Loans and Finance

Loans and Finance

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News and information about loans, money, debt, finance and business issues.

Friday, September 28, 2007

Northern Rock Borrows £8BN

It transpires that Northern Rock has borrowed another £5BN from the Bank of England, bringing its indebtedness to the BoE close to £8BN.

This means that Northern Rock has now borrowed the equivalent of 33% of its retail deposits at the end of June.

How long has this bank got left in its present form?

Who will buy it, and at what price?

Thursday, September 27, 2007

The Banana Republic of Great Britain

Richard Lambert the Director General of the CBI put the boot into Britain's financial services industry yesterday, by likening the regulatory system's failure in its handling of the crisis at Northern Rock as akin to something from a "banana republic."

Quote:

"Outside the movies, a run on the bank is something that happens in a banana republic.

That one should have happened, under our noses, in a mature and prosperous country like the UK, is almost unimaginable
."

He poured scorn on the tripartite system, whereby financial regulation is split between the Treasury, Bank of England and the Financial Services Authority, saying that it had "failed to deliver the goods" and needed to change.

Adding that the Bank of England's lender of last resort facility should be reassessed, and rules governing how deposits are protected must also be overhauled.

Quote:

"No institution will ever go down that route again if it remains unchanged. What happened to Northern Rock is just too grim a precedent."

It all comes down to confidence in the system, regrettably as a result of numerous scandals (endowments, pensions, bank charges, over zealous lending etc) people in Britain have totally lost in the financial services industry.

It will take more than a revamp of the tripartite system to restore that confidence.

Wednesday, September 26, 2007

Northern Rock Caves In

Northern Rock finally caved in to pressure from politicians and taxpayer groups, and cancelled it £59M interim dividend. The 14.2p-a-share dividend was due to be paid next month to shareholders on the register at the end of this week.

Thus hammering another nail firmly into the coffin of the shareprice.

Northern Rock is now trying to sell itself, potentially to investors who target distressed assets.

Selling Northern Rock, possibly in pieces rather than as a whole entity, will effectively wipe out the remaining share price. The shares have fallen 74% since the bank said it was having credit problems 12 days ago.

The bank, trying to shore up its share price, said after the close of trading yesterday that it had received several approaches. Talks are preliminary and no price has been mentioned, it said.

This situation is beginning to resemble the Marconi debacle, where stock that once traded at above £12 ended up being traded for 12p.

Tuesday, September 25, 2007

Speculators Target Sterling

Speculators are targeting Sterling, in the belief that the Bank of England does not have enough money to head off the continuing credit crunch, and that it will be forced to cut interest rates.

Bloomberg notes that the UK's Financial Services Compensation Scheme has £4.4M to protect deposits, compared with $49BN in a similar fund in the US.

It will be interesting to see how the Chancellor's plans to offer a £100,000 guarantee to all savers will be financed. The banks will most assuredly target their customers for any "perceived" increase in their cost base arising from the implementation of this scheme.

Monday, September 24, 2007

Heads Should Roll

Alistair Darling used his inaugural Labour Party conference speech as Chancellor to drop a very large hint that, in his view, senior managers at Northern Rock should lose their jobs over the recent shambles.

AIA Accountant of The Year

Following on from my earlier note, about being nominated for "Accountant of The Year" for The Association of International Accountants (AIA), you may be interested to know that I have made it through to the finals.

Ken

AIA President's Awards 2007

Congratulations to the finalists and to all those who were short listed. Winners will be announced at the President's Dinner on 21 November 2007.

AIA Accountant of the Year

Finalists

Ken Lever, Helen Weir, Ken Frost.

Short listed
Ken Lever, John Griffith-Jones, Helen Weir, Jon Symonds, John Connolly, Ken Frost.

Criteria

An award designed to recognise organisations' accountancy stars. Firms, businesses and institutes are encouraged to make nominations, though individual entries are also welcome. Open to all qualified accountants whether in business, practice or public services.
  • Nominees must have demonstrated sound judgment, technical skill, innovation and leadership ability.

  • Nominees must have demonstrated dedication to clients.

  • Nominees must stand out from their colleagues as an accountant who has made significant impact, taking into account the length of their career in accountancy and any notable obstacles they have had to overcome.

  • Nominations should include any work related activities undertaken and broader contribution to the profession.

  • Nominations should include their contribution to the community.
Source AIA

The two other finalists are:

Ken Lever

Finance Director Tomkins plc
Age: 52

Appointed to the Board of Tomkins plc in November 1999. He is a non-executive director of iSOFT Group plc. He is a Chartered Accountant and a member of the ICAEW Financial Reporting Committee and Chairman of the Hundred Group Financial Reporting Committee. He has held executive directorships at Albright and Wilson plc, Alfred McAlpine PLC and Corton Beach plc and was a partner in Arthur Andersen.

Helen Weir

Group Finance Director Lloyds TSB

Joined the board in 2004. Group finance director of Kingfisher from 2000 to 2004. Previously finance director of B&Q from 1997, having joined that company in 1995, and held a senior position at McKinsey & Co from 1990 to 1995. Began her career at Unilever in 1983. A non-executive director of Royal Mail Holdings and a member of the Accounting Standards Board. Aged 45.

Wednesday, September 19, 2007

Northern Rock

Whilst the depositors in Northern Rock may now feel relaxed, the shareholders are in a very different position.

Shares are down 8%, and are currently trading at 280 pence (off a low of 246 pence).

This is rapidly becoming a "traders" share, as stake sales from two investors reignited concerns over Northern Rock's future.

The drop is explained by traders as being due to possible offers for takeover at around 200 pence or lower.

Tuesday, September 18, 2007

Northern Rock

Chancellor Alistair Darling, speaking after the stock market closed on Monday, said that if necessary the government and the Bank of England would guarantee all existing Northern Rock deposits during the current instability.

This intervention appears to have calmed market nerves, as shares in Northern Rock currently stand 11% up on yesterday.

The banking system and the indeed the whole financial system can only work if people have confidence in it; it seems that the actions by the Chancellor, certainly in the short term, have restored some confidence.

That being said, the "shorters" will do their best to test the resilience of the share price.

Monday, September 17, 2007

Northern Rock

Bloomberg notes the following:

"The cost of overnight borrowing in pounds rose the most since June as the bailout of U.K. lender Northern Rock Plc stoked concern other home-loan providers will be forced to seek emergency funding.

The overnight rate banks charge to lend pounds soared 60 basis points to 6.47 percent today, the highest in more than a month, according to the British Bankers' Association. The three- month rate fell 7 basis points to 6.75 percent, the BBA said
."

Northern Rock's share price is currently down 34% on the day.

The time has come for the Bank of England to:

1 Lower interest rates

2 Knock some heads together in the City, and ensure that the self imposed moratorium by banks on interbank lending is lifted

Should the Bank of England fail to loosen interbank liquidity, other banks will start to wobble. Bloomberg notes that Bradford & Bingley Plc and Alliance & Leicester Plc also rely more on financial markets than customer deposits to fund mortgages.

It is time for the Bank of England to get off the fence.

Northern Rock

Monday morning is proving to be a "grey day" for shareholders in Northern Rock, as they saw the share price plunge by 29% in early trading to 311 pence.

Friday saw the price fall by 31%, as the Bank of England agreed an emergency lending facility for Northern Rock.

Whilst it is clearly bad news for shareholders and those wishing to take a mortgage out with Northern Rock, the fall in shareprice and liquidity issue should not worry savers with money sitting in Northern Rock accounts.

The fact that the Bank of England has agreed to cover Northern Rock's liquidity means that savers will not lose their money.

The reality will be as follows:

1 Northern Rock will be taken over at a bargain basement price

2 The mortgage market, and hence housing market, will be adversely impacted.

That being said, people are still queuing to withdraw their savings from Northern Rock, why?

1 The herd instinct of fear

2 The sadly British lack of understanding of how the financial markets work

3 A complete lack of trust in the financial services industry.

The blame for the latter can be laid fairly and squarely at the door of the financial services industry, which has foisted on the hapless British public a plague of disasters including:

-The endowment crisis
-The pensions crisis
-Excess bank charges
-Irresponsible lending
-Conspicuous greed (eg mind boggling bonus payments to senior bank executives)
-Offshore call centres
-Impersonal banking etc

Who can blame the public for no longer trusting the financial services industry?

The financial services industry will now have to work very hard indeed to regain the public's trust, I wonder if they have realise quite how hard they will have to work and whether they will ever regain the public's trust?

Sunday, September 16, 2007

Northern Rock

Northern Rock two years ago was the only bank to offer mortgages of up to 125% of a property's value (or 95% of value plus up to £30K) and up to six times borrowers' income.

Is it possible that, by being so "generous" with its loans, it has brought this mess that it is in upon itself?

The Telegraph takes the view that Northern Rock was doomed:

"No other lender has been more aggressive in growing its share of the ever-more inflated UK housing market.

No other bank has gorged itself on cheap debt to the same extent in order to maintain its relentless growth profile.

No other bank has been so dependent on short-term cash from the money markets to keep funding its business model.

There has always been a school of thought that believed Northern Rock was an accident waiting to happen
."

The Sunday Telegraph quoted a source close to Northern Rock as saying if its shares fall heavily again on Monday, then a fast break-up and sale of its assets "looks inevitable".

In other words, Northern Rock will cease to exist and be taken over.

This should not adversely affect those with savings in the bank (note: had the Bank of England not stepped in, then the position of savers would be entirely different and they could face losing everything). However, it may well adversely affect the mortgage market and hence house prices.

In case you are wondering who will end up footing the bill for the Bank of England bail out of Northern Rock; it will be us, the taxpayers.

Saturday, September 15, 2007

Northern Rock

In scenes reminiscent of "It's a Wonderful Life" Northern Rock experienced a good old fashioned run on the bank yesterday, as customers queued to withdraw their money.

About £1BN, 4-5% of retail deposits, was withdrawn on Friday; it is claimed that there are queues forming today as well.

As ever, with matters of finance, the hapless citizens of Britain have got hold of the wrong end of the stick. There is precious little likelihood of their savings in Northern Rock disappearing, as the bank is not about to go bust.

The danger in fact is posed to those who wish to borrow money for a mortgage. Northern Rock and other lenders simply do not have the liquidity to lend money on the scale that they were doing before.

The result?

Falling house prices.

That's where the danger lies!

Friday, September 14, 2007

Northern Rock

Northern Rock, Britain's fifth biggest mortgage lender, has been forced to go cap in hand to the Bank of England to secure emergency financial support.

Today the Bank of England provided that emergency financial support, as Northern Rock became the first major British bank to be severely hit by the US credit crunch crisis.

Northern Rock also issued a profits warning, stating that profits would undershoot forecasts by £147M.

The Chancellor of the Exchequer, Alistair Darling, took a side swipe at American financial practices by noting that Northern Rock's problems might have been avoided had US banks not been so willing to offer cash to borrowers with poor credit histories.

The Bank of England stated:

"The Chancellor of the Exchequer has today authorised the Bank of England to provide a liquidity support facility to Northern Rock against appropriate collateral and at an interest rate premium.

This liquidity facility will be available to help Northern Rock to fund its operations during the current period of turbulence in financial markets while Northern Rock works to secure an orderly resolution to its current liquidity problems
."

Darling waded into the American financial system by saying:

"Right across the world, banks and financial institutions do need to be clear who they are lending to... If you look at the root causes of all this problem in the United States, perhaps if someone in America had actually looked closely at who they were lending the money to ... then some of these problems might have been avoided."

The share price of Northern Rock has fallen 25% this morning to 482 pence. Not surprisingly, Northern Rock management are believed to be talking to investors who have seen their investments collapse as a result of the Bank of England bailout.

There are two lessons to be learnt here, both by the "man in the street" and the so called "sophisticated" financial institutions:

1 Don't borrow more than you can afford to pay back.

2 Don't use complex financial instruments, and sign agreements, that you don't understand.

Thursday, September 13, 2007

Bank Charges

As the date for the court appearance by eight banks, who will be taken to court in January by the Office of Fair Trading (OFT) for allegedly unfair bank charges, draws ever nearer; some banks are trying to show "some flexibility" in their approach to their customers.

Thisismoney reports that Lloyds will be the first bank to reduce its overdraft charges.

Quote:

"On November 2 Lloyds will introduce a monthly charge of £15 and a sliding scale of daily charges of between £6 and £20 instead of its previous daily charge of £30 for unauthorised overdrafts."

Whether this mollifies the OFT, or is the start of a price war between the banks, remains to be seen.

The list of shame includes; Lloyds, Abbey, Barclays, Clydesdale Bank, Natwest and its owner HBOS, HSBC, The Royal Bank of Scotland and Nationwide Building Society.

Wednesday, September 12, 2007

Nomination

I am now back in the UK, having had a very sucesssful business trip to Pyongyang, and thought that you may be interested/amused to see that I have been nominated for Accountant of the Year for the Association of International Accountants (AIA) in the AIA President's Awards 2007.

The Association of International Accountants (AIA) was founded in the UK in 1928 as a professional accountancy body and from conception has promoted the concept of "international accounting" to create a global network of accountants in over 85 countries worldwide.

AIA is constantly working with its people and partners in financial centres worldwide to encourage trust, clarity and shared international standards in the accounting profession. Many of its members are at the top of the industry, from senior management to director level, representing some of the most important and profitable firms in the world. With a select membership demographic including high numbers of these influential decision makers, the AIA is a truly prestigious organisation.

The award is designed to recognise organisations' accountancy stars. Firms, businesses and institutes are encouraged to make nominations, though individual entries are also welcome.

Open to all qualified accountants whether in business, practice or public services.
  • Nominees must have demonstrated sound judgment, technical skill, innovation and leadership ability

  • Nominees must have demonstrated dedication to clients

  • Nominees must stand out from their colleagues as an accountant who has made significant impact, taking into account the length of their career in accountancy and any notable obstacles they have had to overcome

  • Nominations should include any work related activities undertaken and broader contribution to the profession

  • Nominations should include their contribution to the community
Best regards

Ken