Anorak News | Credit Crunch: Northern Rock Rationalism

Credit Crunch: Northern Rock Rationalism

by | 25th, September 2007

cartesian.gifI SAID yesterday that I rather admired the bravado on display at Northern Rock as they continued to offer mortgages with high multiples of income and over the value of the security. But his story today shows that they’ve moved beyond bravado into the realms of pure stupidity:

There are lots of logical reasons why Northern Rock should push on – regardless of the growing criticism – and pay shareholders their interim dividend.

For a start the cost of the 14.2p interim dividend is just £59m – “a mere drop in the ocean”, as one Northern Rock adviser put it, given the £3bn that the troubled bank has had to borrow from the Bank of England to prop up its broken business model.

It is also reasonable to point out that the dividend was promised weeks before the bank was plunged into chaos and that it won’t just be the board and senior management who miss out – small shareholders, frontline staff and pension funds will also be hit.

But the fact is that the Northern Rock situation is no longer about logic.

Well, yes, it is still about logic, but the logic of how people react, not the purer Cartesian logic, where we do what is correct. The dividend is indeed a drop in the ocean, it has already been promised and it comes from profits that really were made.

However, that’s not good enough: the directors need to be thinking a little more about how this will play with the less sophisticated man in the street. You can see it now, can’t you? Those fat bankers have run their business into the ground, they’re relying on the taxpayer to prop them up….and they’re still creaming off the profits?

The thing about banking is that it’s all about confidence. Northern Rock has lost that of the money markets, that’s why they’re in this mess, they lost the confidence of their depositors, as the queues showed, now they’re angling to lose that of everyone else in the country?

Posted: 25th, September 2007 | In: Money Comment (1) | TrackBack | Permalink