"“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” "

Chinese premier Wen Jiabao 12th March 2009

""We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."

Timothy Geithner US Secretary of the Treasury, previously President of the Federal Reserve Bank of New York.1/3/2009

Thursday, September 20, 2007

Northern Wreck- a lesson in terminology, Insolvency v Liquidity

It is evident that in the various discussions about Northern Wreck there is a great deal of confusion about liquidity and insolvency. The reasons vary from ignorance , through to a high capacity for self-delusion, and ultimately the criminal, depending whether you are simply a retail depositor, a politician, or a banker , be it at the BOE or Northern Wreck.

To 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. Loans are due for repayment by NR cannot be replaced. Because they are illiquid ? NO

Because the lender does not think they have sufficient assets to cover their liabilities, or the assets offered have no or little value - the lenders believe NR to be insolvent - they have Insufficient assets to cover liabilities and vote with their closed cheque books.

Once the Tripartite parties BOE / Treasury / FSA had muddled this up and failed to grasp the nettle of insolvency, and suspend NR share trading , the credibility (and hence creditworthiness) of the City and it's Bankers were in jeopardy.

Now they are all lashing out pointing the finger at each other and are ready (as ever) to "learn lessons".

More tears before bedtime.

PS Mid day - The London Stock Exchange (Shares up 0% today) said it "welcomed" the 20% stakeholding from the Qatar Investment Authority - Dubai Bourse has taken the 28% owned by NASDAQ.


Anonymous said...

Does my Lord Postmanpatel have in mind wrongful trading?

"Under UK insolvency law [1], wrongful trading occurs when the directors of a company have continued to trade a company past the point when they:

* "knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation"; and
* they did not take "every step with a view to minimising the potential loss to the company’s creditors".

Myron said...

This Northern Rock fiasco has got me thinking a little. I know, a dangerous thing to do, especially for me.

Somewhere I read some journalist mentioning that with the Bank of England got involved then the Northern Rock had, essentially, access to an infinite financial resource.

If this is truly the case then does this mean that debt does not have any meaning and as there seems to be in existence a bottomless and infinite financial pot then in a matter of fact every currency in the world is actually totally worthless?

So if that is the case then is the existence of any type currency the exact same as religion itself? The reason being that currency only serves as a strong mechanism to control the masses and establish a social class system?

Something else I see over the years is that the financial markets have evolved to such an extent that if you want to know what will happen next then the best thing to do is go and study the reason for earthquakes and then apply that to the financial markets.

So, to me the Northern Rock fiasco was a tremor, which has released a little pressure, but like nature dictates sooner or later there ends up being so much pressure that there is a massive Earthquake, or some volcano devastates a massive area.

so the next question is (because of the secrecy of the financial institutions it may never be known) what exactly will happen when the biggie arrives?

Now, many people may insist that this will never happen. Well, humour me. Many big men have been knocked flat with that attitude.

So I'm left asking myself the question of; "Exactly what is the point of any sort of currency?"

Might not be the best examples, but wasps, termite and ant colonies seem to work pretty well and I don't see those insects carrying and exchanged any dollars, pounds, yen, sheep's heads or whatever else you can think of.

It's unfortunate that over so many thousands of years the concept of currency had been drilled down so very deep that try explain to someone a theoretical world with no currency and then every excuse in the universe is mentioned than finally that person's head implodes.

Shutter said...

Anon - He does indeed, although wrongful trading applies in a liquidation.

Administration is a far better route,or was but may be overtaken by a forced liquidation. On which it is impossible to make any judgement at present.

However as the £10 Bn (Oh how easy it is to write billion !) facility up to £1.5 N. per company would not sort out Northern Rock there are evidently huge un funded laibilities at present.

Whether the company can trad out of them is left to the Directors, but pressing creditors could perhaps force the matter.

If I was a creditor I would be very active in the lively expectation of swift payment to remove unwanted publicity.

(C) Very Seriously Disorganised Criminals 2002/3/4/5/6/7/8/9 - copy anything you wish