Wednesday 17 June 2009

Well, duh ... how long did it take them to work that one out?

As I said back in September 2007:

Even if Northern Rock have to write down their loan book by a quarter, there'd still be plenty enough to cover savers' deposits. It just means that bondholders (more sophisticated investors, hedge funds, other banks and so on) take more of the loss on the chin. So HM Treasury [should] put NR into liquidation, lend it £20 bn, allow the savers move their deposits elsewhere, and then pay itself the £20 bn back with interest and let the bondholders squabble over what's left. Shareholders would get nothing, presumably. This would be more-or-less risk-free from the point of view of the government, the taxpayer and the savers.

It looks as though HM Government have finally cottoned on. From yesterday's Times:

The Government is proposing the bank be split to create a new company that takes on the deposits and branches and provides new lending*. Separately, Northern Rock's existing book of mortgages would be put into an asset company to be run off over time... The bondholders are set to be put into the asset company by the Government in a move that has caused consternation among them because they fear that they will be stuck with all the bank's toxic loans.

It's a pity they didn't give me a ring in late 2007, I could have saved the taxpayer tens or hundred of billions of pounds.

Ah well.
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* As it happens, I've been honing the finer details of my original plan over time - the government's final answer is more or less identical to what I posted at Capitalists @ Work last week:

The MW plan:
1. Sell off branches, employees and savings business ASAP (like they did with B&B) preferably as a job lot, but broken up if necessary.
2. Encourage existing NR borrowers to refinance elsewhere by hiking interest rates.
3. What's left over is fairly 'toxic' stuff, but hey, at least they're paying the higher interest rates.
4. Have rabid policy on repossessions, get it over with before house prices fall any further. Properties to be auctioned could be offered in priority to bondholders, SPVs and shareholders so they know they aren't being conned. If these people want to rent back to original owner, then all the better, less hassle all round.
5. Repay taxpayer loan in priority.
6. Whatever money comes in after that gets dribbled out over the years to bondholders and SPVs, who will get most or all of their money back (well, at least half or two-thirds), maybe even shareholders get a few pence.

3 comments:

John B said...

I could have saved the taxpayer tens or hundred of billions of pounds.

Since NR shareholders got nowt anyway, where does your magic money-saving come from exactly?

Lola said...

Quite. Except I wouldn't hike interest rates. I would let the market decide the rate at which NR services existing borrowers. In any event those rates would be higher than the average as the market segment inhabited by many of NR's borrowers is higher risk.

Plus politically it'd be impossible to sell.

Mark Wadsworth said...

JB, I said "I would have saved the taxpayer tens or hundreds of billions of pounds", sure, there are latent losses, which have to be shouldered by reckless borrower and reckless lender, so for every £1 the taxpayer saves, the bondholders lose slightly <£1.

I never said I could magic the losses away.

L, the market interest rate is the highest rate that NR can get away with charging before their borrowers remortgage elsewhere, so I don't think we disagree on that.