Let us pretend that you have money in the Northern Rock Building Society: what then is the rational course of action? According to the Chancellor, the emergency loan he has authorised to the beleaguered building society means that everyone can be reassured. It's not going out of business. That still leaves the question: what would you do? Well, the Financial Services Compensation Scheme that protects depositors only provides full compensation up to £2000 and ends £35000. This loan from the Bank of England isn't exactly free money either. The loan is secured on the Northern Rock's loan book, so it is effectively capped at £31.5bn, and that is assuming that none of the loans have not already been used for collateral elsewhere. It is also at a punitive rate of interest, so taking it up cuts deep into profitability, and Northern Rock will certainly have to take it up. So, in strictly rational terms the smart thing to do might be to get your money out, especially if you are well over the £33000 limit. In any case, Northern Rock customers are voting with feet, regardless of warm words from politicians, with £1bn withdrawn yesterday and more today, and the more is taken out, the more sensible it is to take your money out. Whatever happens Northern Rock is finished, facing either takeover or bankruptcy, probably the former. They ran a money market-based strategy, and, like so many similar, it worked just fine until the market changed. Using your business as a one-way bet is never a good idea.
I reckon that Northern Rock customers have got it right. The question is how correct are the Chancellor and the Bank of England on this one? They are being much less sympathetic than the the Fed or the ECB. This could turn out to be a mistake, especially if the Northern Rock collapses.
2 comments:
I must say what an absolute bunch of garbage this gentleman has posted! I am a conservative supporter, but by reading your absolutely ignorant comments has made me question my faith! Firstly may I state that Northern Rock PLC is NOT a building society (if you had done your homework you would have realised it was a fully functioning BANK...oh by the way the PLC part gives it away!). Secondly, I am quite curious how a failed politician such as yourself, who obviously has such a deep understanding and knowledge of the situation to hand could make such remarks! I'm thinking it's possibly because you are "the Cabinet Member responsible for Regeneration and Green Issues" in Basildon. I'm dumbfounded and find it remarkable that a man in your position has made a completely blind observation on a situation you know clearly nothing about!! Thirdly, may I also make the public aware that due to the Bank of Englands provisions for a loan to Northern Rock (don't forget the PLC part my intellectual friend), they will not allow the company to go bankrupt!! What this does mean is that the consumers money is safer than ever! And may I follow up with that Mr. Horgan and say that you are no better than the headless chicken!! Why on earth are you handing out financial advise when you should be focusing on recycling bins and rubbish collection times! The key for Northern Rock PLC's continuation is not for the consumer to act like yourself and run around like you are on fire trying to withdraw all your money, and judging by you probably keep it under your bed, but for them to realise this is a short-term issue and to read all the relavent material and articles to hand before making rash decisions! Also, if you had done your research you would have realised that despite this current liquidity issue Northern Rock PLC still stand to make profits of £540m this coming year, and before you post another ignorant reply, this figure is taking into account the current problem!! For all those who read this please note that Northern Rock still stand to grow this year even though it will slow some of its business activities! I hope this response is alot more helpful to the general public than the ramblings of an clueless environmentalist!
Dealing with the substantive issues:
1. You are quite right that it is a Bank. A building society would never have got into this mess.
2. The Bank of England extending collateralised loans to Northern Rock at a punitive interest rate does not equate to a guarantee that it will not be allowed to go bankrupt. You may assume that is the case, but no such actual guarantee has been given, by anyone.
3. Northern Rock's profits will be hit hard as it progressively has to refinance about 75% of its mortgage book from the Bank of England facility, at a very high price. Customer withdrawals exacerbate this situation as will the credit re-rating that is almost certainly coming.
4. The Northern Rock brand is finished. They won't be growing this year or in any year. It is simply a matter of who buys them and when. The only thing that puts a floor on the share price is that their market capitalisation is already close to their break-up value.
5. Bankruptcy is unlikely, but not impossible. Good businesses can collapse from cash-flow problems, never mind those built on trying to outsmart the money markets.
At the very least, Northern Rock will be in no position to offer a good deal to savers any time soon. At worst they fall well below the limit of investment risk that most people want for their Bank. Withdrawing money is quite rational, especially if the sums exceed £35k.
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