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Northern Rock's Cartesian Well Of Bad Logic
I said yesterday that I rather admired the bravado on display at Northern Rock as they continued to offer mortgages with high multiples of income and over the value of the security. But his story today shows that they've moved beyond bravado into the realms of pure stupidity:
There are lots of logical reasons why Northern Rock should push on – regardless of the growing criticism – and pay shareholders their interim dividend.For a start the cost of the 14.2p interim dividend is just £59m – "a mere drop in the ocean", as one Northern Rock adviser put it, given the £3bn that the troubled bank has had to borrow from the Bank of England to prop up its broken business model.
It is also reasonable to point out that the dividend was promised weeks before the bank was plunged into chaos and that it won't just be the board and senior management who miss out – small shareholders, frontline staff and pension funds will also be hit.
But the fact is that the Northern Rock situation is no longer about logic.
Credit Crunch: Northern Rock Down & Goldman Sachs Poised
Quite what is going to happen to Northern Rock is as yet unknown. It seems pretty clear that it's not going to survive long as an independent business, that's for sure.
There's no way that the commercial paper markets are going to open up again for it, if, as and when, the Bank of England guarantee is withdrawn.
So that leaves only one of three options, someone else buys it, it goes bust or it is closed down in an orderly manner.
The thing is, there doesn't seem to be anyone who wants to buy it: thus there's going bust quickly or slowly:
Northern Rock Still Offers Mortgages Six Times Salary
You really rather have to admire the bravado on display here:
Northern Rock stands accused of “reckless” lending after it emerged this weekend that the beleaguered bank is still offering mortgages of six times salary to potential borrowers.Despite provoking the worst banking crisis for decades, the bank last week offered a reporter posing as a first-time buyer a £180,000 mortgage even though he had a salary of only £30,000.
The loan was at least £30,000 more than other leading lenders were prepared to offer. Repayments for the loan would have accounted for more than 60% of the fictional buyer’s take-home salary.
The reporter, posing as another potential customer, was also offered a so-called “negative equity mortgage” worth 117% of the value of the property he claimed to be interested in buying. The mortgages offered by other banks to the same potential borrower were significantly lower.
Don't forget that this sort of lending is now being supported by the taxpayer's money: even if it is at a high interest rate.
Students Should Bank On Debt And Say No To Easy Credit
You’re right-on. You’ve got a “Drop The Debt” T-shirt, two years on a kibbutz under your hemp belt and more cheap-yet-meaningful bracelets than Argos.
And now you’ve got a bank account.
Oh, the shame. But you need one of these instruments of capitalism because you are about to experience debt at close quarters. The maximum maintenance loan is £4,405. A year! Can you live off that?
To facilitate the debt you need a bank account. And that gives you access to an overdraft.
This is the amount of money you owe the bank. And because the banks know you are a student, and therefore cash poor, they can offer you a very decent rate.
The incredible thing is that because the banks see you as a future good earner they are fighting for your custom.
Bonds: Corporate Bonds & Distribution Bonds For Safer Investments
In our crash course on the alternatives to the stock market, we’ve already touched on bonds, namely guaranteed income bonds and premium bonds. We now look at a few other variants on the theme.
The first are distribution bonds. These are operated by life insurers and mix gilts with equities and corporate bonds. They can also involve commercial property, a boom sector in recent years.
The key thing to remember here is that you can lose your capital. But these bonds can offer some income and steady growth. At present, they are a decent investment, giving a yield of around 5%. Since your savings account is paying you around 4%, these bonds look attractive. And you may be getting next to nothing leaving your cash in some bank accounts.
And what is yield?
Nothern Rock: Fear, Panic And Madeleine McCann
Rick Jacobs writes on the Northern Rock debacle:
With the relish that they reported the recent Tube strike, all the news outlets here in Britain are reporting on the crisis surrounding Northern Rock.
If you don't know the story, this bank is the 8th largest in the UK, and last Friday it was reported that they had to go to the Bank of England (the central UK government bank) in order to keep the cash flow on the positive side.
Thanks to problems within the mortgage and loan sector, and lots of defaults, Northern Rock is especially vulnerable because it's business is mainly around mortgages and loans.
They tend to lend and borrow from other banks out of habit, but now that the economy has turned to dust thanks to lousy risks taken by everybody, nobody wants to loan to Northern Rock and now they don't got no cash.
All very interesting and probably the start of a slow and painful pinching of the already unstable economy.
Northern Rock's Asymmetric Information And Reputation
Northern Rock is in the mire. Customers have withdrawn £2bn. They are set to withdraw £12bn. Adam Applegarth, the bank's chief executive (salary: £1.35m), says: "Your savings are secure and there is no need for you to withdraw your money based on our recent announcement."
Can it be exepected that Mr Applegarth's money is at the Northern Rock? If it's not, can we expect a John Gummer moment - the Tory MP is remembered for making great public show of feeding his four-year-old daughter Cordelia a hamburger in the midst of the "mad cow" disease scare?
But what does it all mean? The Guardian's editorial make sense of it:
Globalisation Makes Victims Of British Building Society Customers
We need to return to pre-globalisation days when a man’s building society was in his locale, and strictly for locals, writes Anorak.
The site of Northern Rock customers queuing for the money in Swindon serves as a warning to one and all.
But for some is comes too late. Take the case of Graham O’Brien, profiled in the Sun.
Mr O’Brien, 29, is a customer at the Halifax. Mr O’Brien chooses to live not in West Yorkshire but in Collyhurst, Greater Manchester.
He calls his bank to check on his account. “I answered all the security questions every time I phoned and they still wouldn’t accept I was Graham O’Brien,” says Graham O’Brien.
Current Credit Crunch Will Hurt The UK More Than The US
The Croydonian has spotted this in Business Week, via Der Spiegel:
"Could any country be more exposed to the current credit crunch than the U.S.? You bet, and that place is Britain...."Britain is likely to suffer more severely than the U.S." if the current market turmoil continues, says Danny Gabay, director of Fathom Financial Consulting in London....As in the U.S., consumers are another key driver of the economy-and today they're among the most indebted in the world. British consumers owe $2.7 trillion on credit cards, mortgages, and other consumer loans-or more than the country's entire economic output. Household debt as a percentage of gross disposable income is 166%, compared with 127% in the U.S. So it's hardly surprising that in the past year, British banks have had to write off $18 billion in bad debts, mostly consumer borrowing.Such write-offs could be just the beginning if housing prices start to fall."
What am I bid for the Dismal One [Gordon Brown] bottling calling an election and then waking up to discover, "For they have sown the wind, and they shall reap the whirlwind: it hath no stalk: the bud shall yield no meal: if so be it yield, the strangers shall swallow it up".
Via [The Croydonian; Anorak; Business Week]
Check Your Bank's EAR And Consider Alliance & Leicester For A Zero Per Cent Overdraft
A few years back, the banking sector was dominated by the so-called Big Four. These four banks – Lloyds, Barclays, Midland and Natwest – bestrode the high street.
And then came the introduction of competition. Times became tougher - and the Big Four knew it. Lloyds became LloydsTSB and Midland renamed itself HSBC, a rebranding strategy to reflect the new market conditions.
And still we bank with them. We do so because they offer security for our cash, offer various benefits and we are creatures of habit. Ask yourself this: when was the last time you changed your bank account?
The Sub-Prime Market: What It Is And What It Means To Your Wonderful Life
The American housing market is making news.
In short, the sub-prime market is for those borrowers who can’t get the best deals because of bad credit histories. There is an increased risk that the borrower will default on the loan.
The loans are offered at a premium. Bigger risk equals bigger payments. The brutal truth is that if you can’t borrow money easliy you have to pay more to get what money you can.
And – get this – borrowers have started to default.