Prudence defenestrated as Darling / Gordy agree to BOA bailing out reckless lenders at Northern Rock ........
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. They are insolvent.(Banner above from their website Main page)
So the BOE has arranged as the Lender of the Last resort to lend them money at a "penal rate" of 1 % over base rate - which is in fact lower than the current Market Rate to "tide them over", during these entirely forseaable and foreseen conditions.
The BOE statement issued at 0700 says ; (see impact on NR share price)
The decision to authorise was made by the Chancellor on the basis of recommendations by the Governor of the Bank of England and the Chairman of the Financial Services Authority in accordance with the framework set out in the published Memorandum of Understanding between the Bank, FSA and HM Treasury.
The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book. The decision to provide a liquidity support facility to Northern Rock reflects the difficulties that it has had in accessing longer term funding and the mortgage securitisation market, on which Northern Rock is particularly reliant.
Northern Rock have issued a simultaneous statement ;
STATEMENT ON MARKET CONDITIONS AND TRADING UPDATE
14 SEPTEMBER 2007
It has now become clear that the global credit and liquidity markets have not recovered .....Northern Rock has taken action to preserve liquidity and to maintain margins on its current loan book, while modifying its lending approach to avoid writing new business that is unprofitable in current conditions. (Trans : We've stuck up mortgage rates)
Although Northern Rock expects ....
its new lending volumes to increase once the wholesale funding markets return to more normal volumes and prices, it must now plan on the basis that the wholesale funding markets will not return to historic levels in the short to medium term.(Trans : didn't see this comin g but by Christ it's a big one)
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.(Trans : Business has come to grinding halt)
So how did we get into this position ? well...
" In the first 8 months of the year, Northern Rock’s total net lending was up 43% over the same period in 2006, with net residential lending up 55%." and they claim the quality of those loans based on recent historical past is good - 3 month arrears in the residential book were 0.47% at the end of August half the industry average and 1.2% on the standalone unsecured book. Together this was about 0.9% of loans.
Of course we made some dodgyt investments but don't we all and relying on Credit Rating Agencies (and when this all blows over they have some questions to answer)
"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.(rans : There is a fair crock of shit at the back of the cupboard)"
Adam J Applegarth, Chief Executive of Northern Rock, comments;
“We are seeing extreme conditions in global liquidity, which have impacted on world markets. As a result, we have taken prudent action to rein back our lending until markets normalise.
So the brief outline is - the CEO of the major company lending money for housebuying blames it all on , "extreme conditions in global liquidity" which is in NO way related to us expanding our book by 55% in the first 8 months of the year.(Trans : Handing out fistfuls of money to anyone who walked through the door)
It is , "albeit disappointing, that our profits will be affected" - any sensible analysis shows that their £588 Mn profits are actually going to be wiped out. Not only this year, but next year as well.(Trans : We are up for sale)
Now the Financial Services Authority ," judges that Northern Rock is solvent" - so the BOA and Treasury have by resorting to their prior arranged financial legerdermain, shifted responsibility for judging that problem off their shoulders and waving their TRi-partite MOU have told the Chancellor that he needs to authorise the Bank to act as LOLR - and they have managed to extract a promise that ....
"In its role as lender of last resort, the Bank of England stands ready to make available facilities in comparable circumstances, where institutions face short-term liquidity difficulties.(Trans : Barclays, Bradford & Bingley, RBOS the door is open, Fill Ya boots) "
Even briefer - "it's not us Gordon, it's that terrible world liquidity crisis, which none of us saw coming, and we in the City want your authority to bail out the first boat load of reckless lenders ... and there will be more to come" Strange how the shareholders saw what was coming.
See also Aliance and leicester down 5% on opening and below 900 , was at 1200 in June.