If I were Gordon Brown.

Chat and items of interest about Crete and Greece.
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Postby Muttly » Sat Sep 15, 2007 12:55 pm

Not really Kilkis, the lack of lending in the interbank system is a direct result of the sub-prime lending situation created in the US.

The Northern Rock model, which has been discussed exahusively here in UK, depends wholly (i.e. for 75% of funds) on the availability of interbank lending and funds thereby to do their business.

Since 9th August 2007 that facility has gone. So ergo for Northern Rock the business model has failed and they have not been able to continue their business in a normal fashion without B of E intervention as in the Barclays case but Barclays being a larger concern could spread and absorb it's ills far better than Northern Rock who's dramatic expansion has been a result of it's one horse business model and virtual one horse market of mortgages..

Since yesterday £1 Billion has been drawn out and the bank is remaining open today. However media coverage seems now to be producing a panic and long queues are building up outside every branch today. Usually closing at 12pm they look as if they will be open until late tonight as they were last night.

As you say the sub-prime problem is the rot in the system now as no one knows where it will appear next having been packaged in rather exotic financial vehicles. Indeed the first bank to feel this was Parisian and they had to be bailed out.

So far from being misleading I am correct in saying that the demise of Northern Rock is a direct failure of the business model which has arisen as a result of American banking practices. Nobody expects Northern Rock to survive and just about everyone agrees that a White Knight will have to be cobbled together to save what is left of them and try to restore some confidence in the system.

The rest of the banks and mortgage lenders find their shares drifting south as is the stock market generally and the £. The sad bit is now having been launched into two useless and costly wars with the US under the most dubious of circumstances and evidence we now find we are propping up the US war efforts and economy with our economy.

It seems the "special relationship" is special in so far as the US gets the benefits and we get the bill. I personally for all their ills wish we could draw away from the US models of life in general and become a little closer to our European partners. It seems that our mobility to live in Europe has been facilitated by the EEC Treaty and with more effort on our part we could be even bigger partners.

I don't think that the ease that we move through the EEC can be quite matched or reciprocated by the US, particularly if you are of one or two ethnic origins. I am afraid I'd rather live in an "Old Europe" as Donny Rumsfeld put it rather than a "New World". I cannot help thinking that if Europe spoke English as a first language or we spoke French or German as ours, our intoxication with the US might be a shade less habit forming.

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Postby Phaedra » Sat Sep 15, 2007 1:06 pm

Muttly, I thought you didn't have access to internet from yesterday? Have I missed something or have you forestalled your move into the 13th century?

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Postby Muttly » Sat Sep 15, 2007 1:18 pm

No its still on but we've had to move over three days. Friday, Saturday and Sunday. Where we are going has milk cows, beef cows and sheep. Of course what has hit us........Foot & Mouth (no not me the country). We also have the same here and there is bio-security in place so my last exit to the Dark Ages will be tommorow.

Just at this moment I'm sitting in the garden with two bemused dogs having been kicked out of the house. Apparently the bath chair and I am getting in the way of the move.

Tommorrow Mrs Muttly has two blonde and tanned surfers with a big van from work to shift the final bits. At least that is what she said there coming for..........I'm supposed to twiddle me parts in the garden again.

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Postby Kilkis » Sat Sep 15, 2007 1:46 pm

We seem to have a different understanding of words, Muttly.

If Northern Rock had bought packaged loans with a view to benefiting from their relatively high interest rates and had suffered losses because those packages included defaulted sub-prime lending from the US then I would describe this as a DIRECT consequence of the sub-prime problem.

If Northern Rock can no longer borrow money on the International money markets, as they have been doing successfully for years, because those markets are afraid of the possible consequences of the sub-prime problem then I consider that an INDIRECT effect.

It is perhaps also worth noting that Northern Rock's failure to raise funds either on the International money markets or from other UK banks is not a reflection of their own solvency. If it were the BoE would not have given them an UNLIMITED credit facility. It is purely because the markets are not functioning normally.


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Postby Muttly » Sat Sep 15, 2007 2:15 pm

No really Kilkis, your splitting hairs here. For over a year or more now the US sub-prime problem has been telegraphed. The markets were expecting it and the interbank lending rates were on the rise.

Everyone knew the packages containing the sub-prime problems were out there and that so being liquidity was drying up. Everyone knew why banks were holding onto their funds and why.

Interviews with the chief executive has made that plain. However Northern Rock could not or would not alter where it's main funds were coming from. So with everyone knowing that the sub-prime would hit at some point and the interbank rates going up with a credit crunch finally ending with a complete stall on the 9th August the Northern Rock found itself in the difficulties as a direct result of its business model which was flawed and vunerable to a threat it was fully aware of as everyone was.

When the tide is coming in your a bit of a twit if you stand there hoping it's going to turn before it drowns you. Common sense tells you to back away a bit. So why did not Northern Rock. In banking all risks are assessed not just selective ones. In addition since the practice in modern banking is to lend funds at a cheap rate between banks we can now say the system is not working without the help and intervention of Central Banks. So much for capitalism (I'm no socialist by the way) when it behaves like socialism or worse.

As for the unlimited credit I would remind you of a Merchant Bank called Johnston Matthey and a thing called the old boys act! Besides it is clear that there is political interference in this affair. So much for Bank of England independance as the Treasury signed off on this, admitted by Alistair Darling.

Not only that but both the Treasury and the B of E are somewhat afraid of the effects of Northern Rock going to the wall. If the Northern Rock business model is so wonderful let us see if they survive or it remains the same.

The UK economy would suffer greatly if the housing market becomes unhinged, which I think it will and house prices crash, it may not be as drastic as the 80's and we can call it a readjustment. If the paper value of the UK housing market were to fall by 25% we'd be in serious trouble and back into the 80's.

To illistrate the stupidity of some of these valuations in the late 80's the Emperors Palace in Japan was valued at more than the whole of Greenland. When the 80's crunch came we know what happened to the Japanese economy much of which was admittedly involved with corruption, however it was the banks involved in that as well.

Sadly I don't think we've seen the last failure directly allied to mortgages and we don't know how many commercial companies are involved with hidden sub-prime packages.

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Postby filippos » Sun Sep 16, 2007 8:08 am

There's an article in the S. Telegraph by one of their City people on this subject headed,

"Why Northern Rock was doomed to fail"


It seems there have been concerns about the company for months.

The last two paragraphs read,

"While Applegarth [CEO] is still reluctant to admit that he made a mistake, he acknowledges that his model is broken.

"What is absolutely sure is that the environment post August means that things will have to change," he says. "From Northern Rock you will see a very different company, a company that is noticeably lower growth, but with different funding sources. You will see less emphasis on shorter-term wholesale markets, and greater emphasis on longer term wholesale funding and retail cash deposits. The model will have to change because the world has changed."


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Postby Kilkis » Sun Sep 16, 2007 10:49 am

Please don't misunderstand my earlier posts. I was not seeking to defend Northern Rock's business model in any way. I just felt Muttly's original post gave the impression that Northern Rock was in trouble because they were exposed to bad debt from the sub-prime problem. They are not. They had a business model that was particularly vulnerable to the structural changes being triggered by the sub-prime problem. Other banks are also vulnerable to these structural changes. Probably not as vulnerable but still vulnerable.

I also think Muttly's comment regarding the length of time the problem has been known about is somewhat exagerated. This is a quote from a CNN news item in March 2007, http://www.cnn.com/2007/US/03/29/subpri ... index.html , "The recent wave of defaults in the subprime mortgage sector that sent shocks through Wall Street has caught the attention of Congress." If Wall St and Congress were shocked in March 2007 then I don't think it can have been that widely predicted before that.


The Adjectival LFB
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Postby The Adjectival LFB » Sun Sep 16, 2007 10:02 pm

Lowell, Frank and Townes - all gone now.

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Postby Kilkis » Sun Sep 16, 2007 10:57 pm

Quote from the article "Britain's house price growth will be halved next year as the global financial crisis exacerbates the impact of rising mortgage rates, according to Nationwide, the biggest mortgage lender."

One Northern Rock analyst is predicting a 30 to 40 % fall in house prices in the medium term, whatever that means as a correction to the recent 200% growth.

Quote from the article "With base interest rates at a six-year high of 5.75 per cent, economists said that the feelgood factor was already evaporating and that the Northern Rock crisis could deal a fresh blow to confidence"

Historically 5.75 % is still remarkably low. I had three consecutive mortgages on different houses from 1971 to 1999 and the mortgage rate was never that low and at one time was as high as 15 %. One possibility from the current structural changes is that the Bank of England will loose control over lending rates. They can set the base rate at whatever they want but if the markets ignore it the markets will prevail. They are more powerful than any government or institution. Norman Lamont found that out in 1992.


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