Anorak News | Credit Crunch: The Northern Rock Question

Credit Crunch: The Northern Rock Question

by | 25th, September 2007

QUITE what is going to happen to Northern Rock is as yet unknown.

It seems pretty clear that it’s not going to survive long as an independent business, that’s for sure. There’s no way that the commercial paper markets are going to open up again for it, if, as and when, the Bank of England guarantee is withdrawn.

So that leaves only one of three options, someone else buys it, it goes bust or it is closed down in an orderly manner.

The thing is, there doesn’t seem to be anyone who wants to buy it: thus there’s going bust quickly or slowly:

For the time being, Goldman will take a back seat, leaving the rescue plan to Merrill Lynch, which is advising Northern Rock’s board. Merrill Lynch is seeking a buyer, but banks appear to have balked at the lender’s potential £20bn funding liability. The shares fell a further 22 to 172p yesterday as bankers said a white knight was unlikely to emerge.

The brand’s not worth much, the computer systems a little bit, but clearly no one’s very interested in the price tag, that £ 20 billion risk.

Goldman Sachs’ appointment is a clear signal that the Treasury is ready to seize control of the lender. Bankers say if a buyer cannot be found soon, the Treasury may wind up the bank, leaving shareholders with nothing. They added the lender’s £113bn of mortgage assets are unlikely to be sold as, at present prices, buyers would demand a 5pc discount that could mean a £5.65bn loss. With just £2.35bn of net assets, the bank would then be insolvent.

That could well be the end game: a work out. They can’t sell the mortgages because they would take a haircut on the price.

So Northern stops offering new mortgages and gradually, over time, as people pay off their old ones it shrinks until, some day thirty years or so in the future, the last person pays off the last month’s money and finally, we taxpayers are off the hook and Northern Rock disappears into history.


Posted: 25th, September 2007 | In: Money Comment | TrackBack | Permalink