had minimal exposure to the US subprime meltdown, was “utterly misleading“, because it didn’t go any further. The FT’s blog would have preferred a more genuine communication:
While we have minimal direct exposure to US subprime, contamination of the wider credit market has exposed a deep structural flaw in our business model. A buyer is being sought for the bank with some haste. Merrill Lynch is on the case.
Broadstuff, a technology consultancy, says it’s a big IT story too because internet customers were unable to access their accounts.
“Our own“, Dr Keith Anderson, lecturer in finance at Durham University sent this by email:
I hope you are being entertained as I am by the current turbulence around Northern Rock. I went up to photograph the queue outside their branch in Durham yesterday. It is the first physical sign that as a Doctor of Finance I might be able to afford to buy a modest house in Durham in a couple of years’ time, once house prices have dropped by 30%… It was reported that £1bn had been withdrawn on Friday, amounting to 4% of Northern Rock’s deposits. The amazing thing to me is that 96% of people DIDN’T withdraw their money on Friday. If I had had any savings with them, I would have been in the queue at 9.00 on Friday morning. Figures in authority say that there is nothing to be afraid of, but Northern Rock is in this situation precisely because the other banks refused to lend it money. If the other banks won’t touch them, why should private savers feel safe about keeping their money there?
Alphaville has a guide to the ‘crunch week’ ahead, in which $49b of commercial paper matures, the US treasury secretary meets Gordon Brown and Alistair Darling, Lehman Brothers opens the third quarter reporting season for US banks, the US Federal Reserve makes its interest rate decision, the Bank of England releases its Monetary Policy Committee minutes, subprime is under scrutiny in the US, and Mervyn King and Ben Bernanke testify in front of committees. Crunch week finishes on Friday when, says the, FT it’s:
Time to see where the bodies were buried.
Oh and on Friday night, the FTSE 100 closed down, but a shade above it’s level at the beginning of the year. Remarkable.
Comments
32 Responses to “Selling Northern Rock”
I was interested in Dr. Keith Anderson’s comment that 96% of depositers were not lined up to withdraw their money from NRK. Logistically that would seem impossible and as 10 billion pounds is in postal accounts, they would not be queueing anyway. If 1 billion pounds represents 4% then the postal percentage od depositees must be approimately 40% so only 56% failed to queue for their money with a large percentage of those being unable to get to a branch through possible work commitments, infirmity, or transport problems.
The Bank of England and the Chancellor have both said that deposits with NR are safe, as the Bank stands as lender of last resort. Perhaps if one or, preferably, both of them stated they guarentee 100% of savers’ investment with NR, that would stop he run. At present th guarentee is 100% for the first £3000 and 90%for the next £33000. After that you’re on your own. Perhaps this is why investors are nervous. Theyshould make explicit the limits of the guarentee they have given. At present it is open to interpretation.
Northern Rock has a good loan book and has not been involved in high risk lending, if people think that a deposit with them is not worth the risk, with the guarantee that their money is safe, then those withdrawing money in their droves must think that the money issued by the Bank of England is worthless, as this is in the form of promissory notes. The problem is that credit has been too readily available and people have been borrowing and spending money as though there was no tomorrow, hence the personal debt is now about £1.3 billion, this has bank rolled Gordon Brown’s booming economy, payback time has arrived.
The FSA will cover upto the first £35000 anyway so if you have more than this and are worried then move it?
The momentum seems to be building for a quick answer to the question of whether Northern Rock will remain independent.
The buyer need not be a strategic investor (such as a foreign bank looking to enter the UK market), and in fact may at this point more likely be a hedge fund or private equity investor that purchases Northern Rock to strip out the attractive assets (which we must assume includes their mortgage portfolio) and liquidate the unattractive assets — plus take out unnecessary expenses (which would include senior management and, unfortunately, many other employees who didn’t have anything to do with the bank’s current problems). Those remaining ‘attractive assets’ would then later be sold to another bank, either UK or foreign.
nothing said yet about small investors who happen to have Northern Rock shares as their only savings. Should they (we!) not be helped out as the govt is now doing for those with savings accounts?
Any thoughts on other building societies and banks, e.g. Yorkshire?
Hi Richard, this story is possibly even more fascinating than the Mccanns.
I have had an online silver saver a/c with NRK for maybe a year or more. It had the best rate of interest at the time but is really a “mickey mouse” website in terms of its funcionality, or ease of use meaning you have to go through 3 screens to get into your account and depending on what info you want there are various other screens and procedures to use that have frustrated me since day one and if it had been my main a/c for regular use I would have left ages ago.
However last week I decided I would move it after reviewing the current crop of high rate accounts in the market but did not get round to it when around 1100 thursday evening my wife alerted me to the article on the news concerning NRK and the mess they were in, so I immediately went online and closed it and the funds were deposited in my current a/c with my main bank overnight last night, barely 2.5 days when it is usually 3 to 4 days.
Maybe I was lucky but it worked for me and would I have done it if I wasn’t going to do so anyway? Don’t know but if I had been tempted then I’m sure I would have been mad as hell if I could not access my funds as people are reporting now.
Cheers
ian
Surely any buyer will only want to buy certain assets ie from an administrator.
Who wants a heap of liabilities and dissatisfied customers?
That’s what you get when you sell telephone and internet banking and turn the phones and server off.
my monies on KPMG
Vivien, you are asking for this to happen if you life savings are invested in one company. There is a thing called diversification!
Ref. the government bailing out the small shareholders in Northern Rock. Unfortunately an investment in ordinary shares is speculative and in the event of a company being wound up the rights of the ordinary shareholders come why down the list as to those who should receive the remaining assets. There is basically nothing wrong with Northern Rock, it has been a victim of events beyond its control, the property market bubble burst in the USA, followed the Sub Prime loan problem. The property market in this country has been overheated for sometime and a correction has been long overdue, hopefully when everything settles down Northern Rock will still be in existence. It is never advisable to have all your money invested in ordinary shares in one company.
Yes the BOA has said they will cover any savings but for how long and also how long would they take to pay up if it came to it. What would happen if other banks went the same way, would the BOE continue with their guarantee. still to risky I think. I was always told you must have everything in writting, would I get a letter giving me a personal guarantee from the BOE, I think not.
The FT today suggests that this protection on current accounts might be a permanent thing. I do not know if that is a good or bad thing. This would basically eliminate one of the fundamental risks that all savers should be aware of (i.e. nothing is guaranteed, not even cash in the bank).
Anyway I bought a few Northern Rock shares today. I figured that with the big price drop on Monday, plus the BOE guarantee, plus the anticipated 0.25% Fed rate cut then it was a fairly low risk.
Now we have got a 0.5% rate cut then everything will go up tomorrow
Bloody Hurrah.
What about shares is it worthwhile buying a couple of thousand pounds worth??
Good luck with it Robin. STEPH - I’ve expressed my doubts here: http://blog.iii.co.uk/?p=240 - mostly reflecting my own (in)tolerance of risk.
I have just read the message from Mr. Applegarth thanking both customers and staff during this difficult time. Why should those people who, through panic, withdraw their money have any penalty refunded if they return to the fold? Surely those supported Northern Rock by keeping their savings where they were are the ones who should be receiving Mr. Applegarth’s thanks.
[...] Fore more buy-out speculation, see Selling Northern Rock. [...]
To STEPH. I think the answer would have to be … No!
With hindsight I agree with Richard. There are too many unknowns
Anyway I am keeping mine until the bitter end (which may not be too long)
Let those that have jumped ship, saved themselves, beat the system smirk happily into their sherry or whiskey glasses and rest fully content, of course.
But please, please, remember when letting this prestige, solvent (and up to now profitable) NE Company go to the dogs that there are innocent human beings involved - about 6,500 of them - ordinary young people working for the Company - who now face being out of work whilst the cherry-pickers and piranas move in and strip the assets bare.
Spare a thought also, please, for those many many call-centre staff who also did what the Government & society seemed to suggest was an appropriate way to act - ie save and make provisions for their futures - by putting aside over many years parts of their meagre (this is the North East) salaries into Approved Sharesave Schemes investing in their own Company…
These are not ’speculators’ ready for burning on some ‘moral ground stake’.
How could they possibly know what was happening in the USA; and that their meagre (but very important )savings in a Top 100 company (an English Bank for heaven’s sake - how much safer could you act?) are now to be virtually worthless.
This after they were assured by the Company Directors (some earning £1.3m pa, plus perks) that all was going well.
These helpless humans are ruined, will still have Mortgages to pay back - to whoever takes over the book - and have been kicked in the teeth by the system with no protection or support.
Thank you media - especially SKY - for hysterically hastening their demise. Ordinary people in the UK.
The region (and its charities and needy causes) will be devastated along with the Company.
Enjoy your sherries, people. May your profits keep you warm at night.
Kingston will forever be remembered.
Mrs Thatcher will no doubt have been proud of you all.
Dennis,
After reading through the various comments, I came to yours (last) and completely agree with your sentiments, particularly with regard to the media. One wonders how many of the many banks and BSs would have the same solvency problems if a similar run happened. How many would the BoE actually be capable of propping up? Could Barclays or HBOS find enough to support even half their savers withdrawing their funds? A worrying thought? I’d rather not think about it!
Good luck and God bless all the staff at NRK - I believe that you will all weather this storm.
I’m inclined to think that although NK’s modus operandi in respect of loans from funds other than their savers is slightly unhealthy, there is still a basically good company here.Hysteria, as in the South Sea Bubble, tulips etc etc has unjustifiably played its part in bringing this co to near collapse.Think I’ll invest a few quid in it - remember Warren Buffet: “buy when people are selling etc etc…..”
I agree we all want to make money but when the going gets a bit trickey some of us pull out shame on you when you have taken the good with NR if you lot had not panic NR would have done what was needed no bank wants this unfair bad press
Dr Keith Andersen’s article seems to indicate that even a doctor of finance could turn out to be a quack
To agree whole-heartedly with Bryan Collins, it is perhaps symptomatic of ‘academics’ that a local University lecturer (’our very own’ a Doctor of Finance no less) such as Keith Anderson is able to be and express his ability to be ‘entertained by the turbulence’ (to use his words) surrounding this national and particularly regional complete disaster.
How very very entertaining that as 6,500 local ordinary decent people may lose their life savings and their jobs, an academic of a local University, only a few miles away and said to be bent on working with local business on local initiatives, rejoices in the event, and the prospect for yet another exciting MBA case study.
Presumably he is not from the North East.
If he is indeed from this planet.
On Monday I mailed the Vice Chancellor at Durham to ascertain whether he actually condones the line taken; will keep you posted as to any response.
Sadly
Dennis
Cramlington
I think that you can read Dr. Anderson’s comments in one of two ways. One is a cold and heartless academic viewpoint on the Northern Rock situation or another is a comment on the fact that no one trusts the government to safeguard their savings, or to save a household company name, or to make good quality housing affordable to everyone.
Also remember that this comment was made on Friday the 14th which was well before the full extent of the damage was known in general. No one assumed that Northern Rock was in such a precarious position on Friday, or even Monday, that it would actually be allowed to fail, with the possibility of all the employees losing their jobs. It was assumed to be a good buy out target until at least Tuesday, by all accounts.
Sadly we now know that, even with 113 billion pounds of assets, they are collectively virtually worthless to any potential buyer. No one knew this until recently.
Whatever way you read Dr Anderson’s words and regardless of how accurate he may be, the comments remain tactless and misguided in my view.
Surely the real worthwhile opportunity here is for learned ‘expert’ local people such as Dr Anderson to rally around the cause and set themselves the task of helping to find the best solution to the very bad situation - for both the public good and future understanding & teaching - not rejoice in the entertainment value of the obvious suffering of others.
Dennis
Further to earlier post re Dr Anderson…
I have now had a reply from Chris Higgins (Vice- Chancellor at Durham Uni) and paste the substance below:-
I had not seen Dr. Anderson’s comments and they are entirely inappropriate and, in fact, silly. They certainly do not reflect the University’s views.
I am a strong supporter of the Northern Rock and while I have never had an account there before, I opened one today. I have personally shown strong support for the Northern Rock and, indeed, its Chief Executive is a Durham Alumnus.
I very much hope that Northern Rock recovers.
I reiterate, Mr. Anderson’s views are not of myself or the University and he does not hold a senior position within the University. It is purely his own personal view.
Well done Mr Higgins
Some sense of fair play and even-handedness exists in the world after all.
Has there been any other comment on this issue since the one posted by Dennis, Cramlington Northumberland on October 1st, 2007 2:43 pm?
I guess no one really knows what will happen. Any trading in the shares would be pure speculation.
I guess one option is that it is broken up into parts. The shares become worthless. The offices are all closed. The tax payer pays back the 20 billion that was borrowed from the BOE. The organisations that are expecting to be paid the other 10 to 15 billion coming due will be disappointed.
Another option is that global interest rates eventually become low enough to make the assets more attractive. It depends how long the bank can hold out at the tax payer’s expense. All eyes on the US I guess.
I do not really understand how it works to be honest. A more informed comment would be interesting though.
Any other thoughts anyone?
I found a more informed answer myself
http://www.wsws.org/articles/2007/oct2007/rock-o24.shtml
What a mess. I can just imagine the BOE ending up owning all the 113 billion pounds of assets (basically UK mortgages)
Half of me is telling me to sell my 500 ordinary shares, which I bought many years ago. But then I am thinking… they have gone down so low now that I might as well keep them! Any opinions?
Hey,
I’ve been reading about the gaps in the FSA and BOE, and how some mistakes happened in the regulatory system that further contributed to the fall down of the NRB. However, I was trying to see what are the regulations applicable to NRB such as the BASEL II requirements and the captal adequacy regulations, but I haven’t been able to find some specific accurate info… Could anyone explain??!!