Be Excellent To Each Other

It was nothing at all to do with their reliance on sub-prime backed financial instruments to fund their mortgages, then?

They didn't fund even a remotely material fraction of their mortgage book via their deposits, so the withdrawals would have been a drop in the ocean.

MR WRONGY FROM WRONGLAND.

Ahem.

Their mortgage book indeed became pretty much a write-off, and as a result their market capitalisation plummeted. That wasn't what caused the consumer crisis though (although it caused quite the investor crisis), because their mortgage book value didn't materially affect their cash reserves in the short term.

Er. The inability to cover their mortgages due to the reliance on sub-prime investments did indeed affect their cash reserves, as the revaluation meant they were hugely overextended - i.e. had no money. THAT then caused the customer crisis, as they were being told (rightly) by the meeja that Northern Rock was on the verge of collapsing due to a chronic shortage of funds (caused by the investements they were using to balance their mortgage book being suddenly not worth enough to cover it). Otherwise technically known as being insolvent. A slightly worrying state for a bank, really.

What on earth do you think caused the customer crisis? The papers weren't saying "Northern Rock has no cash because one of the cashiers lost it on the way to the paying in desk". It was the funding for the mortgage book drying up and Rock being left with a massive, now unsecured, debt to its debtors wot dunnit.

I'm with Mr Chris here - Northern Rock's liabilities were massively over their assets, by orders of magnitude. They could never have paid off their outstanding loans with the cash they had. They were reliant on being able to borrow money easily to pay off the money they already owed. When banks stopped lending, they were screwed. It's like juggling 10 times your salary on interest free credit cards - works fine when there is a new offer to move to, but when they withdraw all the deals, you're suddenly screwed.

No, the papers were saying "Northern Rock on verge of collapse". That's enough to trigger a panic in account holders. 80% of people with a savings account wouldn't know what balancing a mortgage book means. By "the papers", I'm of course not referring to The FT.

Yes, BECAUSE IT WAS.



Quite rightly, too.



They didn't need to know what it means. They were told, rightly, that the bank had no money. Which it didn't, due to its security for the mortgage book disappearing up the swanny. The customers didn't need to understand the mechanics of the reason when the bald truth was that they had deposits in a bank which was insolvent and so their deposits were at risk.

I'm perplexed as to the point that you're trying to make, seemingly by bashing your keyboard randomly.

I'll back down to the point of accepting split cause.

I still think that as with most of corporate finance, image is everything, and the image of Northern Rock was far worse than it's actual finances, and that's what really caused the disaster. The perception that everything was much, much worse than it was caused a crisis of consumer confidence, which caused a plummeting spiral of available cash funds.

I'll accept that the finances were indeed very bad, but I don't think that alone was enough to make it the disaster that it was.

Anyway, that's beside the point. Companies that undertake risky borrowing should deal with the consequences without government intervention.



EDIT - Heard an excellent debt trading analogy with regard to sub-prime borrowing this morning. "It's like a big game of pass the parcel where everyone has a parcel and every parcel has a big turd in it."

THE BANK WAS INSOLVENT. THAT WAS THE CAUSE. END OF.



Indeed. However, from the government's point of view, I suppose bailing the banks out is a lesser evil than allowing the collapse of the banking system and consequently of our entire economy.

That wouldn't go down well on the front pages of the Dail Wail, would it?

"I haz all ur munneeeee"

[quote=MrChris]THE BANK WAS INSOLVENT. THAT WAS THE CAUSE. END OF.[/quote]

Of course it was. However, I'm maintaining that if the consumer confidence crisis hadn't happened, the bank would not have become insolvent.

Eh? It already was insolvent - that was the cause of all the problems and the consequent customer withdrawals.

And the insolvency had nothing to do with the customer withdrawals (which, as I've already mentioned, were a comparatively small part of their business) and everything to do with the sub-prime investments et al with which they were supposedly backing off their mortgage book becoming worthless all of a sudden. They'd still have been insolvent if the customers had all left their money in the bank as the deposits were a tiny tiny tiny drop in the ocean compared to the hole in their accounts where the mortgages were.

I'd better check - do you know what insolvent means?

No, they weren't insolvent. They were in financial difficulty and could well have been heading towards insolvency, however they absolutely were not at the point of insolvency when the consumer crisis started. THAT is my point.

Except, of course, that they were.

And if they hadn't been (but they were, though, so this is hypothetical), the consumer crisis couldn't have pushed them over the edge unless they were only a few hundred thousand off.

They were not insolvent. The BoE wouldn't have offered them the lifeline they did had they been.

According to the wikipedia, they asked the Bank of England for 3bn on 12th Sep, the news didn't break until late on the 13th and people didn't start withdrawing until 14th. It seems only a few billion was withdrawn, against a total exposure of over 110 billion. Admittedly, the first loan was only for about the value of withdrawals made, but they never had anywhere near the 100 billion odd they now owe the BoE.

I'm very sure they were balance sheet insolvent, and almost as sure that they also met the "cannot pay debts as they fall due" test as well. That's why they needed bailing out. Yes, no creditor had issued a winding up petition, but they were still in a situation where debts>>>>assets which is, technically, insolvency.

And if they had been really, proper insolvent, I'm 100% sure the BoE would have propped them up - the system can't afford a bank that size going/being bust. That was the whole point of the nationalisation.

EDIT - Craster, I was wrong about the level of depositor withdrawals (£1 billion), but that was still only 5% of their deposit business.

I'm going to attemp to be a filthy peacemaker. This may not work out; wish me luck.

Look at it this way. A bank run is caused by a crisis in consumer confidence in a bank and is always dangerous because no bank keeps more than some piffling percentage of their deposited accounts on hand as liquid capital. We all agree on that, yeah?

In the Northern Rock case, Mr Chris is quite right in saying they were in deep doo-doo and that the justification for the confidence crisis was valid. However, I think Craster is thinking about the fact that even if they had had incredibly solid finances, the exact same coverage in the media would have caused the exact same run on the bank. In other words bank runs are caused by perceived insolvancy, almost regardless of how much trouble they are actually in. From that point of view it didn't actually matter if they were insolvent or not; no bank, healthy or not, could survive media coverage of queues of hundreds of people outside branches, and the fact that they really were in trouble becomes almost ancilliary to the ongoing bank run.

This goes hand in hand with the fact that for such a complex banking entity to prove it isn't insolvent is no easy process, requiring lots of cross-examination by independent experts. There wasn't time for that so all we got was "hey, everyting's groovy" comments from the Northern Rock board, which was a bit like chucking a bottle of water on a house fire.

Summary, like a lot of other things in macro economics, it only works because everyone believes it works, and any predictions that things aren't working have a strong tendency to become self-fulfilling. Sorry if I've mis-stated anyone's position, this is only my interpretation of what you guys have been saying.

I didn't exhaustively read all articles everywhere, but my understanding is that NR made use of a loan facility that the BoE had created specifically for those banks that needed, or might need, a bit of cash in light of the sub-prime crisis. I remember reading, even after millions of idiotic peons decended on the bank, desperate to withdraw their PROTECTED £50, NR hadn't utilised any of the loan.

Anyway, as I have a NR mortgage, doesn't mean much to me. Even if it goes tits up I'll still have to pay it all back. I have to say there hasn't been so much as a blip as far as I can tell, from a customer point of view.

I'm right, because you smell of bottoms.

It's certainly correct that NR took up none of the loan pre-rush.

Possibly because if they had, it could have precipitated said rush. Well, would have, given the herd mentality.

Richard - fair summary there, old thing. No peacemaking really required though. Craster has long been June to my Terry.

Craster - So's your face.

The banks have been "functionally insolvent" for a while now haven't they? Which is fine until a market goes tits up or customers want their cash, both of which happened.

It's stupid to operate on the basis that people won't be people though - just look at the petrol thing; "okay, ONE REFINERY is shutting for A BIT, but everything will be FINE if you just go on AS NORMAL".

"Closing for a bit, you say? Fine and normal, you say? TO THE PETROL SHOP! Judith, GET THE PANS!"

Edit: Ironically, and just like the last two times people started panic-buying petrol, I bloody need some, so will look like part of the problem (apart from not being in Scotland).

That happened to my mum when dickheads everywhere were stocking up on bottled water before we attacked Iraq for a laugh. She looked like a right muppet, even though she did the same thing every few weeks anyway.

Does anybody know of a place to check what's going on regarding the costing of houses? I need to make some urgent desicions but need the info to base them on. I don't even know if there is such a thing, but ta anyway.

Sites like UpMyStreet have quite granular (as in, per-street) statistics on house price changes, if that's what you want. All those sites work off the same Land Registry data, so try and find a site that doesn't charge you for reading it.

All the news reports seem to refer to Nationwide when discussing house prices, this is their house prices home page:

http://www.nationwide.co.uk/hpi/

Don't know if it's of any use though.

Rightmove let you search for sold prices. I think the data they use (presumably Land Registry) are about 3 months old.

Cheers guys, I'll have a nosey around.

Aye, same data. Just have to find a site with non-hateful interface that lets you do a bunch of searches for free (most of them start to charge you at some point because the Land Registry charges a chunk of change itself).

ourproperty.co.uk is the one

No offence to your mum, but "stocking up on bottled water" does seem like a bit of a muppety thing to do, unless there's extenuating circumstances, such as discovering a dead pigeon in your water tank.

Sorry, I wasn't clear - rightmove let you do searches for free. The interface is okay. I don't know if there's a limit, but I've not hit one, and I'm quite nosey.

I'm sort of house hunting (I'm looking, but I'm not going to buy in the current market), and here's the stuff I use:

http://www.houseprices.co.uk/
Prices for houses sold since 2000 - good for seeing what the current owner paid and similar houses nearby so useful when making offers

http://www.property-bee.com/
An absolutely invaluable plugin for firefox. It tracks each property you look at on rightmove, and highlights any changes made (description changes, price reductions etc.) you can also share data with other users, so the history of a property can go back a fair way.

http://www.propertysnake.co.uk/
Tracks house price reduction in your area. Not as good as property bee, but intresting all the same

http://www.housepricecrash.co.uk/
Has all the latest statistics and price indexes. Also a lively, if a little cliquey forum.

Has there been any noises as to when this might be changing does anybody know?

Hopefully not for a long time.

Yeah, that's what I'm thinking too.

It varies between 1 to 2 years, with estimates between 30-50% from the peak. obviously this depends on region and price range.

What I'm basing it on is parity with renting. Once I can get a mortgage for roughly the same as it costs to rent, then I'll buy. Currently it cost twice as much to buy as it does to rent, so I'll just keep saving until the numbers add up, or I find a place I really want and my heart rules my head.

Rents don't really seem to be changing round here. Which sucks, because tomorrow our landlady's lender is taking her to County Court to begin repossession, for the second time in less than a year. Except this time we can't get in touch with her at all, unlike last time, so it's quite possible she has no idea it's happening

A mate of mine had to vacate his rented property quick sharp because it had a possession order served on it. I suspect this is only going to become more common as private landlords with chancy mortgages from the boom period of the last few years come out of fixed-rate mortgate deals and find their repayments increasing across their portfolio.

Whilst that would help me greatly in terms of ever being able to afford a house, it's majorly screwing several of my friends, and whilst it may also screw over the buy-to-let bastards, that in itself could very well lead to higher rental prices.

I thought there was something that protected tenants in the event of a property being reposessed, that meant they couldn't be forced out without decent notice?

It's not going to screw over all the buy-to-let people, only the poorest ones. It's going to be a huge help to richer people.

It'll screw over the ones who have to remortgage!

Not that those evil shark bastards need an excuse to raise prices.

When does the middleman ever get screwed over? The only people really getting hurt are the people selling the houses and the people trying to pay the rent.

Apparantly not, or at least, not often.

For exmaple, they might have bought a house with a fixed rate mortgage of, say, 900 quid a month, which they can get in rent. Then the value of the property goes down so they are in negative equity. Time comes for the fixed rate period to end, and their mortgage springs up to 1400 pounds a month. They cannot increase their rent to 1400 (they can get away with 1000, probably), so they're now having to sink cash into the flat when they didn't want to.

So their options are:

Pay 400 quid a month extra for something that was previously 'free'

OR

Sell at a loss.

Either way, it's not something they'll enjoy, and it will probably serve to push up rental prices.

It seems an odd thing to be happy about.

It's good for you if:

Your landlord doesn't have negative equity (and won't slam up your rent) and you're looking to buy in the next few years, so you can save up a deposit and buy for far less than you would have normally done.

or

If you bought ages ago, have equity in your property, and wish to upgrade to a bigger house, which you can now do for less money.

How is it screwing over your friends, falling house prices benefit virtually everyone. The only people it genuinely screws are the tiny number of people who are in negative equity and have to sell right this second and people who want to trade downwards (and even they will make a massive overall profit, just a slightly reduced one)

First time buyers have a chance to afford a house.
People upgrading can do so cheap.
Long term owners who never intend to sell it doesn't effect one bit.



My heart bleeds FTFY.

It's not just falling house prices though - it's also the increased cost of borrowing. People are paying more for the houses they already have, and first time buyers aren't finding it any easier to buy as they still can't afford mortgages.