Was Northern Rock threatened by insolvency?
Posted on September 14, 2007 by Richard Beddard
Filed Under Companies, Markets |
I think the answer lies in today’s trading update:
While Northern Rock has continued to raise new funds, these have been mainly in the short term wholesale debt markets and the amounts raised have not allowed Northern Rock to refinance maturing liabilities as well as to write new business at previous levels.
Assuming it could meet it’s liabilities from its cash and reserves it looks as though, without funding from the Bank of England, Northern Rock would have been forced to drastically cut back it’s lending. Even with the credit secured it’s going to have to cut its cloth to fit the Bank’s penal rates. If you think of it that way, today’s falls reflect diminished expectations of profit and not fears of insolvency. Professor Willem Buiter’s not convinced:
…it is by no means obvious that Northern Rock (total assets £113 bn as of 30 June 2007) suffered just from illiquidity rather than from the threat of insolvency. The organisation has followed an extremely aggressive and high-risk strategy of expansion and increasing market share, funding itself in the expensive wholesale markets for 75% of its total funding needs, and making mortgage loans at low and ultra-competitive effective rates of interest. No matter how efficient you are, or how safe your assets are, if the effective interest rate on your borrowing exceeds that on your investments, you are unlikely to be a long-term viable proposition, no matter how impressive the growth of your turnover. Northern Rock’s share price had been in steep decline since February of this year, well before the financial market turmoil hit.
Maybe I’m being naive. It’s my first banking crisis. But if Northern Rock isn’t going to the wall. What’s the Bank of England doing bailing it out? It’s supposed to be a last resort.
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2 Responses to “Was Northern Rock threatened by insolvency?”
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Sir
Every day of the week trading companies and businesses find themselves in the same position.
Unfortunately, when they turn to their lenders of last resort… it’s never judged a liquidity problem, it’s always considered as insolvency.
And in which case they are forced into administration or liquidation.
Why should Northern Rock be any different?
This smacks of a cover-up… How many other banks are in the same position?
Doubtless, if one went to the wall others would follow! And before you know where we are there would be a major run on all of the banks.
Is this why the Chancellor stepped-in and instructed BOE to bail out Northern Rock.
If so, it stinks. A trading company would have gone to the wall and its directors would have been reported on to the DTI.
One rule for banks and another for business…
what a wonderful world we live in.
I just posted the following on another site - you may see the steam rising from the page! The thread there was “Do I but N Rock” - but the commesnts are just as applicable to this thread. I wait with interest to see whether the execs bonuses are recalled - they should be the “profit” figures they were based on are like to be inaccurate!!!
It might be - but I wouldn’t if I were you. I sadly have experience of this type of mess - probably before you were born in the early 70’s. Not generally known that Nat West were bust for half a day before the Bank of England launched the so called life-boat - guaranteeing certain banks. The net upshot - anyone not on the list was absolutely “screwed” (whio would put money in a bank not on the list?) - and the people who caused the mess were bailed out. This might not quite happen the same here but I wouldn’t guarantee it and everyone should steer well clear of any financial companies outside the very very largest (they will not be allowed to fail). Some good properly run companies will go to the wall because of the mismanagement of others.
PS : Do you here the “spokesperson” and the Chancellor and the FSA sayig it is sound and not insolvent - they should read their own Act. If you cannot meet your liabilities as they fall due yo ARE insolvent - so definied in the act.
PPS: What happened to the clowns running Nat West all those years ago? Did they suffer for the mayhem they wreaked on others? Not quite - No 1 clown mr (now Sir) de Pemberton became Governor of the Bank of England quite shortly thereafter! Hey ho, twas ever thus