Safe and Secure

Darling has made a financial statement this afternoon and this was reported on Sky News about Northern Rock.

He also revealed nationalised bank Northern Rock has now paid back more than half the £26.5bn of taxpayers’ money that was lent to it.

So perhaps they had done the same sums I did and realised there was enough good business in there to repay the loans.  Also people have been moving savings into the bank.

Or could it be that the new management have read my blog?

I was intrigued by this tale on the news this morning.  Lloyds TSB will have access to Northern Rock customers who need new mortgages in return for a fee from Northern Rock.  Customers will pay no arrangement fee for their new finance.

Have they been reading my notes on how to make money out of A Finance Company?  It looks like Lloyds TSB are taking lots of nice tasty bites out of the best and most choice bits of Northern Rock’s mortgage book.

Here’s what I said last August, well before Northern Rock hit any trouble.

This tale from some years back illustrates the weird mathematics of finance.

My husband was approached by a woman, who’d just lost her husband. He’d been the owner of a very successful local finance company, which had a book, that was worth several million pounds. She was the company book-keeper, but didn’t have any selling knowledge and really didn’t trust the two salesman that the company employed.

Both had said they would leave, if they didn’t get to run the company. They were number twos not number ones.

She’d had an offer for the company from one of the financial majors in the industry, but she felt it was derisory and really wouldn’t see her through the retirement she wanted to take.

So could we help?

Luckily, she had built a beautiful spreadsheet of the company and it’s debts and loans. Most debts were on sensible cars, trucks and equipment and most were local and known to the widow. Loans were from respected banks and they weren’t particular bothered, but they did want a plan for the future.

I remember that I spent a day with her and one of our analysts, whilst we played the spreadsheet for maximum return at the lowest risk.

The best solution was to build the company out of the business.

We found a suitable very part-time MD for the company, who would be the contact point with the banks and solicitors and took a small stake in the company.

The first thing she did, was to make the salesmen redundant, as the company would not be writing any new business. In fact the only members of staff that remained were the widow and her collections manager, who was a retired policeman and an expert at making sure payments were made on loans.

I said that the company didn’t write any new business, but a lot of the bigger customers liked the local service they got, so the widow signed these up as agency business to various reputable finance companies. It became a large slice of icing.

The outcome was that over the next four years, the widow received many times the amount of the best offer she had received for the company and all its business. As it wasn’t all in one great lump, her accountant was able to deal with it in a very tax-advantageous way.

Does this mean that Northern Rock is being closed down in an humane way?  After all it does look that it might just left with the crap business that no-one wants.

So the government has finally decided to nationalise Northern Rock.  Talk about the Nero tendency of the Labour Party.  It should have acted immediately and done something like put it into administration then or allow Lloyds TSB to take it over.

But there was an election looming.

This is what I said before.

The government has poured an awful lot of our money into a bank that got its sums wrong. And why have they done that?

Not to protect the investors and the borrowers, as any decent administrator would have done that, as the debts are more than covered. But to make sure that the North East votes Crooked Labour next time.

Suppose the bank had been based in Southend. Would they have rescued it?

Of course not!

It should have used Administration to recover our money.

I am an honest woman who pays her taxes and fines on time. Well, I usually do. I also don’t get speeding tickets and parking fines.

According to the BBC, Portsmouth has taken fairly extreme action with those of its citizens, who won’t pay their council taxes. We’re not talking about those who can’t here as these are the ones who’ve been through the courts and still won’t pay.

When they talked about the story on the radio, one guy decided that it was better to pay the £3,000 he owned in cash, rather than lose his mobile home.

But why does anybody have £3,000 in cash in their house at seven in the morning?

He must be an ex-Northern Rock customer.

Northern Rock have called in everybody’s favourite football manager, Sir Bobby Robson, to calm down the situation.

As the Northern Rock story unfolds there is one curious fact.

If they’ve been drained by their customers of upwards of two billion pounds, then why have they not taken any of the money offered to them by the Bank of England?

I would guess they were being prudent and as a good company decided to forewarn everybody about what was happening.  I suspect that no-one could have foreseen what would happen in reality, with a collapse of the share price and everybody wanting to withdraw their money.

Even popular financial experts like Martin Lewis were not flagging up that you should withdraw all your money. Read his full Q & A on Northern Rock.

But it is likely that Northern Rock will be taken over.

Given that the Bank of England have given unlimited guarantees to savers at Northern Rock, there would appear to be very little there to frighten a purchaser.

But the Northern Rock name has gone from a marketing rock to a dangerous quicksand and the purchaser will bury it as quickly as they can.

So what will they do with the rest of the company.

If the purchaser, is a bank without a significant mortgage business, then it would probably just rename Northern Rock to something suitable and then carry on as normal.

But if say it was a bank with a substantial mortgage presence, then they would just drive it into the ground, reducing staff to a minimum level and collecting the money on the existing business as it matures.

Doesn’t this sound a lot like the plan outlined in The Finance Company?

The panic is still running.

There’s an interesting scenario behind this.  Or there could be.

Suppose you were the Chief Executive of a large bank in the UK and when the sub-prime stuff hit, you looked at your balance sheet and said something like, Phew, we’re OK.  You then checked and still liked what you saw.

So you then thought about it and said to all of your managers, that it’s probably not in the bank’s interest, if you lend to other banks, as you don’t want to pick up the fallout from the rubbish.  A good sensible decision.

Then you realise that if all the sound banks did this, then any dodgy bank will be flushed out.  And anyway, you also believe there are too many banks and that if you took over another, you could be bigger and more efficient.

So Northern Rock is the first to be in trouble in this very high stakes poker game.

Now, if you are the Chief Executive of a very sound bank, you’re getting ready to pounce.

Northern Rock is in trouble, its share price has tumbled and customers want their money out.

So what would I do, if I had large sums of money in the bank?

I think it’s pretty certain that any money in Northern Rock will be safe. Or at least as safe as in any other major bank.

But Northern Rock is mainly a mortgage lender and although its business is by no means the dross described as sub-prime, it has been aggressive in setting up this type of business.

So I might sometimes think that it has put too many eggs in one basket.

Northern Rock has often given very good rates for savers and sometimes I think people chase the rate and move money from one account to another. I always split savings around accounts and plan when I will need the money, so that I can get a better rate at my preferred institution, by giving them the money for longer.

By removing any money from Northern Rock, people will actually be making matters slightly worse for those who are still with the bank, as it will reduce the capital available. But actually not by much. You could also argue that Northern Rock will have to offer higher rates for savers to attract money.

So perhaps you might leave a certain amount of money in the bank.

The real losers though will be those who have fixed-rate mortgages about to expire with Northern Rock, or any other bank or building society, for that matter.

They will not see the same rates for a few years.

But it always puzzles me that people have such large sums in banks and building societies.

If for instance I had a spare £200,000, which seems to be quite common, what would I do with it?

Perhaps I would enjoy it as I can’t take it with me and all my family are well set up.  I might buy a property and let it.  But I’d probably use a small amount to back an exciting idea, that was being developed by someone I knew and trusted.

The latter is often a good way to lose money, but sometimes it turns a few thousand into a few hundred thousand, with a great deal of fun.