Northern Rock

Northern Rock Memo Emerges

The Northern Rock sales memorandum that FT Alphaville was forced by a British court to remove last night has re-emerged on Scribd, a website supporting document uploads. Our thanks to a loyal but anonymous reader who provided the link to us.

Northern Rock Summary

A British court has forced the Financial Times to remove details of a confidential sales memo circulated to would-be buyers of Northern Rock, the troubled UK lender. The memorandum had been obtained by the FT’s Alphaville blog and was available for several hours yesterday. The Blackstone group brought a lawsuit requesting an injunction against publication of material from the memo, which the court granted.
The memorandum, which had been prepared by Merrill Lynch, Citigroup and Blackstone, suggests that even if the company found a buyer, Northern Rock is expected to receive financial support from the Bank of England until at least 2010.
The FT has now summarized much of the memorandum, although the court order prevents them from publishing the memo itself. You should read the whole thing but here are some quick highlights:
• Northern Rock expects to have borrowed an estimated £24bn from the Bank of England by January 1 2008, which is about £4 billion more than it has already taken.
• In 2010 Northern Rock will need £6bn to refinance its Bank of England facility.
• Profits are expected to sink as low as £143m in 2008 and recover to reach £643m by 2010.
Northern Rock faces years of debt [Financial Times]

Finding Elvis In The UK

“Can’t buy a house, can’t buy a lot,” Elvis sang in “Poor Boy.” We’ve got Elvis on the brain after the boys at FT Alphaville reported an Elvis sighting—at the Financial Services Administration. According to FT Alphaville, “Elvis” is the FSA’s codename for troubled mortgage bank Northern Rock. And now it has caught on with each of the regulators who have a hand in its rescue are using the name as well.
And, as long as we’re talking about Northern Rock, we might as well touch on some deal news. According to the Times of London, private equity group JC Flowers is in the “advanced stages” of due diligence and is making progress pulling together the financing. They are expected to submit a formal bid for the bank sometime in the next two or three weeks. And, as the paper reports, they believe they are now well ahead of the consortium led by Virgin founder Richard Branson.
It seems Flowers is not going to let the mess at Sallie Mae slow him down. Indeed, the young private equity firm may be eager to put together a new deal to show investors it can execute an acquisition after it’s last big banking deal landed it in court. It’s hard to show a return on equity if you can’t even close your deals.
Oh, right. In other Northern Rock news, its chief executive went before the House of Commons Treasury committee to pin the blame for the banks troubles squarely on the tail of the Bank of England. You see it’s the Bank of England’s fault that Northern Rock ran out of money because they stubbornly refused to be Ben Bernanke.
“The fundamental cause was the speed and duration, and the global nature of the liquidity freeze – heightened for us by the fact we didn’t have access to the same type of borrowing facilities available to banks in the US and from the ECB,” Adam Applegarth said.

From Northern to Jailhouse – the FSA’s Rock codename revealed
[FT Alphaville]

JC Flowers ‘leads’ Richard Branson in the race to conquer Northern Rock
Rock chiefs ‘offered to resign’ [Financial Times]

You’re just jealous. You know you wish you had the chorizo to announce an acquisition dressed as Superman.
Our man here is Jose Maria Ruiz-Mateos, one of Spain’s more controversial and colorful business figures. He’s got everything you want in a cartoon version of a dodgy Spanish business man. Ties to Franco and Opus Dei, mutual legal recriminations against the Spanish government (the socialist government took his assets and called him a thief, he says they’re a bunch of socialist jerks), ownership of a football club, and a private army of 13 children. ¿Quien es mas macho? If this guy didn’t exist, the Italians would probably have to invent him. And then elect him prime minister.
Now word comes that he’s leading a group of Spanish investors who want to buy Northern Rock, the bank that broke Britain. Even though the Brits are totally over their fear of Spanish Popery, there’s some doubt about whether Superman’s bid will fly. As the Financial Times dryly put it, “the Bank of England and the Financial Services Authority might have to think twice before allowing Jose Maria Ruiz-Mateos take control of the mortgage lender.”

Ruiz-Mateos an unlikely bidder
[Financial Times]

With customers mobbing Northern Rock branches across the UK and the stock plummeting so fast that trading in the shares was briefly halted today, the British government moved to quell panic by issuing a statement that it would guarantee all deposits in the bank.
Chancellor of the Exchequer Alistair Darling said the guarantee was being made in conjunction with the UK’s Financial Services Authority and the Bank of America.
“That is unequivocal, I’ve put the matter beyond doubt,” he said. “People will be able to get their money back.”
One question: if you are a Northern Rock depositor, why should you put yourself at risk of even a temporary delay in getting your funds out should the bank fail? Whatever the government says about guarantees, it’s unlikely that the money will be as readily available from government as it would be from a sound financial institution. Why not withdraw and put your money some place with less trouble? We’re sorry if those questions seem irresponsible but that’s what we’d be asking ourselves if we had money in Northern Rock.
Update: Lots of readers have asked why the customers of Northern Rock would rush to get their savings out of the bank. Don’t they have the equivalent of a the FDIC? Aren’t bank deposits insured by a government agency?
The answer is that the UK doesn’t insure bank deposits the way the US does. To begin with, the total amount covered by deposit insurance is much lower than the US, which insures up to $100,000 in deposits. Only thirty-five thousand pounds is covered by insurance for depositors in the UK.
More importantly, the UK employs an insurance practice called “co-insurance” which shifts part of the risk to depositors. After the first two-thousand pounds of savings, only 90% of each persons total claim on a failed bank is covered by insurance, even for amounts below the insurance cap. The move is intended to impose tougher market discipline on the banks and essentially requires that even small depositors assess the credit-worthiness of banks.
As UK regulators are discovering in recent days, however, small depositors may not always agree with regulators about the credit worthiness of a troubled bank. Would you risk 10% of your savings in Northern Rock?
British Will Guarantee Northern Rock Deposits [Wall Street Journal]

Northern Run: Customers Emptying Out Bank Accounts

It only got worse for Northern Rock this morning. It was another day of long lines at the bank’s 76 branches across the UK, with customers ‘queuing’ up to withdraw their savings. Customers have reportedly withdrawn $4 billion—around 8 percent of it’s total deposit base.
“It looks very much like a run on the bank,” one London based American investment banker told us over instant messaging. “People are talking about the nineteen-seventies, whatever that means?” The banker we spoke to was in his mid-twenties and only knows the seventies from re-runs of “That ’70s Show.”
In a new twist on the old concept of a ‘run on the bank,’ the companies websites and call centers appear to be struggling. Calls to a call center were going unanswered according to a source in London. And it’s website has been experiencing extreme delays and delivering error messages reading: “We are currently experiencing high levels of activity on the site, which is intermittently affecting normal operation. We are working on a solution to address this. Please try again later.”
The lines, the unanswered calls and the website troubles are hardly re-assuring to customers or investors in Northern Rock, which is mockingly being called ‘Northern Wreck’ and ‘Northern Crock’ by various people with English accents.
Overnight lending rates in the UK shot up sharply as banks became concerned that the problems at Northern Rock may be replicated by other home-loan providers.
Perhaps the best sign of how bad things are is that the Brits have stopped blaming America for the fate of Northern Rock, and started blaming each other. The Liberal Democrats are blaming Labor’s Gordon Brown for not halting the “reckless” lending practices that they say has led to the crisis at Northern Rock.
The British banking officials have been urging calm, saying that if they believed the bank was insolvent they would not allow it to remain open for business. Apparently, however, many Brits aren’t willing to wait until the banking officials shut the bank down and are taking matters into their own hands.
Rush on Northern Rock continues [BBC]
Northern Rock website struggles to cope with strain []

Lending Rates Surge as Northern Rock Concern Deepens
Brown attacked over Northern Rock [BBC]
Customers lay siege to Northern Rock [IC Wales]

A Run On Northern Rock

runonnorthernrock.jpgWhat happens if central bankers decides a bank is too big to fail but the bank’s customers and investors don’t agree?
We got a little closer to finding out today when depositors besieged the branch offices of Northern Rock Wreck to withdraw their savings. Long lines—or queues as the English insist on saying—formed outside of the bank. It looked very much like an old fashioned run on the bank.
Investors fled the bank’s stock as well, pushing down share prices by 30%.
The flood of withdrawals will further weaken the bank, and may well necessitate a secondary cash infusion from the Bank of England. You can bet that the people in the executive suite at Northern Rock are damn happy it’s a Friday, giving them the weekend to work out some sort of rescue plan.
In an item on the bank today, Breaking Views gave voice to the general consensus that Northern Rock is done. At least as an independent bank.
“This run on Northern Rock surely puts the final nail in its coffin as an independent bank,” Mike Verdin wrote on Breaking Views.
Northern Rock shares plunge [Guardian]
Rocky run [BreakingViews; subscription required]