Bank of England to prop up Northern Rock

ok - let's have news fight (below FT - the only paper that matters in the City):

"The Bank is understood to be confident about the quality of Northern Rock’s mortgage book, which has no exposure to subprime borrowers and which will provide collateral for the emergency facility. But the bank, one of the UK’s largest mortgage lenders, has proved particularly vulnerable to the liquidity squeeze because it has a smaller deposit base than other lenders."

"It will lift the uncertainty that has been hanging over Northern Rock’s future for much of the past month because it could not access the wholesale funding upon which it is heavily dependent. The Bank is also expected to reassure thousands of Northern Rock’s customers that their deposits are secure."

http://www.ft.com/cms/s/0/6cdb3a98-6236-11dc-bdf6-0000779fd2ac,stream=FTSynd,s01=1.html

 

hmm. AUDJPY stronger by 70! pips from lows already. it may still go back your way - important is the london open.

 

Just another completely healthy, financial sound, adequately reserved, diligent, risk averse lender asking someone for a temporary handout due to the cruel illiquid markets.

Apparently all the poorly run companies have all realized they don't deserve loans and don't bother to ask.

 

yep. the world is still the same place. it is funny that it is only hours after king's strong public comments about moral hazard blah blah blah. bernanke and trichet must smile.

 

to be fair to king he mentioned it in the letter to Treasury 2 days ago:
"In addition, central banks, in their traditional lender of last resort (LOLR) role, can lend
“against good collateral at a penalty rate” to an individual bank facing temporary
liquidity problems, but that is otherwise regarded as solvent. The rationale would be that
the failure of such a bank would lead to serious economic damage, including to the
customers of the bank. The moral hazard of an increase in risk-taking resulting from the
provision of LOLR lending is reduced by making liquidity available only at a penalty
rate. Such operations in this country are covered by the tripartite arrangements set out in
the MOU between the Treasury, Financial Services Authority and the Bank of England.
Because they are made to individual institutions, they are flexible with respect to type of
collateral and term of the facility. LOLR operations remain in the armoury of all central
banks."

 

Northern Rock in cash SOS to Bank
By Richard Fletcher, Philip Aldrick, Richard Blackden and James Quinn
Last Updated: 2:33am BST 14/09/2007



Shares in Northern Rock will plunge today with the company expected to issue a profits warning and confirm that it has been forced to turn to the Bank of England for emergency financial support.

Adam Applegarth: the man under the spotlight
The court of the Bank of England is understood to have met last night to approve the unprecedented support. Northern Rock is believed to be paying the Bank of England a penal rate of interest believed to be 6.75pc - a whole percentage point above base rate. "Customer deposits are safe," said a source to close to the Bank.




Another source familiar with the situation said: "The firm is solvent, and has a good asset book, there is no black hole. The problem is that it just can't raise money in the short-term money markets."

Last night a spokesman for Northern Rock would only say: "The next scheduled announcement is on October 1. The company is aware of its obligations. If it needs to make an announcement in the mean time it will do so."

But traders expect the company to issue a profits warning and make a full announcement before the Stock Exchange opens at 8am.

Adam Applegarth, chief executive of Northern Rock, is likely to face criticism for building a business based on short-term funding and could even come under pressure to quit the firm he has worked for since he left university.

Unlike many other mortgage lenders Northern Rock relies on borrowing from other financial institutions, rather than using customer deposits. As the sub-prime mortgage crisis in America has spread contagion around the world the money markets which Northern Rock borrows from have seized up.

Last month, Northern Rock admitted it was struggling to raise money in the markets. The lender is now the highest profile UK casualty of the so-called credit crunch reaping havoc across the world.

Shares in Northern Rock have fallen 48pc since February. They closed down almost 5pc yesterday at 639p.

A leading banking analyst said: "It's clearly not going to be well received, although given that Northern Rock is so reliant on wholesale funding, I wouldn't necessarily read that this is a foreteller of future such events across the wider banking community.

"I would have thought that a mortgage bank would essentially be able to avoid such crises given the nature of its asset book," he added

However, stock market traders warned that the fallout could well spread to the rest of the market, with banks and other financial institutions likely to be hit hardest.

Paul Kavanagh, a partner Killik & Co, said: "Northern Rock's model is unique, but this is nevertheless still a sign of the lack of liquidity in the lending market. The market is not going to like this - banks will lead the market lower."

One City analyst, who wished to remain anonymous, said: "This is a potential disaster… it is already the most shorted stock in the FTSE. This will be a major blow for it."

But despite the insistence of the bank that there was no need to panic last night the bank's website was struggling to cope as customers attempted to transfer funds.

The crisis in the credit markets has caused several banks to raise their mortgage rates this week after the cost of their own funding soared due to the market crisis.

 

King clearly did it to stave off a bank run (as did Bernanke, but he waited until option expiry), once there is one suddely there are many. Can't have that in a fractional reserve banking system.

There is a hell of a difference between lending at a penalty rate against good collateral as in “against good collateral at a penalty rate” to solve a short term liquidity crisis (in a way that does not allow the banks to make a profit on the borrowing) and cutting the discount rate to provide cheap money which is what Bernanke did. Short term liquidity issues could have been resolved by a penalty rate, instead he chose to lend [actually repo] cheap money against worthless collateral for Wall St to use to profit from.

King is acting responsibly to a potential crisis, Bernanke is either a buffoon or a market manipulator who should be prosecuted as such. Eitrher way he should go.

 

I don't see a significant difference. Both are lending at a "penalty" (50-100bp) rate to institutions with collateral that nobody in the market will accept.

 

Cdntrader, do you think it is necessary to re-post all news from the web? Links would suffice. Also I believe ET users can write NRK into google themselves. On top of that your news selection seems to have a particular bias
I hope you had a stop in place for that Yen trade - it now looks like one of the worst calls I ever saw on ET - well over 100pips in the red in relatively calm markets...

p.s. I will take my chances here again - bought 2000 shares at 510p (all-in cost basis). Let's hope I will not beat your Yen trade - I am already down

 

very true indeed. however I think Fed still uses primary and secondary credit distinction when lending out of discount window. they can dictate terms for borrowers as they wish - therefore possibly mitigating moral hazard. but you never know. cheers