Monday, September 17, 2007

Rock and Roll

Well it looks like all the Northern Rock depositors are having their savings underwritten by the government, which is nice, although I wasn't terribly worried about my £170 in an old ISA. Not so much joy for the shareholders though as the stock has plummeted quite impressively over the last few days. But that's what you get for investing in a risky company. Or is it?

I'm going to put my neck out here and say that very soon would be a good time to invest in Northern Rock again. There's nothing like picking up a bargain. Just ask Warren Buffet.

Now I know there are a few differences in the business models but there is also quite striking similarities between the Wells Fargo near-collapse and today's Northern Rock panic. The problem is fundamentally a lack of availability of short-term credit to Northern Rock, which it would normally obtain from other banks but which are now too nervous to lend. Yes, this is indirectly linked to the sub-prime problems in the US, but Northern Rock's lending has not been reckless. Mortgage arrears on their £100bn book are less than half the industry average, and over a third funded by deposits (of which only 8% has been withdrawn by scared Northern pensioners - see, I watch the news sometimes....).

Northern Rock will either be bought out, or wound down. It's asset book is worth about 180p per share according to some sources and this is the worst case scenario. If it's bought the price would likely go up again. So, if I had some money lying around to invest, I reckon I'd be waiting for the share price to hit this figure (probably some time tomorrow) and start buying.

Only time will tell if I'm right. Maybe I just like to invest in the same way I play poker - for the thrill rather than the gain?

Of course all bets are off if B&B, A&L and HBOS continue to plummet. These all share the same wholesale funding model which could see savers running to the traditional big banks and no one trusting anyone any more. Still, good news for us with debts though isn't it?

16 comments:

Jamie said...

*MOMENTARILY SPEECHLESS*

SO... MANY... INSULTS…

If you ever say or write anything quite like this again, I’ll be forced to burn down your flat.

Did you read what you just wrote? Did you? DID YOU? Here’s a quote to act as a slap round the face to snap you back to reality:

"Now I know there are a few differences in the business models but there is also quite striking similarities between the Wells Fargo near-collapse and today's Northern Rock panic"

ARRRRRGHGHGHGHGHGHHHHH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I’m stunned. Actually in disbelief. I was waiting for a punchline. BUT THIS POST IS THE PUNCHLINE.

Oh when did we lose you Will, when?

Jamie said...

You know the Disney type of films when a businessman has his teenage/child version of himself come back and say "LOOK WHAT'S HAPPENED TO YOU!", to show him that he's forgotten what life's about... Well if you starred in that film, THIS is what your 16 year old self would wave in your face in outrage.

Jamie said...

"Yes, this is indirectly linked to the sub-prime problems in the US, but Northern Rock's lending has not been reckless. Mortgage arrears on their £100bn book are less than half the industry average..."

I'M ACTUALLY CLOSE TO TEARS HERE.

Tim said...

LOL

bagelmouse said...

Actually, what I read was a quite sensible post about how the panic over the Northern Rock is just that - panic. And how the shirt-rending we're seeing in the media is likely just a frenzy that will pass, and how people shouldn't get that worried. Pretty close to my own position.

Honestly puzzled; can't see the problem.

Kate said...

"Northern Rock's lending has not been reckless" - hmm depends how you define reckless. Until August 9th, short-term commercial paper borrowing to fund longterm lending (mortgages) looked perfectly sensible. It's looking like a pretty reckless thing to do now, though.
As does the way NR stepped up its lending activity massively in the past 18 months.

As for '
Still, good news for us with debts though isn't it?' - no, probably not actually. Credit crunch = banks have shortage of funds = less keen to lend to consumers = interest rates go up = less affordable debt, and also reduced overdrafts, credit card limits, etc.

bagelmouse said...

In a way, it's about bloody time credit limits were scaled back so part of me thinks this whole farrago's a good thing (of course, the bit that has to remortgage in June isn't quite so convinced).

Still don't see what Jamie's whining about though.

Will said...

I'm not sure what Jamie's problem is either. I'm quite pleased about the effect this has had on him though. Why can't I write about something other than the kid in the cornflakes ad and why no one wants to go out with me any more?

Anyway, Kate, I still say Northern Rock's lending hasn't been reckless, it's their method of funding this which was dubious and has proved to be it's downfall. But they wouldn't be having any problems where it not for the current market conditions.

And actually it's good for me because I don't see the BoE raising their rates any time soon and my mortgage is guaranteed to be less than 0.9% above the base rate for the life of it. Ok, people looking for more debt might have issues but I can feel pretty smug.

And I don't believe banks do have a shortage of funds - they're just nervous about lending them to other institutions because they're not sure a) how much they'll have to set aside for sub-prime exposure and b) they're not sure how much others are exposed to the same. There are rules as to how much capital banks must hold on to, like the Basel Accord, to prevent liquidity crises. I'd be interested to see how (or if) Northern Rock meets these requirements.

That bit should really piss Jamie off.

Kate said...

Don't understand what you mean by 'method of funding' and how that differs from raising most of their £ on the shortterm commercial paper markets.

Agree with the rest though - never believed the banks lack the dosh either, as I said on my blog a week or so back iirc.
Basel 2 was always going to be a bit of a fucker, but it's going to be especially interesting now.

[waits to see Jamie go off on one again about us talking financial matters ...]

Will said...

I don't know what you mean either. I was talking about their use of the financial markets to fund their lending as opposed to using customer deposits.

bagelmouse said...

God, I hadn't thought of Basel II...

Kate said...

That's what I was talking about all along, Will. NR is in a worse position than other banks because its business model relies on access to short-term borrowing on the commercial paper markets to fund long-term mortgage lending to its customers.

And if we start talking about Basel 2, Jamie will go spare.

Jamie said...

Has it really come to this?

Jamie said...

Hahaha you money face cunts. All of you. Not calling my mates cunts or anything, but listen up, turns out you were all wrong. You money face cunts.

"I'm going to put my neck out here and say that very soon would be a good time to invest in Northern Rock again."


"Actually, what I read was a quite sensible post about how the panic over the Northern Rock is just that - panic. And how the shirt-rending we're seeing in the media is likely just a frenzy that will pass, and how people shouldn't get that worried."

P.S. you're all not really cunts. Just very, very wrong, money faced bastards.

Jamie said...

Ah, that last post was harsh. I wsn't raging at anyone there, just the system. I was Raging Against the Machine

Will said...

Don't get ahead of yourself sunshine. Who first mentioned Buffett aye?