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Northern Rock set for more pressure amid calls for calm

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Published Date: 15 September 2007
NORTHERN ROCK is expected to remain under pressure from its customers today after the group sought emergency support from the Bank of England.
The bank's 1.5 million savers were urged not to panic after news of the move sparked queues of people anxious to withdraw their savings from branches around the country.

Customers in Edinburgh's Castle Street queued up yesterday to take their money out.

The UK's fifth biggest mortgage lender has been hit by soaring costs in wholesale lending markets, where it borrows cash to fund its mortgage business.

Alongside the emergency funding, the Newcastle-based bank warned it could take a profits hit of nearly £150 million due to the money market turmoil.

The British Bankers' Association urged worried customers to "calm down". It said: "There is absolutely no reason for either mortgage customers or savers to worry."

But some queued for hours to empty their accounts.

Tony Looch, a 68-year-old London saver who queued for nearly two hours at the bank's Moorgate branch in the city, said: "My confidence has been shattered.

"I would not put a penny into that company again."



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  • Last Updated: 15 September 2007 8:54 AM
  • Source: Edinburgh Evening News
  • Location: Edinburgh
  • Related Topics: Consumer debt
 
1

Maria Thomson la guapa,

15/09/2007 11:09:11

Whooppeee
... a speedy return to the days of Negative Equity in the early 1990's

I s it not amazing how this Sub-Prime mortgage collapse thingy
in America

can cause banks here to go "shaky blanket"
... as well??

Watch all the pensioners

... run to their local branch of Northern Rock

... to withdraw their life-savings on Monday morning

... huh

2

A Friend of Fernando Poo,

Newington 15/09/2007 17:50:02

Synick.

Northern Rock don't seem to be releasing details, but I know enough of finance to make an educated guess.

Much of NR's business involves making mortgages. Once it has made some mortgages, it packages them up (securitises) them into a bundle called an asset-backed bond (mortgage-back). Then it sells these to financiers who take a bunch of mortgage-backs, bundle them into Collateralised debt Obligations( CDO's). These are splitinto different risk tranches and sold on to insurers, pension funds and hedge funds.

The problem is that a lot more mortgages than usual have been going into default. This is mostly in the uS so far, but few in the know expect it to remain confined there. These badly affect the value of CDO's due to what's called "gearing" - basically each bet is multiplied by borrowing ten or 20 times as much from a bank and making the same bet. This technique multiplies losses as well as gains and so a whole load of CDO's and not a few hedge funds and banks, are in trouble.

Because CDO's don'thave to be reported in the same way as banking transactions, nobody knows which CDO's arebad and which are still solid. Worse, nobody knows who's holding the bad ones and so everyone is suspect.

So nobody buys any new CDO's which means nobody needs to buy mortgage-baclks to make new CDO's. In turn this means that flks like NR can't sell mortgage-backs.

If NR can't sell these, then they can't raise cash to make new mortgages. Given that they have to keep paying their staff, that's a problem.

What the BofE has done is let them lodge the mortgage-backs with them, and take a loan against their presumed value. Then NR can use the cash to make new mortgages. I assume the plan is lather, rinse, repeat and hope that at some point folks will start buying CDO's again.

I wouldn't care to make that bet, and I don't think the BofE should be making that bet with our money either.

3

Parking Permit,

It's Looking Good 15/09/2007 18:14:47

Another share price fall on Monday. Then savings rates up. Should be time to make some money out of stupidity and panic.

4

ruralboy,

15/09/2007 20:24:20

#4
Brilliant
You're a journo or v close - have not seen it explained in such a direct way - even in the Daily Mail's 'cut-out-and-keep' guide to keeping your bank manager hostage until you remove their genitalia etc...

If you've not tried it please check out www.thedailymash.co.uk.

CHRISTIANS PREPARE FOR RAPTURE AS HOUSE PRICES DIP
TUMBLING house prices and the bail out of the Northern Rock will lead to the resurrection of the dead, Armageddon and the beginning of the End Times, leading Christians confirmed today.
etc
PS my NUJ number is..

5

A Friend of Fernando Poo,

Newington 16/09/2007 19:08:29

Thanks ruralboy, but I'm not a journo. Part of my job is to explain computery to non geeks though. Someone has asked me to do a "US Subprime - Why Is It Affecting Us?" article for their magazine - I'll get to it soon...

Since yesterday I've read more on the NR situation. It looks like the logjam wasn't directly in shifting their securitised mortgages, though I daresay they're not having much fun with that either. The hitch seems to be that they've been financing long term loans with short-term (as in 3 months or less) commercial paper. The CP market has if anything been hit even harder than that for mortgage-backs.

They aren't the only folks who're going to be caught on that particular hook. There's loads of commercial paper out there and the market is effectively dead. Anyone else who has been relying on it are also going to be looking for other sources of finance within the next 2 or 3 months.

Yep, I saw dailymash - pretty damned funny!


 

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