The FSA, Insolvency, Shadow Directors, and how the Bank of England fucked up BIG style over Northern Rock - Tip to get to head of Queue on Monday

On Friday morning a Statement was issued by the Financial Services Authority and posted on their website Friday 15th September - note the date of issue ....

Liquidity support facility for Northern Rock Plc Tripartite Authorities Statement 14 September 2007
The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.

This was followed later in the day by a further statement as the queues built up during Friday

FSA statement on Northern Rock PLC and market conditions
14 September 2007

Commenting on the statement made by the tripartite authorities this morning in relation to Northern Rock, the chairman of the FSA, Callum McCarthy, said:

"The FSA's judgement on Northern Rock is that we believe it is solvent, meets all capital requirements and has a good quality loan book.

This was followed by (note date change)

FSA Statement: Northern Rock
15 September 2007

The FSA reiterates that it judges Northern Rock to be solvent and that savers can continue to deposit (!) and withdraw funds.

Callum McCarthy, chairman of the FSA, said:

"To be absolutely clear, if we believed that Northern Rock was not solvent, we would not have allowed it to remain open for business.

The FSA could NOT close the company's business , the most it could do is to suspend the share quote until the companies affairs were put in order pending a re-quote or sale to third party(ies).

There are two tests of solvency ;

1. Inability to pay debts as they become due.
2. Insufficient assets to cover liabilities.

Northern Rock borrows money wholesale and lends it to people to buy houses. Due to the interbank rate (LIBOR) now exceeding Base Rate by over 1 % their sums don't add up. Loans are due for repayment and cannot be replaced = without recuorse to the BOE. Can they pay their debts as they become due ? - NO . Then they are insolvent.

In UK law, the people who decide that a company is solvent / insolvent are the Directors. When they judge themselves insolvent they are obliged by Company Law, to undertake certain legally prescribed steps, which effectively places control of the company out of their hands - into those of receivers, administrators.

If the BOE hadn't stumped up, the Directors would have had to file for Administrators to be called in. Period.

If the BOE hadn't stumped up, the Directors could not continue in business as they had lost their ability (and confidence of lenders) to raise capital to continue to fund their loans. Period.

That is the simple, clear, transparent unvarnished TRUTH.

It is not the duty of the FSA to determine solvency / insolvency, they do not have the time, staff, expertise, legal / statutory responsibity. Their only source of information is the Directors the Company.

Furthermore that was then , this is now. Withdrawals , by person , post or by the badly functioning website will have reduced their asset base - with little prospect that the situtation will only worsen as time passes.

Regardless of the funds provided by the BOE which simply increases their liabilities - and it is likely (the terms of their funds have not been published) are payable on demand and have no term agreed.

Furthermore it is inscreasngly evidence that these funds held by NR ...

"As announced on 20 August 2007, Northern Rock only has a £75 million direct exposure to the US sub-prime market which is all rated AAA, and a £200 million
exposure to the US CDO market, within which there is indirect exposure to US sub-prime.

We also have £325 million of investments in a number of Structured Investment Vehicles (SIVs)of which £305 million is bank sponsored. Included in the £200 million of CDOs referred to above is a modest exposure of £22 million of SIV "Lites

... are a Northern CRrock of shite and at best can be priced at 10 cents on the, dollar wiping out any profits for this Financial Year.

There is evidently little room for cutting capital / labour costs as they have to simply manage 20% of the mortgages in the UK and operate on the narrowest of margins at the best of times.

The Sunday blats claim that major banks have turned up their noses at a take over, they can simply pick up any business as it falls.

The FSA have 4 Statutory objectives two of which are ;

1 . Market confidence: maintaining confidence in the financial system; public awareness: promoting public understanding of the financial system;
2. Consumer protection: securing the appropriate degree of protection for consumers;

It is evident that the FSA have made claims which are patently dishonest - they have claimed Northern Rock is solvent (although these statement have become less emphatic and more convoluted "if we believed that Northern Rock was not solvent, we would not have allowed it to remain open for business. " .. presumably as they now realise their folly of overstatement.).

It is not their job to either determine insolvency or to give comfort to Directors, or to make public statements to that effect.

It is significant that the Board have not made a public statement that they are trading whilst solvent / insolvent.

Even Angela Knight, chief executive of the British Bankers' Association trod carefully and chose her words well (and advisedly) ..."This isn't about solvency, this is about a short-term problem that the Northern Rock has in getting liquidity _ that is, getting some cash from the normal interbank lending market."

The Tri-partite Authority couldn't have fucked this up more royally - Tommorrow the queues will be bigger, the dumb ox of a CEO, Adam Applegarth will vaguely blame those damn yanqis and claim "Business as normal" and Westminster's headless chickens with no or little understanding (or experience - except Vince Cable of the Lib Dems who talks 100% common sense) of banking or business will alternately wring their hands and cry Woe! Woe ! Sharp mortgage holders will take a holiday for payments, safe that they can withold payments whilst the ordure hits the airconditioning and pay up as and when requested - icreasing liquidity problems.

There is a very good case for claiming that the FSA have acted as Shadow Directors and falsely made statements - knowing them to be false, that have encouraged or instructed the Directors to continue trading whilst insolvent. Director's responsibility is to the company and not to the shareholders. Directors have an obligation to act in the company's best interests.

By acting as they did the FSA have acted against the interests of the company. If the company had filed for Administration as required under the Companies Act the disposal of assets would have been orderly and at a cost that truly reflected the value of those assets.

Their action - even if it was sanctioned / approved / made jointly by the MOU , the BOE , The Treasury , the Chancellor of the Exchequer and Prime Minister was illegal.

Nowthe BOE have to find a buyer, the big banks have turned up their noses , the truffle hounds from the vulture funds will be sniffing the air - the same people who have gobbled up the closed pension funds. The FSA can explain how this result squares with their objective of ..."Market confidence: maintaining confidence in the financial system".

How to get to the head of the queue in the morning.

Dress like the lady in the picture. Service will be guaranteed