Northern Rock: Government attempts to stem banking crisis
Chris Marsden | 20.09.2007 11:13 | Analysis
The Labour government’s pledge to guarantee savings at the Northern Rock building society has been forced on it by a massive public display of no-confidence in Britain’s banking sector.
Strenuous government and media attempts to insist that Northern Rock was a liquidity problem due to a bad business model and not a systemic crisis—and that the bank remained solvent—fell on deaf ears, as customers continued to queue up to close their accounts and bank shares took a hammering.
Chancellor Alistair Darling was forced to guarantee savings at the mortgage lender to “promote a stable banking system,” amidst fears that the bank faces collapse, with savers withdrawing more than £3 billion. Other major mortgage lenders such as the Bradford & Bingley had begun to register losses, with the Alliance & Leicester worst hit with a fall of 30 percent. The Alliance & Leicester recovered all but 2 percent of its fall with others rising by lesser amounts. But the fact that the government’s promise only slowed the demand for cash and raised Northern Rock shares by just 8 percent one day, only to fall back twice as far the next, indicates that the loss of public confidence is just as great in the political sphere, if not worse.
The general recovery in share values has more to do with the cut in interest rates by the US Federal Reserve than any move by the British government.
The Financial Times opposed action to rescue Northern Rock by the Bank of England, stating that Mervyn King, the Bank governor, had “played by the book” in initially opposing such a move. It published a comment by Philip Stephens entitled, “Stopping a crisis becoming a catastrophe.”
He concludes, “In the end fine economic judgments were swept aside by politics, calm deliberation by panic on the streets.... Signs that the contagion was spreading to other leading banks risked a crisis turning into a catastrophe. Only a blanket guarantee would do.... Gordon Brown’s government has built its reputation on economic competence... This week’s scenes of anxious voters emptying their bank accounts, redolent of Latin America 20-odd years ago, threatened to sweep it all away.”
Under the headline, “A government rocked,” the Guardian editorialised, “Before he made his announcement, chancellor Alistair Darling must have been given news from the markets. There was carnage among bank shares, with nearly a third knocked off the value of Alliance & Leicester. What had seemed a local problem on Thursday evening, confined to a Newcastle-based bank that had made outlandish business decisions, threatened by Monday night to become a banking crisis.... In the end though, the queues won.”
A spokesman for one of Britain’s top retailers had warned as much days earlier: “Up until now, the credit crunch has been way up in the clouds—now it is on the street. This is the first consumer-related event. This has massive significance on the high street, it is major. People are worried about money and they won’t be spending.”
The lack of confidence in the banking system proved to outstrip the actual import of the Northern Bank in the financial markets. But that does not mean that customer reaction was merely panic.
Northern Rock was first of all the UK’s eighth-largest bank and fifth-largest mortgage lender, with 1.4 million savings customers, 800,000 mortgage customers and assets totalling £113 billion. If the bank had collapsed, then many of these customers would have faced massive losses. The official Financial Services Compensation Scheme covers only the first £35,000 in savings. In the event of insolvency, an individual saver would get back all of the first £2,000 in the account, but only 90 percent of the next £33,000—a possible loss of £3,300. Any savings above £35,000 are not guaranteed.
Northern Rock looks to be a dead dog, beyond rescue. It will reportedly pay a penalty interest rate of close to 7 percent to borrow funds from the Bank of England, which is too high to sustain profitability on its own mortgages. It is expected to appoint the US bank Merrill Lynch in an attempt to find a buyer. Its shares will probably go for less than £3, down from a high of £12.
Baillie Gifford is the largest institutional shareholder in Northern Rock and is believed to have lost more than £250 million. Other major shareholders include Scottish Widows, Legal & General and Fidelity. Northern Rock staff own 46.7 million shares and have lost hundreds of millions.
Secondly, Northern Rock gets 73 percent of its funding from wholesale markets rather than customer deposits. Its strategy of borrowing money from other banks and then lending to its customers at a higher rate fell foul of the international credit squeeze that followed the sub-prime mortgage collapse in the United States.
As Adam Applegarth, Northern Rock’s chief executive declared, “Life changed on August 9, like snapping a finger. Watching the liquidity disappear since then has been astonishing.”
The impact of the sub-prime mortgage crisis is still working its way through the system. At least 16 US lenders have been forced into bankruptcy, and the Federal Reserve was forced to cut its discount interest rate to prime the economy.
The European Central Bank has loaned cash to banks seven times since August 9, and Germany’s Landesbank Sachsen Girozentrale and IKB Deutsche Industriebank AG are getting emergency bailouts. Bear Stearns & Co., Goldman Sachs Group Inc. and Barclays Plc have all been forced to prop up investment funds in the past three months.
The failure of the market in risky mortgages in the US has left banks internationally saddled with huge losses and unwilling to lend to one another. And though Northern Rock lends more money from other banks than its rivals, it is not alone in facing a liquidity crisis. For example, Bradford & Bingley’s buy-to-let loans account for more than half of its mortgage book. It has the second-highest ratio of loans to deposits after Northern Rock, with loans accounting for 1.8 times its savings and deposits compared with 3.1 times for Northern Rock.
Awareness of the impact of the credit squeeze on millions of working people was also raised by the recent announcements that Britain’s house prices are stagnant or falling. Hometrack’s August survey found London to be the only part of the UK that showed any rise in prices. The website Rightmove and the Royal Institution of Chartered Surveyors have both reported that property prices fell in the last month for the first time in three years.
UK interest rates have risen five times since the middle of last year. Mortgage repayments already take up more than 50 percent of take-home pay, with interest on loans taking up a whopping 17.4 percent of income. Banks are now expected to raise loan rates still further, hitting tracker mortgages immediately and the 2 million UK borrowers with fixed-rate mortgages when their deals expire. A credit squeeze will also force banks and building societies to clamp down on the amount they are prepared to lend. Some lenders have been offering loans of up to 125 percent of a property’s value and six times a customer’s annual salary.
An end to Britain’s 10-year house price boom will have a massive impact on the entire economy, but it is only one manifestation of a credit-fuelled boom that has left Britons with total debts of £1.3 trillion.
An economic slowdown is already evidenced in rising bankruptcies and mortgage repossessions. The Ernst & Young Item Club has predicted that UK economic growth may be as much as 1 percent lower in 2008 and 2009 as a result of the credit crunch, stating that this “will have a ripple effect on everything from related industries to the top end of the housing market.”
A drying up of credit has grave implications. Northern Rock is an extreme example, but its reliance on credit is nevertheless illustrative: During the first half of 2007, it received just £1.7 billion of new money from savers, but lent £10.7 billion to new borrowers financed by borrowing £10.3 billion from the City. As one independent investment banker told the Telegraph, “Everyone frets about insolvency, but it’s never insolvency that brings a bank down. It’s liquidity. If a bank has solvency issues it dies a long painful death.
“A lack of liquidity can be like a bullet that hits you out of the blue. It was liquidity that caused the great Wall Street crash in 1929.”
Danny Gabay, director of consultants Fathom, warned, “The UK has a double vulnerability. We are vulnerable because of our hugely over extended consumer sector, and because of our large financial services sector. This is a financial market event; but the longer it goes on, the greater the risk that it becomes a real economy event—and I think we are at a tipping point.”
The City of London and the finance sector account for just under a third of Britain’s annual income. A generalised economic slowdown in Britain and internationally would render the promise by the government to guarantee savings at Northern Rock worthless and would absolutely exclude any similar promise being made should another bank run occur.
Darling initially promised that people could get their money back “whatever happens.” But his pledge could only be made in the hope that restored confidence would mean it never had to be honoured. To do so in face of a collapse would cost around £20 billion. That is why he later told the BBC that savers could get their money back “at the moment.”
Northern Rock is not just an economic event, but a political event. It has underlined the degree to which the Labour government has relied on a credit-fuelled spending boom to offset the impact of its pro-big business agenda on working people.
Prime Minister Gordon Brown has yet to rule out a snap general election, but his cabinet ministers are clearly rattled, with some calling for no election to be held until 2009. Darling told the press, “I don’t get any sense that people inside government or outside government are anxious for a dash to the polls,” while Health Secretary Alan Johnson said, “My instinct is we should get on with the job of governing. There’s big issues to tackle.”
Whatever happens, Philip Stephens was correct when he wrote in the Financial Times, “Now, nothing seems quite so solid. Politics, as they say, has got interesting again.”
Already deeply unpopular, a sharp change in the economic situation can galvanise an already alienated and hostile population into taking political and industrial action.
Conservative Leader David Cameron has failed once again to benefit significantly from the government’s difficulties. But this is because his party is as hated and mistrusted as Labour—and as out of touch. He even chose to pontificate about the dangers facing “every business and family in the country” in a speech to a meeting of international accountancy firm KPMG and in the pages of the Sunday Telegraph.
The real danger facing the government is not a transfer of voter allegiance from one right-wing party to another, but a decisive shift to the left in the working class and an eruption of sharp class conflicts.
Chancellor Alistair Darling was forced to guarantee savings at the mortgage lender to “promote a stable banking system,” amidst fears that the bank faces collapse, with savers withdrawing more than £3 billion. Other major mortgage lenders such as the Bradford & Bingley had begun to register losses, with the Alliance & Leicester worst hit with a fall of 30 percent. The Alliance & Leicester recovered all but 2 percent of its fall with others rising by lesser amounts. But the fact that the government’s promise only slowed the demand for cash and raised Northern Rock shares by just 8 percent one day, only to fall back twice as far the next, indicates that the loss of public confidence is just as great in the political sphere, if not worse.
The general recovery in share values has more to do with the cut in interest rates by the US Federal Reserve than any move by the British government.
The Financial Times opposed action to rescue Northern Rock by the Bank of England, stating that Mervyn King, the Bank governor, had “played by the book” in initially opposing such a move. It published a comment by Philip Stephens entitled, “Stopping a crisis becoming a catastrophe.”
He concludes, “In the end fine economic judgments were swept aside by politics, calm deliberation by panic on the streets.... Signs that the contagion was spreading to other leading banks risked a crisis turning into a catastrophe. Only a blanket guarantee would do.... Gordon Brown’s government has built its reputation on economic competence... This week’s scenes of anxious voters emptying their bank accounts, redolent of Latin America 20-odd years ago, threatened to sweep it all away.”
Under the headline, “A government rocked,” the Guardian editorialised, “Before he made his announcement, chancellor Alistair Darling must have been given news from the markets. There was carnage among bank shares, with nearly a third knocked off the value of Alliance & Leicester. What had seemed a local problem on Thursday evening, confined to a Newcastle-based bank that had made outlandish business decisions, threatened by Monday night to become a banking crisis.... In the end though, the queues won.”
A spokesman for one of Britain’s top retailers had warned as much days earlier: “Up until now, the credit crunch has been way up in the clouds—now it is on the street. This is the first consumer-related event. This has massive significance on the high street, it is major. People are worried about money and they won’t be spending.”
The lack of confidence in the banking system proved to outstrip the actual import of the Northern Bank in the financial markets. But that does not mean that customer reaction was merely panic.
Northern Rock was first of all the UK’s eighth-largest bank and fifth-largest mortgage lender, with 1.4 million savings customers, 800,000 mortgage customers and assets totalling £113 billion. If the bank had collapsed, then many of these customers would have faced massive losses. The official Financial Services Compensation Scheme covers only the first £35,000 in savings. In the event of insolvency, an individual saver would get back all of the first £2,000 in the account, but only 90 percent of the next £33,000—a possible loss of £3,300. Any savings above £35,000 are not guaranteed.
Northern Rock looks to be a dead dog, beyond rescue. It will reportedly pay a penalty interest rate of close to 7 percent to borrow funds from the Bank of England, which is too high to sustain profitability on its own mortgages. It is expected to appoint the US bank Merrill Lynch in an attempt to find a buyer. Its shares will probably go for less than £3, down from a high of £12.
Baillie Gifford is the largest institutional shareholder in Northern Rock and is believed to have lost more than £250 million. Other major shareholders include Scottish Widows, Legal & General and Fidelity. Northern Rock staff own 46.7 million shares and have lost hundreds of millions.
Secondly, Northern Rock gets 73 percent of its funding from wholesale markets rather than customer deposits. Its strategy of borrowing money from other banks and then lending to its customers at a higher rate fell foul of the international credit squeeze that followed the sub-prime mortgage collapse in the United States.
As Adam Applegarth, Northern Rock’s chief executive declared, “Life changed on August 9, like snapping a finger. Watching the liquidity disappear since then has been astonishing.”
The impact of the sub-prime mortgage crisis is still working its way through the system. At least 16 US lenders have been forced into bankruptcy, and the Federal Reserve was forced to cut its discount interest rate to prime the economy.
The European Central Bank has loaned cash to banks seven times since August 9, and Germany’s Landesbank Sachsen Girozentrale and IKB Deutsche Industriebank AG are getting emergency bailouts. Bear Stearns & Co., Goldman Sachs Group Inc. and Barclays Plc have all been forced to prop up investment funds in the past three months.
The failure of the market in risky mortgages in the US has left banks internationally saddled with huge losses and unwilling to lend to one another. And though Northern Rock lends more money from other banks than its rivals, it is not alone in facing a liquidity crisis. For example, Bradford & Bingley’s buy-to-let loans account for more than half of its mortgage book. It has the second-highest ratio of loans to deposits after Northern Rock, with loans accounting for 1.8 times its savings and deposits compared with 3.1 times for Northern Rock.
Awareness of the impact of the credit squeeze on millions of working people was also raised by the recent announcements that Britain’s house prices are stagnant or falling. Hometrack’s August survey found London to be the only part of the UK that showed any rise in prices. The website Rightmove and the Royal Institution of Chartered Surveyors have both reported that property prices fell in the last month for the first time in three years.
UK interest rates have risen five times since the middle of last year. Mortgage repayments already take up more than 50 percent of take-home pay, with interest on loans taking up a whopping 17.4 percent of income. Banks are now expected to raise loan rates still further, hitting tracker mortgages immediately and the 2 million UK borrowers with fixed-rate mortgages when their deals expire. A credit squeeze will also force banks and building societies to clamp down on the amount they are prepared to lend. Some lenders have been offering loans of up to 125 percent of a property’s value and six times a customer’s annual salary.
An end to Britain’s 10-year house price boom will have a massive impact on the entire economy, but it is only one manifestation of a credit-fuelled boom that has left Britons with total debts of £1.3 trillion.
An economic slowdown is already evidenced in rising bankruptcies and mortgage repossessions. The Ernst & Young Item Club has predicted that UK economic growth may be as much as 1 percent lower in 2008 and 2009 as a result of the credit crunch, stating that this “will have a ripple effect on everything from related industries to the top end of the housing market.”
A drying up of credit has grave implications. Northern Rock is an extreme example, but its reliance on credit is nevertheless illustrative: During the first half of 2007, it received just £1.7 billion of new money from savers, but lent £10.7 billion to new borrowers financed by borrowing £10.3 billion from the City. As one independent investment banker told the Telegraph, “Everyone frets about insolvency, but it’s never insolvency that brings a bank down. It’s liquidity. If a bank has solvency issues it dies a long painful death.
“A lack of liquidity can be like a bullet that hits you out of the blue. It was liquidity that caused the great Wall Street crash in 1929.”
Danny Gabay, director of consultants Fathom, warned, “The UK has a double vulnerability. We are vulnerable because of our hugely over extended consumer sector, and because of our large financial services sector. This is a financial market event; but the longer it goes on, the greater the risk that it becomes a real economy event—and I think we are at a tipping point.”
The City of London and the finance sector account for just under a third of Britain’s annual income. A generalised economic slowdown in Britain and internationally would render the promise by the government to guarantee savings at Northern Rock worthless and would absolutely exclude any similar promise being made should another bank run occur.
Darling initially promised that people could get their money back “whatever happens.” But his pledge could only be made in the hope that restored confidence would mean it never had to be honoured. To do so in face of a collapse would cost around £20 billion. That is why he later told the BBC that savers could get their money back “at the moment.”
Northern Rock is not just an economic event, but a political event. It has underlined the degree to which the Labour government has relied on a credit-fuelled spending boom to offset the impact of its pro-big business agenda on working people.
Prime Minister Gordon Brown has yet to rule out a snap general election, but his cabinet ministers are clearly rattled, with some calling for no election to be held until 2009. Darling told the press, “I don’t get any sense that people inside government or outside government are anxious for a dash to the polls,” while Health Secretary Alan Johnson said, “My instinct is we should get on with the job of governing. There’s big issues to tackle.”
Whatever happens, Philip Stephens was correct when he wrote in the Financial Times, “Now, nothing seems quite so solid. Politics, as they say, has got interesting again.”
Already deeply unpopular, a sharp change in the economic situation can galvanise an already alienated and hostile population into taking political and industrial action.
Conservative Leader David Cameron has failed once again to benefit significantly from the government’s difficulties. But this is because his party is as hated and mistrusted as Labour—and as out of touch. He even chose to pontificate about the dangers facing “every business and family in the country” in a speech to a meeting of international accountancy firm KPMG and in the pages of the Sunday Telegraph.
The real danger facing the government is not a transfer of voter allegiance from one right-wing party to another, but a decisive shift to the left in the working class and an eruption of sharp class conflicts.
Chris Marsden
Homepage:
http://wsws.org/articles/2007/sep2007/bank-s20.shtml
Comments
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Triumphera!!!!
25.09.2007 00:01
They split the Labour Party to let in the Hard Thatcher. He did not say, but it would fit in with the way he thought, that he had people in position to get control in all the political parties. John Smith????
It originates in South Africa, we know the one who was covering the Right and setting up the Fascist Economics of Ezra Pound. Do you know who was the agent that covered the specrtum of Leftie movements?
Ghost of International Labour Defence
EVIDENCE OF A CRIMINAL CONSPIRACY AGAINST DEMOCRACY IN THE U.K.
In the 1950s I went to Coventry to buy a car. A 1922 bullnosed Morris Cowley XM4682. the seller was asking £30 and there seemed no point in haggling, it was more a matter of ensuring that the seller would accept me as a suitable caretaker. The seller was a management trainee in a car firm, and he was accompanied by two of his fellows.
Anxious to make a good impression I let slip details of my education, that my father had given the freehold of an Abbey to the Crown, and had established through the courts and the Lords that the Police had a right to enter private property when they believed an offence was likely to be committed.# The effect was amazing.
One of the seller's fellows started telling me of his political plans to eradicate socialism. Standing on a kerb, he told how he already had a follower in position to take over the job of drawing out the boundaries of the parliamentary constituencies, so that when the then present occupier retired, his man would contrive to make a few constituencies with massive Labour majorities, and many constituencies with small tory majorities.
Equal votes would then produce a Tory majority of seats. The idea had come from Ulster. Another lesson from there was planting populations, and this should be done in Wales and Scotland in order to produce a homogeneous British population.
Trade Unions would have to be broken. He was very highly motivated about this. A close friend or relative had been broken by Trade Union action pre-war and had gone to Africa and become a major influence on the speaker. The big plan was to draw the miners into a strike on carefully prepared ground. To use funds which were already in existence to restart a Nottingham miners movement.
The rich and profitable Nottingham mines would enable a crushing defeat to the "Vanguard of the Unions". Truly essential Unions would be bought, but they were few, any of the other Unions would be broken if if they showed any militancy. Bolshie political activists would be hounded, persecuted, blacklisted, and broken to the nth generation as an example to others. there were secret agents drawing up lists of reds and planning how to deal with them.
Following the Nottingham principle, he had some followers who were joining the Labour Party, and they would one day form a breakaway party to split the anti Tory vote. He even had a man lined up to fund them.
Labour voters would be induced to buy council houses in order to make them into owner occupiers. That would change their class outlook, and their voting habits. Nationalized industries would be sold off and put into the hands of voters and foreign corporations in order to make renationalisation more difficult.
Renationalisation was to be made impossible by impoverishing the State. Wealth should be in private hands, exchange controls abolished to enable a free flow of capital to take advantage of cheap labour areas, and to avoid taxation. the militants of the British proletariat were to learn a hard lesson about the value of working. There should be an appropriate pool of unemployed so there would be
plenty of people to take jobs as servants. there would be good scope for private charity which benefitted both the giver and the taker.
And the State would not be creditworthy.
My querying the ability of an impoverished state spending its way out of an economic depression brought the view that Keynes's theory would be invalidated by these policies, and anyhow, once the system got going, there would be no more depressions. Businessmen were much cleverer now.
My stating the small lot theory of investment "Buy when shares are held by few in big lots, sell when shares are held by many in small lots" brought the suggestion that the smart operator would make money whatever happened but the new regime would eliminate the boom bust cycle.
He went on to say how he went around the country addressing dinner parties of selected guests, but it was in University Conservative groups that he found some of his more enthusiastic support. Surprisingly, a valley welshman,a girl who showed great promise, and some who were of working class origins.
He wanted to do away with conscription, to have a professional army. He had contact with plenty of officers and was confident of putting down the Reds when the day came.
The wide range of the vision was emphasised, no part of the power structure of the UK was neglected. His contacts were everywhere, but one would have to be subtle. Come election time, the BBC would not be partizan politically, but programs could be presented showing the awful consequences of voting for the Reds in overseas contexts. His men would see to it that such programs were commissioned and broadcast at the appropriate times. Whatever was necessary would be done.
The use of lies was very clever, even the most outrageous lies would stick to some extent. He seemed to regard a lie as an essential tool in politics, as if no campaign could succeed without a good big lie.
But if all else failed to defeat the reds, then a professional army could be used directly.
It was a shame that they had gone "over the top" in pre-war europe, so much of what they thought was sound.
A national assistance scheme would be devised to enable the great landowners estates to re-establish their proper positions.
I asked what was in all this for him. He expected that great opportunities for profit would arise and that his friends would see to it that he made millions. I doubted that and suggested that he would be better off if he put his great talents to work for himself in his own business, and anyway, had he read Machiavelli's The Prince?
No. Then before doing any more it was essential reading. But I also told him that what he had told me was a criminal conspiracy and he should desist.
One of the other fellows told me not to pay any attention to what had been said, there was a no short speaker standing on the kerb to make himself look taller. He was in fact in Ireland at that moment, as his passport would prove. And he definitely was not on the company payroll, he was paid out of petty cash. That drew forth the statement that what he was doing was far more important than square bashing.
I suggested that success in his enterprise would lead to violent class based clashes, the formation of assassination gangs, arson, and mindless violence. He was sanguine about being able to deal with trouble makers, it would be a healthier society.
The lunch hour ended, my co-driver returned, and we went home to Neath Abbey with the Cowley. I reported all the above to a professional agent of international Communism** who was my paymaster at that time.
He was delighted that the Capitalists were digging their own graves, disabling Keynes Theory, and ensuring that the only way out of a subsequent economic depression would be by expropriating wealth. Then he thought before saying that Fascism meant stagnation.
My memory of the chief conspirator was that he was called Michael, was short, and sensitive about it, had chinese-ish eyes,~ had an oddly spelled welsh surname, and a law degree from a southern African University.
This is true,
#Started in Caerau, ended with Lords ruling on Thomas v Sawkins (1935). Unfortunately did not establish a police duty, only a right.
** The end result of the blacklist after a Trimsaran surface workers strike for waterproof clothing.
There is one mistake, it was a car accessory manufacturing firm, making batteries. there are bits I left out as I might have speculated in Gold myself..... It was the dismissal of Alastair Milne that prompted me to write and send this to the appropriate Police.
Special Branch sat on it. (Copy to Buck House press office.)
~Same eyes as the Tregaron Edwardes.
YKW