Northern Rock - Example of Panic Selling?

Today in the UK Northern Rock closed down around 31% on news that it sought emergency funding from the BoE.

A few questions to you all.

1. Do you see this as a classic case of FEAR and/or the typical overeaction?
2. Did anyone get a piece of Northern Rock at it's lows?
3. Where to for the price next?

Cheers.

1. Fear because the (risky) business model is now confirmed as invalid and resulting loss of confidence by savers and borrowers makes the situation worse.
2. No.
3. Partial retrace then below £3 if not rescued very soon.

Assumption: UK property market starts to deflate and continuation of worldwide credit contraction.

It is interesting seeing what is going on here because NR could end up in a cashflow crisis fuelled even more by everyone withdrawing their funds. The queues of people today taking out their funds can only make things worse.

In reality it is not unusual for businesses that have grown quick (which NR has), to find cash flow an issue at various times in their growth cycle.

What will undoubtedly happen in my view is that there will be a major withdraw of money supply on a general basis and this will be accompanied by higher interest rates from all building societies that will make the problem even worse. I am already hearing of many people who earn in excess of £30K a year being unable to afford the new mortgage payments and this doesn't include other borrowings they have. I am grateful that I paid off any borrowings that I had on my properties as I could see this coming quite a while back.


Paul

fibonelli said:

1. Fear because the (risky) business model is now confirmed as invalid and resulting loss of confidence by savers and borrowers makes the situation worse.
2. No.
3. Partial retrace then below £3 if not rescued very soon.

Assumption: UK property market starts to deflate and continuation of worldwide credit contraction.

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A fairly pessimistic view considering the price it is at right now and the fact that:
1. They haven't called on the funds as yet
2. The funds are to increase their asset base NOT to meet every day runing costs.

But I can't say that £3 is beyond the realm of possibilities.

2. The funds are to increase their asset base NOT to meet every day runing costs.

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That is not my understanding as their asset base is strong and intact. The funds are needed to offset cashflow problems which are classed as every day running costs. The BOE allowed this because it is day to day running costs which they should be able to address. However, I hear tonight that over £1 Billion was withdrawn by customers which means they will need even more to offset this withdraw.


Paul

Trader333 said:

That is not my understanding as their asset base is strong and intact. The funds are needed to offset cashflow problems which are classed as every day running costs. The BOE allowed this because it is day to day running costs which they should be able to address. However, I hear tonight that over £1 Billion was withdrawn by customers which means they will need even more to offset this withdraw.


Paul

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hi paul,

sounds like a text book liquidity run on deposits.

lets see if BOE know how to play it to avoid systemic risks. they mismanage this "small one" and they are up to their ears with a "big" run on deposits somewhere else.

edit: did i ever mention i was a policy maker focused on banking risks

jacinto said:

hi paul,

sounds like a text book liquidity run on deposits.

lets see if BOE know how to play it to avoid systemic risks. they mismanage this "small one" and they are up to their ears with a "big" run on deposits somewhere else.

edit: did i ever mention i was a policy maker focused on banking risks

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Short run interest rates must come down pretty quickly.

Long run they should go up.

Fed's gobledegook of measured rate increases to control inflation has killed off the housing market but done little for inflation. Nice work by the Fed... :cheesy:

Governments and politicians don't mention tax rises any more to cool the economy off so every one pisses about with monetary policy of raising or lowering rates. Simple blunt instrument.

This is going to get a lot worse before it gets better. If they pay me £1000 an hour I may become their advisor as they certainly need some guidance and consultancy.

Dim wits the lot of em. When economies boom directors and central bankers take credit and when it goes ape **** they call it managing the crises - intentionaly in some cases. Can You Feel the Farce? Can certainly smell it.

These bodies are supposed to control and lead not having got us into this mess. Nice piece of regulation. Play it again so we can all see good banking in practice. Fed and ECB eases liquidity and Mervyn King BoE says nah to all that let's teach them a lesson. Too little action too late I think. Mervyn Kind if he doesn't do his job some one should kick him up the bum.

Some dim wits were talking about sub-prime market in US not effecting the real economy as sub-prime market only accounted for 3% of US Economy, and here in the financial centre of the world UK-London we are having a run on a bank. What the hell is going on here? Obviously situ is a lot worse.

Some people are tipping banks as being good value and totally under valued. There has never been a better buying opportunity. Be interesting to see if they tip Northern Rocks shares eh?

Problem is no one is owning up to any exposure. It's all a wait and see. Who knows what assets are backed up or which assets are worth negative borrowings due to creative accounting.

I'm no accounting but how can anybody borrow on short term, buy highly risky instruments and claim they are assets. Effing Fockers the lot of em including controlling bodies and central bankers. Boing and Cisco still practice placing 3 year sales as total revenue acrued in current year as if contracts can not be cancelled. Can't remember what this practice is called but it is absolutely ludicrous. Enron may just be and exaggerated reflection of what lies beneath those murky waters.

As you can all imagine I'm a little upset at all the bull **** that has led to this.

Today has been a little better for me in the markets than last couple of days but it beggars the question how can the markets go up when there is so much bad news and risk out there? $100 bn dollars of bad debt and assets and nobody is owning up to who has what? They call it financial transparancy

We are at the cusp of a new era and it's still doom and gloom out there. In fact it's much worse but hey it's the weekend and let's party. Bankers can alway get into a hot bath and slash their wrists on a Monday...

No disrespect to your position Jacinto...

didnt take that end of the stick atilla, no worries.

my point is not really about the bigger picture you post (whether i agree with it or not, which is a different matter), but actually related to how well they can manage a problem once it arises.

its kind of "either you are a good skipper or a bad skipper during a hurricane" kind of situation.

you get a run on 1 bank and screw the way you manage it, and before you know it, you are getting a real banking crisis. i really know by experience. honest. not joking there. been there, done it. was part of a very small team (5 ) designed a banking system bailout (some 32 banks alltogether), and it all started with a liquidity run and hints of a credit crunch. so no jokes here.

my point, withouth wanting to write an essay on the topic, is that policimakers are slow to understand how deep the hole can be and when they realise they are in a hole, they got their hands out asking for help because they dont know what struck them

a bit like England vs South Africa on the rugby :cheesy: :cheesy:

jacinto said:

didnt take that end of the stick atilla, no worries.

my point is not really about the bigger picture you post (whether i agree with it or not, which is a different matter), but actually related to how well they can manage a problem once it arises.

its kind of "either you are a good skipper or a bad skipper during a hurricane" kind of situation.

you get a run on 1 bank and screw the way you manage it, and before you know it, you are getting a real banking crisis. i really know by experience. honest. not joking there. been there, done it. was part of a very small team (5 ) designed a banking system bailout (some 32 banks alltogether), and it all started with a liquidity run and hints of a credit crunch. so no jokes here.

my point, withouth wanting to write an essay on the topic, is that policimakers are slow to understand how deep the hole can be and when they realise they are in a hole, they got their hands out asking for help because they dont know what struck them

a bit like England vs South Africa on the rugby :cheesy: :cheesy:

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I watched the game. I think Robinson was fantastic and inspiring. But the team needs to play a lot more and gell together. I think we are missing key players and some much needed edge to our game. We are a team but a very ordinary one at the moment.

I concur with what you say. The problem is a lot more serious and people trying to talk up the market and not acting like a bad bluff will get called. Always have been saying it. Doom and gloom and things can only get much worse.

In fact I was thinking of keeping a few 000 in the house as cash just in case. Am I the only person like this or are there others out there?

jacinto said:

didnt take that end of the stick atilla, no worries.

my point is not really about the bigger picture you post (whether i agree with it or not, which is a different matter), but actually related to how well they can manage a problem once it arises.

its kind of "either you are a good skipper or a bad skipper during a hurricane" kind of situation.

you get a run on 1 bank and screw the way you manage it, and before you know it, you are getting a real banking crisis. i really know by experience. honest. not joking there. been there, done it. was part of a very small team (5 ) designed a banking system bailout (some 32 banks alltogether), and it all started with a liquidity run and hints of a credit crunch. so no jokes here.

my point, withouth wanting to write an essay on the topic, is that policimakers are slow to understand how deep the hole can be and when they realise they are in a hole, they got their hands out asking for help because they dont know what struck them

a bit like England vs South Africa on the rugby :cheesy: :cheesy:

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I don't lnow whether they are slow to realise, or not. Gordon Brown has built his and, subsequently, the UK's, success story on a mountain of debt. It's been rob Peter to pay Paul all along the line. The UK's prestige as a world financial centre is the only thing that there is left. If that goes ( and there are many nations hoping to take over that role) with what industries are we left? Think of what we had---cars, shipbuilding, etc. ----all gone. The government will have to support banks, whether they like it or not, to keep our financial prestige intact, but I'm not sure that that will work. The world banking system knows that the UK public is in debt to the tune of one trillion pounds, that we are spending crippling amounts on Iraq policy and that every day that debt is compounding. The pound has started to lose value this summer as a consquence.

Bin Laden does not need to blow us up. We are destroying ourselves, via our economy, without that. The mere fact that we can no longer buy cheap fuel from oil producer nations is the major prop that has been knocked away.

My advice is, if you can't afford to buy gold bars, buy tins of baked beans!

HEY!!!! I'm the eternal pessimist. Cheer me up!!

Split

Refco went down due to a run on deposits from lack of client confidence, I would not be surprised if Nortern Rock go the same way.

Atilla said:

In fact I was thinking of keeping a few 000 in the house as cash just in case. Am I the only person like this or are there others out there?

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I'd certainly be wary of keeping more than the £35k (covered by the FSCS guarantee) with any one bank/building society at the moment.

As to Northern Rock - clearly yesterday the stock price was trying to anticipate the new fundamentals of the business. Even before yesterday's meltdown, its RoA was below current funding rates. Most banks/mortgages lenders have about 7% of their loan-book financed through the markets (rather than from deposits) - NR is 43% at it's last report and will get much bigger as the savers' run continues. The business is unsustainable and will have to hobble along on the BoE facility until someone with deep pockets comes along and buys them. But given that most financial organisations have got quite a bit on their plate at the moment, it's not particularly obvious who that might be, or why you'd want to do any more than pay rock-bottom. There'll be a lot of busy analysts trying to work out a fundamental value for NR over the weekend based on various scenarios. This stock has got 'toxic' written all over it and I would avoid it other than s/t trading opportunities based on dead-cat bounces.

It's interesting that when the Fed increased liquidity a few weeks back everyone was speculating whether it was because a big institution was in trouble...and it's a medium sized mortgage bank in the UK that is first to go tits up. Global markets, eh?!

And on the bright side, for anyone who's had a difficult couple of months trading, draw some solace from Goldman's Global Alpha and Equity Ops funds performance over the last couple of months

Bloomin typical isn't it...
- I have savings with NR which I wont get all money back from, should there be probs.
- I have a mortgage with NR which wont be a problem so just keep paying. There's always someone who can stiff you just as much as NR for a mortgage. Why can't I turn round and say I'll offset what they don't give me back against what I owe them!!
- trading's been going great, watch my broker go bust

http://news.bbc.co.uk/1/hi/business/6994746.stm

Just how far is this debt society going to go? Back to hiding places around the housefor your hard-earned!

The pound has started to lose value this summer as a consquence.

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Against which currency ? It has gained against the USD and only marginally fallen against the EUR ie 1.49 in June and now at 1.465

In my view it is the USD that is going to have long term problems in keeping value but in trading you just never know.


Paul

Trader33 - Cable is off its 24/07 high of 2.0655 at yeterday's 'close' of 2.0159 Paul. I know it's only 5 cents to us when we buy our Dollars for Disneyland, but it's 496 pips to us FX traders!

So GBP has lost a little to USD, but this is nothing to do with NR. LOL.

The relative strength and interplay of these two currencies is always going to be a result of far more than these current credit crunch factors.

Priceman - take all your savings out of NR and tell them you'd like to borrow even more from them to buy their stock.

TheBramble said:

Priceman - take all your savings out of NR and tell them you'd like to borrow even more from them to buy their stock.

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lol tony......

you just described exactly 1 of the several measures that the regulator must ensure is avoided. that they eliminate moral hazzard from lending more (i.e. deteriorate the asset quality) (not meaning you priceman )

interestingly, it is the time the FSA has to be on top of asset quality of all financial institutions such that the asset side does not cause havoc in the system.

on the liability side, well, it is clear from this particular business model the level of liquidity risk they had.....(i.e. funding the assets on the market rather than through deposits), and as such, kind of a no brainer the level of IRM (interest rate margin) sensitivity of earnings if there is a liquidity squeeze or a suden rise in the cost of funding (so, BOE, becareful not to charge to much on the funds lent......otherwise they just make the problem worse )

so, the ball really is on the side of the FSA and BOE to see how the manage this one.

Tony,

I know it is a mountain of pips to FX traders (which includes myself), but the GBP only went and stayed above $2 in July and although it is falling it is still above $2. So I wouldn't class it as losing real value against major currencies just yet.

I even went long GBP / USD on Friday for a few (15 pips) profit. This was a news trade although and my longer term approach is on EUR / USD


Paul

Someone said on the news NR shares have fallen from £12 to £4. Is £4 a good price to buy at on monday morning. Whats the upside potential, based on the current fundamentals?

Perhaps the share price will plummet further if people continue panic withdrawals?

Cheers.

JTrader said:

Someone said on the news NR shares have fallen from £12 to £4. Is £4 a good price to buy at on monday morning. Whats the upside potential, based on the current fundamentals?

Perhaps the share price will plummet further if people continue panic withdrawals?

Cheers.

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I can't see NR going under. BoE has given guarantee. Said NR was ok and this was a temporary thing.

This is like a small breach or crack in a dam. If the BoE doesn't stop it going under and other banks come under scrutiny as our transparency is so brilliant (NOT), the flood will follow.

Make or break time for BoE imo.

The sad point may well be this is still the US sub-prime crises which should not impact the real economy.

Maybe they are right as US economy less affected than UK so far...

This is incorrect, NR shares have fallen from around £6.50 to £4.38 which is a 32% fall and not 67% as would be the case if they had fallen from £12 to £4.


Paul