Thursday, 5 August 2010

Solid...Solid as a Rock...

Northern Rock Asset Management the "Bad Bank" has posted better results than Northern Rock Plc the "Good Bank". How interesting...

Net profit of GBP 359 millions versus net loss of GBP 142.6 millions.

The good bank has increased its mortgage lending by 50 % to 2 billions GBP up until June, yet it still producing a loss.

This is partly due to the withdrawal of GBP 2 billions GBP of savings due to the end of the guarantee of 100 percent of deposits by the government.

Still GBP 22.5 Billions to be repaid to the UK taxpayer though...

Northern Rock has GBP 47.2billion of residential mortgages still sitting on its books.

Yet David Jones, its former CFO was only fined by the FSA 320,000 GBP and barred from working in finance. This is ridiculous given the CFO had clearly misled investors on the level of bad loans leading to the spectacular collapse of the bank.

In November 2007, Alistair Darling declared the following in the Commons: he insisted that the Government “fully expected” to get back the GBP 24 billion that the Bank of England had lent to the troubled bank because the money was secured against its assets.

On the 17th of February this was the statement made by Alistair Darling in respect of the nationalisation of Northern Rock:

"The Financial Services Authority continue to assure me the bank is solvent. It believes that Northern Rock's mortgage book is of good quality. And the FSA will also continue to regulate the Northern Rock."

And on the 6th of August 2008 the Government injected an additional GBP 3 billion into Northern Rock because at that time the bank indicated repossessions had soared 180 per cent and losses had jumped to GBP 585million in the first six months of 2008 only.

So much for the FSA good understanding of Northern Rock's quality of its mortgage book...

Under the existing business plan for Northern Rock, the bank must repay all the money its owns by the end of 2010.

Northern Rock used to have a "fantastic" mortgage product called Together mortgage which let some borrowers borrow up to 125 per cent of a property's value! Nice one...

In August 2008, the arrears on this product was 2.14 percent, double the industry average and was rising super fast at the time.

One year later Northern Rock was borrowing GBP 11 millions a day from taxpayers.

"Its outstanding net debt to the Bank of England reached GBP 10.9billion in the first half of the year, up from GBP 8.9billion at the end of 2008."

Read more:

"Some 39 per cent of its 560,000 customers are in negative equity, the figures showed - an extraordinary 218,000 people."

A year later arrears on the fantastic Together Mortgage had soared:

"Arrears on these loans spiked to 6.5 per cent of Northern Rock's loan book, up from 2.14 per cent in the first half of 2008. The industry average stands at just 2.39 per cent."

Up to 6 months after Northern Rock had been bailed out, it was still providing Together Mortgages at the tune of GBP 800 Millions from September 2007 to February 2008.

The reason why the good bank is losing money is that we are still in a deleveraging process, which means that people, are borrowing less and saving more, which makes it difficult for Northern Rock Plc to make a profit.

The government would like banks to increase lending, which is very difficult in this deleveraging environment. While small business are struggling to get access to loans, Banks have gone back to tightening their credit standards which mean their are much more cautious in relation to the lending their are willing to make, while they are also still busy repairing their balances sheets.

Given banks are a leverage play on the economy, it is an encouraging sign that profits are on the increase (but not sufficient). Yet there are still many issues in relation to the solidity of the recovery, due to the urgent need of structural reforms in government spending and the high level of unemployment.

There is a risk of a double dip, not only because of the seriousness of the damages caused by the crisis but as well due to the increasing risks from a geopolitical point view.
To name a few, the increasing tensions between Venezuela and Colombia, as well as Iran still busy building up its nuclear program.
Also the risk of an increase in interest rates, could as well dent seriously the fragile recovery taking place. The Bank of England for instance is facing increase inflationary pressure due to the failing of QE. Commodities are also rising fast given drought and other issues. For instance price of wheat are increasing very fast, which will have an impact in the level of consumer prices: today Wheat futures rose 7.9 percent to USD 8.155 a bushel in Chicago, the highest price since August 2008...

The Bank of England will try to delay the inevitable as long as possible but it will have to raise rates in the short term.

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