Pryor's pissed

Property hotshot Henry Pryor is pissed off with Northern (c)Rock. According to Rat & Mouse, Pryor - who owns the Primemove search engine - is claiming that the banks are "liar, liar, pants on fire" and that they're doing consumers a disservice by
"withdrawing their products so that even if someone finds something to buy they now find that some banks don't have a single mortgage product to sell!"
Pryor admonishes NR to "get back to work" and start offering mortgages. Question for Henry, where are they supposed to get the money from? Another BoE loan?

LEHMAN BROTHERS SHUTS DOWN UK MORTGAGE LENDING

Lehman Brothers, the troubled US banker, currently fighting a ¥35.2bn fraud case in Japan is facing further troubles closer to home and is set announce a withdrawal from the UK mortgage market effective April 1st.
Mortgage Solutions is claiming that Southern Pacific Mortgage Limited (SMPL) and Preferred Mortgages - both devisions of Lehman, have indicated they would effectively close their doors on Tuesday.

Who benefits from Northern Rock?

Does the government?
Do the taxpayers?
What about shareholders and employees?
How about management? ... Ah yes there's your answer; according to the Times:

Ron Sandler will become executive chairman of the bank and be paid an initial £90,000 a month for his services. He will be assisted by Ann Godbehere, a Canadian accountant and insurance executive, who is to be paid £75,000 a month. Mr Sandler, the former chief executive at Lloyd’s of London, flies to Newcastle today to begin talks aimed at “contracting” the business before a sell-off. He refused yesterday to rule out job losses at the bank, which employs more than 6,000 people.

Anatomy Of A British Bank Run

The 1860's were a very turbulent time for Britain. The country had just lost the American Civil War and the abolition of the African slave trade was no doubt having effects on the overall economy. In this environment, Overend, Gurney and Company, the so called "bankers' bank", spectacularly collapsed in May 1866, owing about 11 million pounds (probably about £6 billion in todays money). At the time Overend, Gurney & Co, had a turnover double that of all its competitors and was the second wealthiest bank in the country. Only the Bank of England had more money.

What caused the collapse?

In 1862, 500 new limited companies were registered in Britain. By 1865, nearly 1,000 companies were registered because of changes in liability law, making it easier for individuals to register companies and not face liability in case they went bankrupt. Many of these new companies were promoted fraudulently, but the bank paid little attention to the finer details, making credit easily available.
Ironically a key source of this credit were new types of 'finance companies' which would accept poorer securities from 'farmers, tradesmen, domestic servants, peers, and peasants’ a market that traditional money lenders did not do business with. These new finance companies were able to charge much higher interest rates and as the bankers bank, Overend Gurney provided the liquidity to these new finance companies. Unsurprisingly, defaults quickly rose as many of the new companies went bust. Overend Gurney began to feel the pressure and in 1865, in an effort to offset losses and increase liquidity, management at 'the bankers bank' decided to take the company public. Subsequently Overend Gurney was converted into a joint stock company under the new regulations but the banks management did not disclose the full extent of their liabilities to the public and regulators.
Laden with bad securities and unable to make calls to nervous shareholders, Overend Gurney began collapsing in the early months of 1866. In May 1866, the 'bankers bank' went into liquidation owing £11 million to shareholders and the public. As a result of the Overend Gurney collapse, nearly 300 companies including other banks also failed, causing one of the worst financial disasters in British history, forcing Parliament to suspend the Bank Charter Act. The directors at Overend Gurney were tried for fraud, but miraculously escaped prison. In fact the Gurney family, being one of the most respected banking dynasties in England survived the scandal sufficiently unscathed to become founding partners in Barclays Bank 30 years after the 1866 crash.
The Overend Guerney crash of 1866 was the last recorded bank run in the UK, before Northern Rock PLC lost over £2 billion, starting 14th September 2007. The similarities are scary.

Further Reading

Overend Guerney
1911 Encyclopedia
Spectator
Taylor
Northern Rock
Peston
Renthusiast

Has Merv lost the plot?

Word on the street is that BoE Governor Mervyn King may be 'loosing the plot'.
In a stunning and uncharacteristic reversal on his word, King agreed with the FSA and other government regulatory bodies to do almost exactly what he said he wouldn't do and that is to use BoE resources and bail out 'unwise lenders'.
Surely 'unwise' is relatively tame to describe what the Rock has done - actually increasing the amount of loans on their books for the first half of this year, when all indications were that the market was going south, coupled with steadily rising interest rates, high inflation, the summer floods and decreased consumer spending:

In the first six months of 2007, its net lending rose 47 per cent to just under £11bn. And at June 30, it had a further £6.2bn pipeline of loans that had been agreed with customers but not yet delivered ... [w]hat’s perhaps even more embarrassing for Northern is that in its interim statement made earlier this summer, it was explicit that it continued to lend even as the interest rate environment turned against it.
[Peston]

Clearly that decision was unwise, but is Merv's decision any unwiser? Is he now under political duress to bail out banks?
Check the Northern Rock statement released today concerning the bailout:

...Northern Rock has agreed with the Bank of England that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the Bank of England or entering into repurchase facilities with the Bank of England. Such repurchase facilities would include securities that have prime residential mortgage assets as underlying collateral. The collateral that can be used under this 'Repo' facility is similar in nature to the collateral currently utilised by many Eurozone banks with the ECB. This additional source of funding will enable Northern Rock to adapt its business model in line with the developing market conditions.

OK so get this, what Merv has actually done is collateralize the bailout using - guess what- "prime [read sub-prime - 'cause that's NR's main business] residential mortgage assets."
So the BoE - yes the Central Bank of England, Wales and Scotland - has now become a prime/sub-prime mortgage lender. But that's not the worse of it; now NR decides to adapt a business model in line with 'developing market conditions'; and King supports this?
To give yourself an idea of just what those conditions are, read what Rightmove had to say this afternoon about developing market conditions, then decide for yourself whether or not King is indeed - losing the plot.

"NO NEED TO PANIC !" as Northern Rock effectively goes bust

The writing's on the wall for UK sub-prime industry as Northern Rock arguably the biggest sub-prime mortgage bank in the UK effectively goes bust, were it not for another Bank of England bailout; yet some politicians feel that there is 'no need to panic'.
However, there certainly is need for concern in Northern Rock's situation because the cash crunch problem affecting UK lending institutions, is being caused mainly by irresponsible lending in US housing, particularly the sub-prime market.
Northern Rock, solely a UK lender, brings the problem close to home.
The actions by the UK central bank appear in some way to contradict the policy Mervin King outlined a few weeks ago, when he stated that the Bank of England would not support 'unwise lenders', although his comments were with regards to interest rate policy. However, today's bailout indicates he may be having a problem sticking to his words

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