Northern Rock - the rewards of reckless lending

UPDATE 1900 hrs The Northern Rock and Alliance & Leics. websites for customers have been down since late last night so customers cannot log onto their accounts.

Listening / watching the media response to the BOE decision to fund Northern Rock we repeat ;

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 now exceeding Base Rate by over 1 % their sums don't add up. Loans are due for repayment and cannot be replaced. 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.

The Money jugglers of the City have shrewdly put (switched) the onus for judging insolvency upon the FSA - who are hopelessly ill -equipped to make such judgements - and of course rely totally upon the information the Directors provide them with.

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.

On Tuesday Governor King was waffling on about "penal rates" and days later lends these reckless Directors at below LIBOR.

Yesterday Darling was waffling on about "old Fashioned Banking" and then accedes to propping up this train wreck.

Why ?

Because the wonderful , sparkling, carefully crafted City mountain of debt, the product of 10 years of Gordy's alleged Prudence, is crashing out of control, the Bank of England is out of control.

Take note that the latest tranche of £4.4 billion relief fund issued by the BOE on Tuesday was drained by the major banks in minutes -
Abbey and Halifax have increased Tracker mortgage rates by 0.1% - 0.2 %... and there is more to come.

Take note, this didn't happen over night, the warning signs have been there for years. Trade deficits have built up, Fiscal deficits have built up and been concealed / camouflaged by PFI / PPP etc., Revenue have declined by theft, loss of North Sea oil and gas and sheer incompetence.

UPDATE 1600 Hrs

So you ask ,how come they say they are on track to make a profit - well look back to the statement last night from the Directors of NR remember - Profit calculation " excludes any provisions that may have to be taken through the profit and loss account in respect of today's crisis".;

"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

Now that is a total £555 Mn of assets they call " a direct exposure of £75Mn" - Note well they don't say they are worth £75 Mn. They are in fact worthless - and maybe that £555 Mn. worth of assets is worth at best 10 cents on the dollar so your £500 Mn. profits evaporates as a £500 Mn hole opens up in the balance sheet.

As is the share price now below the Float price of £4.52 in Oct 1997)

Egg on Face time ...
10th August 2007 note to Investors..."Investors in the banking sector should look to Northern Rock and HBOS for both value and growth, according to specialist broker Keefe, Bruyette & Woods."

To read a little history of the wankers at Threadneedle Street go here