Thursday, December 13, 2007

Gordon's "Pound in Your Pocket" Moment

I've just had the dubious pleasure of reading Gordon Brown's Times interview. Unlike Fraser Nelson I found little in it that I could find thoughtprovoking or "lively". However, this parapgraph on Northern Rock stared out at me...
“There are bids on the table. The one thing you are pretty clear about is
that the depositors have been protected and mortgage holders are in a proper
position. Whatever else, nobody has lost their money.”

To me, that's a bit like saying "the pound in your pocket hasn't changed". Or at least depending on events, it's something that may come back to haunt him. The fact is that everyone in the country has lost £900, as the taxpayer has had to come to the rescue of Northern Rock (if it had been called East Anglian Rock, it would have been allowed to go to the wall). That money is not necessarily safe. The Board of Northern Rock seems to have its head in the sand and not taking bidders seriously. This saga is not over by a long chalk and as every day passes, the likelihood of the taxpayer losing money gets greater.

UPDATE 7pm: Fraser clarifies his views HERE.

46 comments:

James said...

Could we start calling it Northern Pebble, I don't think it is large enough anymore to be a Rock?

Anonymous said...

Howard Davies (former chairman of the FSA) put the NR position accurately when he pointed out the fairly simple fact that there is a difference between spending and lending. The taxpayer has lent the money, and it is secured against £100bn + assets. If the worst happened, the money would be recovered, with interest.

Any other analysis is Simple with a capital S.

Ed said...

What I don't "get" is the government's inconsistency with Northern Rock compared with Railtrack and Farepak.

With Farepak people were ripped off and lost their money, with Northern Rock people took a calculated risk and knew the potential downside.

Why am I (as a taxpayer) propping one up but lettin others starve?

Big Andy said...

I absolutely have to disagree on this one.
1. It is factually correct to say we have not lost any money on the deal. It is an investment and as far as we know there has been no default, the same goes for depositors. Under Harold Wilson, the pound WAS actually worth less and thus Wilson's claims otherwise WERE patronising and misleading.

2. The further reality of this is that the Bank of England just creted "out of thin air" the money that was given to Northern Rock. If Northern Rock pays back in full the taxpayer will be many billions better off. If Northern Rock does not pay ANYTHING back (very unlikely) then even here, no departmental budget will be affected.

Obviously this is not a desirable state of affairs, and technically inflationary, but, the idea that every family in the UK has material amounts actually riding on the outcome does not pass it for me.

The real issue with NOrthern Rock is what it says about our reguulation and monitoring of banking system and whether flaws in this area are likely to undermine our economy.

Big Andy

Chuck Unsworth said...

Has the FSA - or its former chairman - got any credibility at all with regard to Northern Crock? Weren't they supposed to be watching over these monkeys?

This Government will never 'recover' our cash - or from anything else either. 'Unpredictable global events' my arse. This crash was being predicted widely over a year ago. Serious concerns were being raised both in the City and in the USA. But this incompetent bunch of sleazes were far too busy burying their noses deep in the troughs.

Darling is just a fall-guy. Still, he chose to take the job, and the salary...

Anonymous said...

Iain I find it comical that you think if it was a southern back it wouldn't have been propped up. The outcry would be twice as big. The only difference would be the Conservatives would be forced to support the Government, but since it is the North East and irrelevant electoral territory for them then it is excellent bash Brown material. Ask Peter Atkinson what he things about it....

Anonymous said...

I can't quite remember Iain (was slightly too young) but in the 90s did Labour turn every Tory blunder in to "another x moment"...

Anonymous said...

Dear Anonymong

Do you actually understand the term 'collateral', the majority of the Crock asset base is already offered as collateral against its existing funding and/or its securitised assets. Therefore what is securing our taxpayers' money? Sweet bugger all I fancy.

Anonymous said...

Well said Iain, and yes, the taxpayers money in there (now a truly staggering £35bn we are told - more than 5 years' worth of North Sea Oil revenues) is not safe. The so-called "assets" of NR turn out to be so much smoke and mirrors; they are actually owned by the Jersey-based "charitable" trust "Granite", and therefore 75% of the assets which were allegedly (according to the Chancellor) going to "secure" the taxpayer lending DID NOT AND DO NOT BELONG TO NORTHERN CROCK. Therefore the whole "your money is safe" line is baloney. The taxpayer has in fact given many billions of pounds to the various financial institutions who have loans to NR and therefore we collectively are (guess what!) bailing out the City boys when in trouble.

This has happened a number of times before, for example, when Lloyds of London nearly went belly-up. It would seem that the clever-clever investment whizzkids in London making fortunes at our expense cannot be permitted to fail. Yet there is apparently not enough money to run a proper ambulance, police or fire service, or to pay police or soldiers properly.

This would all remind me of a typical Tory government, but it is actually happening under Labour. You couldn't make it up.

Anonymous said...

"The fact is that everyone in the country has lost £900, as the taxpayer has had to come to the rescue of Northern Rock"

It hasn't cost the taxpayer anything yet.

David Anthony said...

"if it had been called East Anglian Rock, it would have been allowed to go to the wall"

That's a ridiculous thing to say.

HF said...

The shareholders have lost billions!

Some of whom were our pension funds.

vervet said...

anon@2:05 - sorry but your analysis is the 'Simple' one - and very much with a capital S. (are you a NuLab troll, by any chance?)

So what do you think the majority of the £100Bn assets are then ? They are the bricks and mortar in which very many (predominantly labour supporting) families live.

So ... "if the worst happened" ... how do you think taxpayers would call-in their 'loans' ?

Do you think that the government is going to oversee the mass eviction of families that have defaulted on a few mortgage payments, so that the properties can be auctioned off to realise the assets ?

Not really likely, is it. So recovery of the money, "with interest" is perhaps a slightly more complex challenge.

Please try to avoid over-simplfying a subject about which your knowledge is clearly lacking.

rob's uncle said...

I agree with 'anon'; the statement 'The fact is that everyone in the country has lost £900 . . ' is obvious nonsense - what is true is that 'The fact is that the country has RISKED £900 a head [but if it was all lost, we would not be asked to contribute equally]'. I think what you need is a course in elementary banking and how to read a balance sheet.

I think 'anon' [unless they have insider knowledge] is being over-sanguine about the quality of the security.

K S Rees said...

But James... Northern Pebble wouldn't accurately reflect the bank's inability to stay afloat.

MrChippy said...

The Times Online has a picture, I assume taken at the treaty signing summit, of Milliband standing with two others each with one hand behind Milli's back. Are they winding him up or his he just their Dummy?

Greater Manchester Fabians said...

'if it had been called East Anglian Rock, it would have been allowed to go to the wall'

what a ridiculous thing to say.

Anonymous said...

Vervet,
Absolute rubbish, I'm afraid.

A sale of Northern Rocks assets (ie a fire sale) is the worst case outcome. Not of the individual properties, but the "mortgage book". If you seriously think the inherent value (ie the "equity" in the mortgages is worth less than the money loaned, you are in cloud cuckoo land. You know nothing.

Your analysis is beyond Simple.

Anonymous said...

"The shareholders have lost billions!

Some of whom were our pension funds."

They should have done their research - if they had, they would have realised that the source funding of the business was high-risk.

Man in a Shed said...

Mortgage holders are in the ahppy position of having Northern Rock's cash - the depositors however - are in a lot more trouble. They will find that Alistair Darling will announce that the credit protection measures he made up earlier have been revoked.

The only sane course of action for a depositor with Northern Rock is to withdraw your money as fast as possible.

For any share holder - unless they like insane risk - is to sell.

February is just round the corner!

Blogfan said...

Iain, do you or anyone else that hangs out here, know how much money the Bank of England can put (create at the same time?) into the Northern Rock and any other failures that might appear? Give it to me 'beyond simple' if you like.

bergen said...

Notwithstanding that it was once a building society,the Northern Rock has issued vast amounts to its borrowers as unsecured top up loans to greatly in excess of 100% valuation.If we have any sort of crash or recession we can kiss goodbye to much of that and the poor bloody taxpayer is not even first creditor in line (see previous posts).

i spy strangers said...

I think "Northern Sand" would be a more accurate renaming (as in building a house upon ...).

a financial illiterate said...

The £25,000,000,000 (or more?) must have been diverted from somewhere before it could be placed in the Northern Crock account. So who or what has lost out? Can one of the experts who has posted above answer that simple question please?

Chris Paul said...

"The fact is that everyone in the country has lost £900" you say.

Are you barking mad Iain? That is not a fact at all. It's absolutely abject nonsense.

I've lost nothing and hope with some confidence that that will remain the case. Big Andy illustrates how it is even if things did go wrong.

If the punitive interest rates hold up in the final settlement we may even have gained money.

Brown is obviously referring to customers in their capacity as customers. Investors may well lose money - though in most cases they only got it for voting for a windfall anyway.

"As every day passes" etc

What evidence do you have for that comment? Perhaps some forged receipts made up on an inkjet printer by a clutz doing service research.

dougal said...

I'd say there is a very good chance that the inherent value of the mortgages is risky - massive loans on assets that are very likely to lose a significant amount of value, with homeowners unable to pay because of imminent recession.

Northern Rock was run by a pro-Labour wunch of non-bankers and Derek Useless, whilst the FSA sat by and snoozed.

The Govt will get back its 'loan'? Yeah, and do you believe in the tooth fairy as well?

canvas said...

Has Gordon Brown ever had an original thought in his life?

You can read philosophy but that doesn't mean you understand it.

The man is a big fake.

dearieme said...

"if it had been called East Anglian Rock, it would have been allowed to go to the wall"

That surely would depend entirely on whether East Anglian Rock would had found some surreptitious way to pass funds to the Labour Party.

simon said...

In the end someone is going to lose money out of this. Logically it shouldbe the shareholders, who are the owners of the business and should take responsibility for the adventurism of its management.

But whoever loses (taxpayer, shareholders, depositors)Iain and his chums will pick up the stick and use it to beat the Government. That's politics.

Paul Linford said...

If it had been called East Anglian Rock, it would have been allowed to go to the wall.

Anonymous 2.22pm is right. If it had been in an area where there were a few Labour marginals as opposed to a region where there are 28 solid Labour seats, the government would probably have spent £50bn propping it up and yes, the Tories would have supported them in it as well.

The very idea that this government would go out of its way to help the North-East is laughably at odds with the reality of the last 10 years.

Trumpeter Lanfried said...

anonymous [3.18 PM] You say, "If you seriously think the inherent value (ie the "equity" in the mortgages) is worth less than the money loaned, you are in cloud cuckoo land.

Mmmmm. Ever heard of negative equity? It happens when house prices fall.

Ever heard of house prices falling? It happens when major lenders become more cautious; for example after a major lender has gone bust.

neil craig said...

If the guys running Northern Rock are merely hanging on to get a good deal for shareholders the government should put in the receivers & take bids. Putting in the receivers is a well tried legal recourse & is not the same as nationalisation. The "value" of the shares is largely their nuisance value to government & receivership would end that.

If Branson comes out of this as a billionaire, the status he has now, we will not have lost any money.

Anonymous said...

For those that think that the money is secured and cannot be lost as it is backed by assets, I would like to point out that the assets are generally houses, whose values are widely predicted to fall.
They will of course remember Black Wednesday, when the then Tory Government "invested" billions in a different sort of asset. They purchased Sterling.
If you can lose money when you are buying pound notes, it is probably wise to consider that you can lose money when you are buying bricks.
As such their is a risk associated with this loan.
Gordon Brown has decided to gamble with taxpayers money to the tune of 30 billion.

PSJ said...

The most amusing thing in the interview for me was when Brown said that he was training up the young players in his Cabinet - trying to make a virtue out of the youth of the talentless toadies he has promoted. He is only forced to do this because he has ruthlessly screwed over all the more experienced NuLab politicians who might conceivably have posed a threat to his birthright.

Anonymous said...

To Iain Dale - apologies if I've got this wrong, but I think you've linked to NHS blog doctor in the past - he has been absent for a while, and yesterday there was a post in the comments from another Dr at the same practice saying that Dr Crippen died in mid-October.

Holly said...

Just out of interest, how did we get to this £900-per-taxpayer figure that keeps being bandied about? I think I might do some back of the fag packet calculations.

Taking the total paid to Northern Rock (£29bn, according to the Times, although other sources are reporting £24bn - I will take both figures) and dividing by number of taxpayers (27.9bn in 2001 according to the ONS, with no more up-to-date figures, although I am reliably informed by a public sector statistician that they use a percentile increase of 4.8% to 2006, which gives us 29.24m taxpayers) results in the following:

£29bn divided by 29.24m = £991.

If you take the £24bn figure, the result is £820.

However...here comes the big but. We are assuming that it is fair to say that a pound spent by the government is a pound from the average taxpayer. A quick look at the government's books show this is not wholly true. for 2006/7, total taxation was £423bn. Income tax and NI together accounted for £230bn of this.

Adding together corporation tax, petroleum revenue tax, insurance premium duties, the climate change levy, aggregates levy, landfill tax, and customs duties and levies gives a figure of £52bn. (The last two are a bit disingenuous to the best of my knowledge as some taxpayers do pay them, but not many.)

It's probably safe to say that VAT and capital gains tax are paid roughly equally by people and corporations. I am therefore making a finger in the wind calculation and dividing those by the ratio of the first two (corporation tax being roughly 18% of the total) which gives a figure of £14bn to add to the £52bn = £66bn. This as a percentage of the total (the rest of the tax is basically booze 'n' petrol, which I am assuming isn't coughed up for by business) gives us 13%, so taxpayers contribute, roughly, 87p in every pound.

So, to take our two original figures:

£991 x 0.87 = £862.

£820 x 0.87 = £713.

Bit less than £900...but still quite a lot.

Please do feel free to pick holes in my methodology. I'm still waiting to get on the MRes course I want to do, so every little blast of reflexiveness helps. :)

BTW, revenue data obtained from DK, taxpayers' data from the ONS website.

stalin unwrapped said...

The poond on your pocket (or was that pounding your pocket) moment, was, like instant gratification, just not fast enough. Blinky Balls missed it all, metaphorically speaking.

Whoops. Wrong blog.

Sorry.

Anonymous said...

I read on the BBC website, referring to the Commons Liason Committee meeting with Gordon Brown
http://news.bbc.co.uk/1/hi/uk_politics/7142019.stm

...But the "turbulence" created by the collapse of the sub-prime mortgage sector in the US, which triggered the collapse of the Northern Rock bank and now threatened a global economic downturn, underlined the need for reform.

"I do believe that it is a wake-up call for the global economy," he told the committee.

"I do believe that the existing institutions are not good enough. I'm going to make it my business to try to reform these institutions to make them better able to deal with the sort of problems that we have got."

Strange - wasn't it Gordon Brown that was responsible for the reform of the UK institutions and the Tripartite group that failed to spot Northern Rock, now he wants to reform the worlds systems... oh dear.

James said...

Trumpeter Lanfried -
Why do you assume that the properties are all mortgaged up to the hilt? Some will be 95%. som (0, som *0%, some 30% etc. Negative equity on the whole book is SIMPLY not an issue.

To put the risk in a perspective you might better appreciate, if house prces plummet by more than 60%, Northern Rock is the least of our worries!

James said...

"the assets are generally houses, whose values are widely predicted to fall."

But not by enough to risk the taxpayers' loan to Northern Rock.

The NR mortgage business health is univerally accepted as sound, it's the source of its funding that has made it's business model a basket case. Try and get your head round it!

Anonymous said...

James 11:29pm

i am afraid you misunderstand the security that you claim to be in place.

You cannot calculate the total debt V's the total assets it is secured on and say that there is no negative equity on the total loan book.

Assuming Northern Rock had just 2 loans, one for £10K on a property valued at £1 million, and another of £290K on a property valued at £220K.

Total loans £300K
Total loans backed by asset £230K

Northern Rock cannot call on the £1 million property to cover their loan to the other borrower.

James said...

Anonymous -
Specious, I'm afraid.
Trumpeter's positon is ridiculous (we've lost because our loan is against a worthless entity)

Your argument relies on negative equity. there is none, when it comers to the value of the saleable asset. There are very few obstacles other than liquidity problems facing a successful transaction.

Liquidity problems will ease (ok, gradually) after year-end. Nothing to worry about, unless of course one has a political agenda to pursue - six weeks of "talking it down", big deal.

The flight of funds from any entity, be it mum and dad's retail exposure, or Northern Rock de[positors' savings is emotionally led. If you are an expert, with no political agenda, you'd be better off educating these trolls tahn scoring points off me.

Sceptical Steve said...

There does seem to be something of the old Titanic spirit in evidence today. A number of posters have broken off from rearranging the deckchairs to deny the the seriousness of the position.

Let's try to put it in the simplest terms:

If the Bank has baled out NR to the tune of £25 Billion, it has added this amount to our already huge PSBR which means that the Chancellor (Gordon's glove puppet) will have to adjust his budget for 2008/9 to compensate. In this way, the £25 billion will effectively have to be added to the 2008/9 Tax Bill or taken from previously announced budgets for Skools n Hospitals etc.

Yes. You're all right. If it all works out and the money's paid back in 2 - 3 years time, we're all in for a bit of a windfall but previous experiance of Government finance doesn't inspire confidence.

Old Lady said...

The problem is Nulab is a victim of past mistakes. If there had been no Railtrack then the tactic used many times in the past could hve been put into place, ie Bank buys NR for £1 ,funds it from the Govt and runs it as a work out over 5-10 years. It has been done many times before, but looks too like Railtrack.

For what it's worth I would buy NR if I could, at the right price, my guess is the asset side is not bad at all, even if we have a housing recession.

The £900 is a liabilty for each of us, only time will tell if it costs us that.

James said...

Old Lady -
Lots of people would love to buy NR, but can't raise the money, because banks are spooked and crossing everything until the Year-end, after which we'll get a clearer picture of the power of Branson et al to mount a take-over.

I don't believe that taxes will have to rise in order to cover the loan by the Bank of England, but I'm not a financial expert. The chances of nationalisation are rising, which suggests there's ann urgency, presumably to head off potential real losses to the taxpayer.

rob's uncle said...

A TV debate between Clegg and Cameron on 'Britain after New Labour' must be the next step: is Cameron up for it, I wonder?