The Oil Drum

24 comments on The Finance Round-Up: September 28th 2007

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Burgundy on September 28, 2007 - 6:26am

Re: Northern Rock

Reading the general press it would seem that Northern Rock pulled its expected dividend. But not so, they actually paid out £40m in dividends whilst also borrowing a further £5b from the Bank of England:

Northern Rock debt to Bank now £8bn
http://www.ft.com/cms/s/0/f1bb99f8-6d42-11dc-ab19-0000779fd2ac.html

Northern Rock borrowed another £5bn from the Bank of England, it emerged on Thursday, bringing its indebtedness to the central bank close to £8bn since it was given access to emergency funds nearly two weeks ago.

The Financial Times has learned that Northern Rock last week distributed almost £40m in dividends to holders of preference shares, issued to maintain capital ratios just two days before the bank cancelled its interim dividend to ordinary shareholders, saving about £60m.

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Stoneleigh on September 28, 2007 - 7:54am

Thanks for posting that Burgundy. All too often, bailouts only serve to pay off the well-connected when problems emerge, leaving the rest holding the empty bag. IMF country bailouts are a case in point (see for instance And the Money Kept Rolling In (And Out) by Paul Blustein in relation to the financial crisis in Argentina).

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Burgundy on September 28, 2007 - 3:43pm

Northern Rock's bailout is becoming increasingly bizarre and the Bank of England trashing its own reputation even more so. I can only assume that the situation is so bad that the BOE has no alternative but risk itself and the entire financial system in a reckless effort to avoid meltdown:

Northern Rock refuses to tighten lending rules
http://business.guardian.co.uk/markets/story/0,,2179625,00.html

Mortgage brokers said the ailing Newcastle-based bank also continued to sell its controversial 125% mortgage and personal loan package.

Most lenders have tightened their lending rules in the aftermath of Northern Rock's bailout by the government more than a fortnight ago. Sub-prime lenders that target home buyers with poor credit histories have scrapped much of their riskier lending in recent days while most mainstream banks and building societies have targeted safer customers with higher credit scores...

...Northern Rock sales staff can sanction mortgage offers of more than five times earnings to customers with salaries of £100,000 or more. If the customer agrees to a five year fixed rate deal they can qualify for a loan worth six times their income, said mortgage broker London & Country.

Northern Rock's shares dropped 7% to 179p today on news that its overdraft with the Bank of England had ballooned to almost £8bn. Some experts said it could be expected to breach the £10bn barrier within days.

"By Jove we're still afloat. Full steam ahead and try not to hit any more icebergs!"

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ilargi on September 28, 2007 - 11:01am

It's a mess down there on the isles, I'd say. All this stuff came about when new PM Gordon Brown handled finance. There's rumours that the government overruled the Bank of England, but I find that hard to believe.

Instead, as we saw in the last Round-Up, it's the government that now guarantees $200,000 of each person's bank deposits. The weirdest thing for me is that Northern Rock, while paying dividend with taxpayers' money, still hands out bigger and riskier mortgages than any other UK bank.

We're sort of counting down Europe now. Financial trouble in the UK, in France (see articles above), and in Spain:

Hundreds of estate agencies across southern Spain have gone out of business in a trend that experts say signals the end of a buoyant housing market that has fuelled the country's economy over the past decade.[..]
Last year more than 800,000 homes were built in Spain, more than in Britain, France and Germany combined.

Than there's Germany where banks are certainly shaking, Dresdner needed a bailout, Deutsche Bank has a hard time staying upright, with $40 billion in loans it can't sell off.

These 4 countries are Europe's largest economies, and have half the 500 million EU population. It doesn't take much imagination to figure how the smaller ones are doing. Don't sleep next to an elephant.

Still, just like in Canada, the official word remains: "don't worry, we're fine, we don't have subprime mortgages", and people swallow that. But it's not the mortgages, it's the toxic paper that has been issued with the mortgages as collateral, that is the problem. And both the EU and Canada have bought tons of it, plus created more of their own.

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Burgundy on September 28, 2007 - 1:33pm

"It doesn't take much imagination to figure how the smaller ones are doing"

ICELAND FACES MELTDOWN
http://findarticles.com/p/articles/mi_qn4156/is_20060409/ai_n16179446

"How much that plays into a full financial crisis I wouldn't like to predict. There is too much debt, too much lending." Stuart Thomson of Charles Stanley Sutherland in Edinburgh agrees. He says: "The maturing debt in two years is 130-per cent of GDP. For Britain it can't go above 40-per cent of GDP. Those debt levels are remarkable, you won't find them anywhere else. The effect is that borrowing is running down net savings and running a very large current account deficit, which is running at 10-per cent of GDP. In the UK it's 6-per cent." Through all the predictions of doom and gloom, the Icelandic Financial News's Arnason says that there is no panic on the streets.

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ilargi on September 28, 2007 - 3:24pm

And that could all come crahing down on Canada.

Europe holds key to credit crisis
_{EU banks have much to gain if commercial paper unwinds}

The future for the so-called made-in-Canada solution to the freeze in the $40-billion asset-backed commercial paper market lies not in this country, but in Europe.

A major chunk of the illiquid notes are backed by bets around interest rates called credit default swaps.

The high degree of leverage and the recent credit tightening means the parties on the other sides of the deals have everything to gain if the issuers of the commercial paper are forced into default and the trades are unwound, sources said.

"If the issuers were forced into bankruptcy, the swap providers would have priority over anybody else," said one analyst who asked not to be named. "They could force a fire sale [of the conduit assets.]"

In other words, the owners of the commercial paper could end up facing huge losses.

The swap counterparties include a group of European banks, some of whom are also part of the consortium of financial institutions that unveiled the restructuring plan back on Aug. 16.

Many of the proponents including the Caisse have much to lose if the plan fails. The investor committee chaired by lawyer Purdy Crawford certainly want it to work. But some players, such as the ones on the other side of the credit default swaps, could potentially find their interests better served if the plan collapses.

"The foxes are in the henhouse," said a senior official at a company that owns more than $10-million of ABCP. "What Purdy [Crawford] is trying to do is keep the foxes in a corner."

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Burgundy on September 28, 2007 - 4:08pm

Looks like the whole system could lock-up with no one being able to make a move without bringing the roof down. Meanwhile, the foundations of the financial system are also eroding away beneath their feet forcing them into ever more risky manoeuvres.

Nail biting stuff :)

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Stoneleigh on September 28, 2007 - 7:49pm

The whole thing locking up is indeed on the cards, and the desperate actions taken to keep things going only postpone (and aggravate) the inevitable. IMO the logjam that's forming will burst once we see asset firesales, as that means marking those assets to market rather than to model. Even one such sale - with assets going for pennies on the dollar, or worse, with no bids at all - would call whole asset classes into question virtually overnight, leading to an every-man-for-himself rush for the exits. We live in dangerous times.