Firstly, NR certainly made a virtue of telling all and sundry that they were only putting emergency funding in place and made repeated statements that they hadn't needed to draw it down. Now it appears they may have drawn down the entire lot in a matter of weeks. What now? Ask for a second emergency fund to be provided?
They were trying to shore up confidence in the bank to stop the run on deposits. The run itself subsequently forced them to draw on the funding earlier than expected.
Secondly, the emergency loan is made at a penal rate of 6.75%. Money market rates are less than 6.5%, so you would only tap this fund if literally no-one else will lend to your business. So despite the government guarantees on deposits and Mervyn King's insistence that the books are fine, professionals in the corporate lending business continue to treat NR like it is about to go under. What does this tell the ordinary man on the street?
If NR was finding it difficult to secure funding before the announcement from the Bank of England then it shouldn't really be that surprising that things have not got easier in the immediate aftermath of the announcement. The corporate lending professionals are a fairly cutthroat bunch. NR is clearly in some difficulty, lending to them in the present environment would amount to doing them a favour or throwing them a lifeline. It may very well suit many interested parties to leave them hanging because they're seeking to benefit from NR's difficulties in some way. Even if they consider the chances of NR going under small, they may see little reason to lend to them at the moment for other reasons.
The ordinary man in the street might very well adopt the same attitude as he is not receiving an immediate reward or obvious bonus for standing by the bank. From an Irish depositor's perspective however there is a lot to lose by the disappearance of NR. I have held accounts with them since shortly after they arrived here, first by post and then online and remember quite well the situation with Irish banks' deposit offerings before that. With the current rates on offer, deposits can even be a viable investment option for some people (if for example they're not making mortgage repayments as then their actual inflation is considerably lower than the reported rate). If there is a significant deterioration in the rates offered going forward due to NR's departure, then deposits will start to look very unattractive indeed. Of course, one individual's decision to keep money invested with the bank will not change anything in itself but the above should at least provide some insight into their motivation for doing so.
They exited the short position before the rumours that NR had drawn down on its emergency funding.
Yes, I'm aware of that and the article states that clearly but it is perhaps helpful to know the source of the figures and that they are not entirely disinterested observers of events.
If my comment is funny yours is hilarious. The UK government "did not want shareholders to be seen to benefit". NR shareholders have taken an 85% haircut on their investment year-to-date. At best they would have had their misery slightly reduced. I couldn't imagine too many riots over a 14p per share dividend payout to the beleagured shareholders but perhaps you are right, who knows?
This issue was widely reported throughout the media before the decision to defer the dividend. MPs had become particularly vexed about it.
from
the Times:
MPs on the Treasury Select Committee had attacked the decision to pay out cash to shareholders while taxpayers’ money was being used to provide emergency liquidity to the bank.
from
the BBC:
First news that the payments would be withheld came from the BBC's Business Editor Robert Peston.
He said that the bank had come under intense pressure from the Financial Services Authority (FSA)
and the Treasury not to make the £59m payment.
"The Treasury was deeply unhappy about Northern Rock paying a dividend at a time when the government
has been forced to underwrite all deposits and loans to Northern Rock," Mr Peston said.
Doesn't seem a particularly optimistic article but eye of the beholder and all that.
I never claimed it was an exclusively positive story, only that it highlighted the bank's strengths:
If you can provide the funding, Northern Rock is a good business. The bank has none of that toxic sub-prime debt. Default rates are 0.47pc, roughly half the industry average, and the average loan-to-value ratio is a conservative 59pc.
Its sales and servicing operation is the envy of the industry, as is its cost control. At 26.6pc, the bank's cost-to-income ratio is well below the 40pc average giving it a competitive advantage. Sort the funding out, bankers concede, and a bidder would be buying the best mortgage salesforce in the country. Not to mention the fifth largest lender.
If people feel there is value in NR and the company is going to somehow weather this storm, then they should be taking an equity stake in the company where at least they may be compensated for their risk. What's the logic in loaning money to NR at 4.75% when they'll gladly pay the Bank of England 6.75% for the same privilege?
I don't see how it follows that one should take an equity stake in the company. Many reports state that shareholders could be wiped out as the price of securing a takeover. You're looking at a possible total loss of capital there. By contrast the Treasury and the Bank of England are not going to want depositors to suffer after committing to a unique guarantee arrangement. In fact, it is likely they will not want to invoke the scheme at all and will not let it get that far. They will want to resolve things in as orderly and tidy a manner as possible after all the negative effects the affair has had on the UK banking sector generally. Ultimately, the Treasury and the Bank of England are in the driving seat now. It's in their gift to let Northern Rock survive if they so wish by altering the penalty rate and the duration of the loans. They may yet have to do this if they cannot arrive at an acceptable take-over arrangement. My view is that having agreed to support the bank and guarantee deposits they are now left holding the baby as it were. It's the politics not the economics that's most important in this story now.
Lastly, Philip Richards of RAB Capital, now the largest single shareholder in the company has some interesting thoughts on Northern Rock in [broken link removed] to the FT.
He makes the point that it is difficult to see why the bank should be left to die when there is no evidence of poor lending practices or dodgy loans and is otherwise a well-run company.
