As we know Northern Rock went bust during that little contretemps in the financial markets. The big question about this being whether N Rock was insolvent, or illiquid. The thing being, if it was merely illiquid then it should have been supported like all of the other banks. If it was insolvent then such support should not have been offered – as it wasn’t.
So? Well, it appears that it was merely illiquid:
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The ‘bad bank’ which runs loans granted by Northern Rock and Bradford & Bingley before their financial crisis bailouts has repaid its £48.7bn taxpayer loan. UK Asset Resolution had not expected to repay the crisis-era loan until the mid-2020s but has been able to do so more quickly by selling off packages of loans to private equity buyers. [/perfectpullquote]So, if it was insolvent then there should have been losses on that loan book. There haven’t been looses on that loan book. Therefore it would appear that Northern Rock was solvent but illiquid.
The central bank exists to lend money to banks that are solvent but illiquid. BoE decided not to so lend – uniquely to Northern Rock too.
Note again the logic here. If NR was busty bust, a la Whoopi Goldberg, then that loan book that was taken over should be showing a loss. It isn’t. Thus NR wasn’t busty bust. It was only bust, illiquid.
Just shows, government isn’t your friend, is it?
The language we use matters - it provides clarity to our own thoughts and enables…
It is now generally acknowledged that the structure of the NHS needs to be overhauled…
In the film Apollo 13, a loss of oxygen causes the crew to start inadvertently…
There's an idea out there which seems intuitive but then so many ideas do seem…
When we think about the darkly opaque goals of modern central bankers as they relate…
As the papers recently filled with the distressing images of desperate souls looking to escape…
View Comments
Having worked briefly on this, I suspect that the losses have been hidden somewhere - the way the loan book was organised (with over collateralisation of better rated debt, combined with lots of risky loans) meant that it was really clear that NR was insolvent. I suppose it's possible that gains have been made on repossessed properties since 2008, enough to cancel the debt, but I'd look somewhere for the hidden write-offs.
Btw it's one thing for the BoE to bail out a temporarily illiquid bank, but NR was way beyond that point. It had funded long term loans with short term debt - complete mismanagement by the same idiots who had screwed up at Nat West.
Well, no, not really. The Granite bonds were the long term finance. Short term funding only covered loans made until there was the stock to issue more Granite. That's what caught them, not being able to roll over the finance for that pipeline, not the whole loan book. And, you know NW got BoE liquidity finance, NR didn't - which is rather the point.
But it wasn't just that. Unlike other lenders, who had various sources of funding, including - vitally - savers, NR was reliant on the (over-) collateralised bond market. It was trying to act like a big player, without the big players' savings base (or a billionaire to fund them). And it did it without proper computerised systems - eg its savings books were still done by hand - the administrators were shocked. Even NW wasn't that badly run - and had a diversified funding base.
I'm no fan of HMT - after all it's failures, particularly since the accession of Brown, and after its treacherous activities around Brexit, I think it needs to be closed down and replaced with a new organisation with a new culture - but on this one, it made the right call.
It wasn't the bond market that did for them, it was the overnight.
The bonds sold nicely, all have paid out, none in default etc. But a bond issue can only be done in a certain size. So, there's some amount of mortgages issued which are funded by the overnight market waiting until there's a suitable pile to be collateral for a bond issue. It was not being able to roll over that overnight money that killed NR.
That's a classic liquidity case. One which the BoE declined to finance. If NR was actually insolvent, not just illiquid, then the bond issues and the loan book would have made a loss over time. They haven't - thus we should conclude that NR was illiquid not insolvent.
The expropriation of Northern Rock was done on the basis "what would have happened IF the BoE withdrew support" (and involved a lot of lies). The BoE was not guilty, it was a *government* decision
According to https://en.wikipedia.org/wiki/Nationalisation_of_Northern_Rock#Offshore_mortgage_book is was the substitution clauses that sank NR as the government couldn't be sure these wouldn't be triggered and have to stump up the £45B up front rather than a lot of it just being guarantees.
Mind you, that's arguing after the fact. If the liquidity support was provided, the above was moot.
I do wonder if NR's records were so bad that the BoE -- forced into making a fairly quick decision -- took one look at it and went "we can't determine if this is insolvency or merely illiquidity, but if this shambles is how they run their business then we are staying well clear"
Most of NR's business was in the North, and outside the centres of Leeds/Manchester/Liverpool and the fashionable bits of North Yorkshire, property prices up here are still below where they were in 2007, so, coupled with the remarkably low rate of property repossessions in the last decade, it is extremely unlikely that anybody has made any serious money out of repos. More likely is that the QE has made the Granite bonds more attractive to investors as they are pushed out along the risk curve to achieve yields that beat inflation -- as the quoted article states, UKAR have been selling off the bonds to private equity, probably at slightly above par value -- rather than redeeming them.