Scramble to quit UK mortgage lender

My crack about banks taking advantage of/with your money was somewhat prescient (a day counts, right?).

As regulators and politicians called for calm, Northern Rock – Britain’s fifth-biggest mortgage lender – scrambled to contain the fallout after it became the first British bank in decades to be bailed out by regulators. One person close to the situation said customers had withdrawn about $2bn Friday but Northern Rock declined to comment on the figure, which would amount to 4 per cent of its deposit base.

The rescue demonstrates the risks from a decade of financial innovation in the capital markets, which allowed a small regional lender to wield financial clout far greater than its network of 76 branches would suggest.

Under the terms of the bail-out, the Bank of England will provide an open-ended facility to Northern Rock, allowing it to access liquidity by posting mortgages or mortgage-backed securities as collateral. The rescue – finalised yesterday after days of negotiations involving the Financial Services Authority and the UK Treasury – came just two days after Mervyn King, governor of the Bank, insisted it would not intervene to bail out the markets.

According to people familiar with the matter, several banks considered buying Northern Rock. However, a deal was undermined by a shortage of liquidity and uncertainty about Northern Rock’s value. Adam Applegarth, Northern Rock’s chief executive, said the bank was not in talks with a buyer.

Which of course comes a day or so after the Bank of England decided to let firms run down the reserves they’re required to keep for exactly these purposes.

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1 comment so far

  1. lordpatel on

    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.

    Administration would have yielded a better return for the shareholders, but cunts like Adam Applegarth with his rayon striped tie and Terylene suit on £1.35 MN. a year whilst he drives the company over a c cliff couldn’t give a fuck for them.


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