Northern Rock is nationalised

[CoteDAzur]

Government announces the nationalisation of Northern Rock this Sunday afternoon.

Shareholders are not happy campers. Neither are taxpayers, I imagine, who are footing the bill of Northern Rock management's incompetence.

We might get some advice... although neither of us have a lot of faith in even independent financial advisers - my friend's one has just advised her to get a buy-to-let this year cos apparently house prices are going to rocket as they always do! We kind of want to move to a new area within the next 18 months but aren't ruling out renting there instead if need be.

Can't really complain - our rent here is a third of what we'd be paying on a mortgage for this house!

my parents have an excellent FA, but have been with the (small independent) firm for YEARS and really trust them.

we also sold to rent until we want to buy again - which will hopefully be 2009.

southutsire - My recommendation would be government bonds. Not necessarily UK ones, but there are some safe and high yield bonds out there like South Africa and Turkey. Buy Eurobonds (bonds in EUR or USD) rather than government bonds in local currency.

If your money is with a bank where you have the option of investing in a bond fund, this could be a good option, provided that:
(1) costs are not too high (funds tend to charge you an entrance fee, exit fee, as well as yearly management and performance fees)
(2) they invest primarily in sovereign bonds (government bonds) and not in corporate bonds

Schnitzel - re "n.rock would have to had to hike its mortgage rates, which is likely to force some borrowers into default"

Not possible. Mortgage agreement is a contract set in stone. Fixed rates are fixed and variable rates track the prevailing BoE rates. No bank can raise mortgage rates just because it needs money.

There are a lot of northern rock products which offer huge loan to value large multiples and low interest rates for a year or two.The problem is a lot of these borrowers will come to the end of fixed rates and will have nowhere to go as other banks have tightened up and so will have totake the NR variable which is fairly steep.If these people start defaulting on the new rates who will bail them out as I can't see this govt shafting thousands of people just before an election.It is a real mess imho

Good advice from CDA there. I'd certainly not profess to be an expert in personal finance, but fixed term bond investments (which are available from most high street banks like Barclays) seem to offer a good return. If you're doing this though, it would be worth checking what the underlying bond is invested in.

CDA: not sure I'd agree that the £25 billion is a sunk cost. It's an asset, of which the value can be debated but certainly an asset. The P&L amount of £433 million is the interest on the mortgage book (plus other businesses) and doesn't correlate with the repayment profile which you'd expect to see in the cash flows and balance sheet.

Using your car analogy, I'd say it's rather like buying a car for £10,000 and selling it to someone for £10,000 plus interest, payable over say 10 years. The interest is the amount you'd book each year through the P&L, and the amortisation of the loan would go through the cash flow. At the end of ten years, you have your money back plus interest. If the other person defaults then you have the car plus the amount paid to you to date.

NR situation is not dissimilar. Assuming they take on no new business (which won't be the case), that £25 billion would amortise over time during which time they would be receiving interest. If after say, 2 years, the government tries to sell it, they'll sell it for market value of mortgage book, plus the capital and interest they've received in the meantime. (I think that's right anyway)

cestlavie - A loan is never an asset. It is a liability, aptly placed in the 'liabilities' side of the Balance Sheet.

The £25 bn taxpayer money is used up and is GONE. NR doesn't have it anymore. It doesn't exist as cash in NR's safe nor as an asset that could have been bought with it (land, building, etc). If it were, we could talk of an asset. Unfortunately, this is a cost that has been incurred in the past and cannot be recoverd, and hence has no relevance for future decisions.

As such, this is the classic definition of 'sunk cost'.

And I just looked at NR's cash flow statement.

NR made £1bn in cash flow in 2006. About £400mn of this was through a capital increase (i.e. asking shareholders for money) so forget that. NR made £600mn at the height of the housing boom.

Even if this boom were to continue, it would take NR 42 years to make enough money to pay back £25bn, and 92 years to pay back £55bn. And it is rather obvious that the good days are past.

So, even if government can turn NR around soon, your children's children will (maybe) see taxpayer's money recovered from NR. Obviously it will not be worth the same money when paid two generations later (see 'time value of money')

CDA: sorry, but I'm not sure I agree. A loan is always an asset for the lender and always liability for the borrower. NR is a lender and as such records its loans as assets.

If A lends £100 to B, then A has a receivable from B (which is an asset) and B has a payable to A (which is a liability). If I lend you £1,000 then I have an receivable (an asset) which I could, for example, sell to someone else.

In the case of NR, their most recent published accounts (June 2007) show a total company asset value of £113.0 billion including an £87.4 billion residential mortgage book asset. Those are mortgages secured against properties and therefore exist as both a very tangible loan obligation from the borrowers, or in the event of default, properties. The £25 billion of tax payers money is secured against this asset base.

This is absolutely not, therefore, the definition of a sunk cost. Feel free to have a look yourself - the documents are on their website.

southutsire, to pick up on your 'pots of gold' comment,
you don't need to be a City Trader to buy Gold and Silver

There are currently two companies that let you buy physical
PM online - bullionvault and goldmoney.

cestlavie - re "I'd say it's rather like buying a car for £10,000 and selling it to someone for £10,000 plus interest, payable over say 10 years."

Er, no. That is more like mortgage lending.

What we see here is government spending £500K on a £10K car that it didn't even own, then trying to sell it for £510K because it is trying to recover its sunk cost. Which is dumb because nobody will pay that price.

"The interest is the amount you'd book each year through the P&L, and the amortisation of the loan would go through the cash flow. "

I used to be a financial analyst and this sentence makes no sense to me. I can explain in detail if you like but for now suffice it to say that this is not how loan repayments are booked AT ALL.

cestlavie - Government tried to pass the £25bn as an asset for NR, when they asked the bids to reflect this high value that was already sunk into NR.

I realize figures are on NR website. That is where I have been linking to for their Income Statement and Cash Flow Statement.

the taxpayers money is not "gone". it has been lent to NR and should, in theory, be repaid to the taxpayer as NR's borrowers repay their mortgages. The taxpayer therefore has an asset. there may be debate about the value of the asset but it's worth something.

the only situation in which the taxpayer loses out is if the NR borrowers default so that NR cannot repay.

NR is not insolvent, it suffered a loss of liquidity which is not the same thing.

CDA: yes, that was rather my intended analogy.

The interest NR make from their borrowers is indeed recorded in the P&L. Because they are a financial services business this is recorded as revenue (£5.0 billion in 2006) which is offset by the amount payable in interest to their obligors (£4.1 billion in 2006) which gives them a total income of £1.0 billion, including fees and commissions etc. The change in the size of their mortgage book asset is reflected in the cash flow, an increase of £17.0 billion in 2006. I guess we agree on that since the figures are all out there.

Since NR only has a small savings base, a fair proportion of their mortgage book is/ was funded in the capital markets (which is what obviously caused the problem). What the government did was replace a £25 billion shortfall in the capital markets funding with a £25 billion loan which now sits alongside the existing funding structure and which is secured against the asset base. What the government could not agree with any bidder was the repayment terms for this loan (I believe bidders wanted to subordinate this facility amongst other things) and the equity upside it would get for having put this loan in place.

Of course NR has a value. Nobody is debating that. The point I am trying to make is that its current value is not higher than £25bn.

Just read in The Times that government will be paying financial firms about £100mn for the failed sale of NR

CDA, when the fixed term on a mortgage expires, the bank can set the rate wherever it likes. if the customer finds the new rate uncompetitive, he or she can remortgage with someone else UNLESS other firms are not willing to lend, for example because a general contraction in credit means they are unwilling to take on risky borrowers. if that's case, as it may be with some of northern rock's overextended customers, you either pay up or lose your house.
and c'estlavie is right, a loan is an asset of the lender. so northern rock's mortgage book is an asset. its liabilities are what it has borrowed in the capital markets and from the government.

"Northern Rock has a value in itself." But it does not seem clear what that "value" is or what it is based on. Some dodgy dealings mean that the decent quality mortgages on Northern Rock's books are actually owned by companies that are part of a "charitable trust" called Granite. Northern Rock does not own Granite and cannot legally use its assets to pay back the treasury.

According to Vince Cable: "The problem is that Granite is a separate institution that, as I understand it, securitises the best assets of the bank. The best mortgages of the bank are wrapped up in the Granite vehicle. We are being told that in some way that is being hived off to the benefit of person or persons unknown, apparently, to the Minister. What is going on here appears to be not the public ownership of Northern Rock but an asset-stripping operation designed to benefit someone-we do not know who.

...My understanding is that the remainder of the assets of Northern Rock, outside Granite, consist of unsecured mortgages and the so-called Together mortgages-those at 125 per cent. of value-or, in other words, the rubbish. That is what the Government have acquired. We now need a rapid and thorough explanation of exactly what has gone on..."

I read that too that it isn't being nationalised merely wound down and the assets stripped.The plot thickens I wish I could go and live abroad because the uk is in a real mess with this govt

Agreed - is there any politician, apart from Vince Cable who seems to have a grip on this?

I have a suspcion that the Labour administration, and also the Tory front bench are composed of innumerate career politicians and former lawyers.

IMO the whole Granite 'charity' thing is one of the most shocking things about this:

article

From the article:
"And at the heart of Granite's operations is a rather peculiar fact: on paper, at least, it had been set up to benefit charities, and in particular a small organisation for children with Down's Syndrome, and their families, which was being run from a semi-detached house on the outskirts of Newcastle.

Even more peculiar, perhaps, is the fact that nobody at Northern Rock bothered to tell the children's charity that it was a beneficiary, and the charity never received a penny from Granite.

For seven years, Down's Syndrome North East (DSNE) raised small sums of money as best it could. There was £125 from a man who cycled across the United States, children at a primary school in Middlesbrough chipped in £100, and the North East Ladies' Luncheon raised £750. And the whole time, the volunteers who kept the charity running were unaware that it was supposed to be the beneficiary of a trust which had raised £71bn on the international financial markets and which enjoyed a turnover of £1.8bn last year."

What a lovely company NR is/was.

Schnitzel - We don't have that kind of mortgages here. You either have a fixed mortgage, a variable one, variable rate with a cap (say, maximum 4%) or variable within a band (say, within 2-4%).

I know loan is an asset for lender's B/S. The point I was trying to make was that government has acted as if it considers the loan an asset OF NR, asking for the Virgin bid to reflect the £25bn already sunk into the company. Which was wrong.

Have not read thread, but have a mortgage with NR. What does any of this mean, if anything, for me and DH?