Northern Rock

[downsouth]

> They are all still essentially solvent because those mortgage loans still have the same asset value.

> Until the market value of the mortgaged properties falls below the amount of the mortgage loans?

Has it not always been so?

[DaveR]

"Until the market value of the mortgaged properties falls below the amount of the mortgage loans?"

- and the mortgagees are unable to meet the repayments. Being in negative equity doesn't mean you will default; on the contrary, most people will try and stick it out. I'm not aware of any evidence that Northern Rock, or any of the others, have a riskier mortgage book than any other UK lender.

[lozzyloz]

Yes and no DS. The collapse of the US sub prime mortgage market is the start of the Domino run. It's exposed what we've seen for the last few years as trouble brewing. Low interest rates and increased money supply have encouraged many to over borrow, has fuelled unrealistic proprty value growth and has artificially staved off the natural economic cycle of highs and lows for political purposes. The problem now is that this is unsustainable. Company stocks are overvalued, property prices are too high in relation to earnings and personal debt is at an all time high. Increased borrowing costs and a slowdown in consumer spending (witness latest retail spending results) will tip the balance. Why Northern Rock and others? These banks led in offering self certified mortgages, high multiples of earnings and loans up to 125% of the property value. Therefore these banks are particularly exposed to the UK Sub Prime Mortgage Market and it's unclear as to the size of the economic impact when these mortgages default coupled with a property price correction. If it happens it could be a disaster and that is what investors (big and small) are gambling on. The governments reaction will probably be to pump cash into the banking system and reduce or stabilise interest rates. How often does the government get it right and how much will the slowdown in the US economy affect us?

[mockney piers]

People (and I include the chancellor in all of this) keep saying that the gov't won't let banks go under.

But if it was to underwrite financial institutions' debts it would obviously have to go to the money markets, whether issuing bonds or taking loans, to raise the funds to so do.

If confidence continues to be undermined and this panic gets out of hand, where exactly is the government going to go to get the money to prop up the entire financial system. I suppose we could sell some of our trident submarines to, oooh I dunno, Iran, that'll raise a pretty penny?

I guess it'll have fall to the ECB, who have alreadly released billions of their cash reserves to prop up the markets, to save the day.

Nasty old europe eh! ;-)

[Brendan]

What does the England Cricket Board have to do with any of this Mockney?

[mockney piers]

Freemasons obviously Brendan. Duh!!

[Brendan]

*offers a significant handshake* ;-)

[mockney piers]

*rolls trouser leg up and winks with unblinking eyes.*

*strange how my eyelids blink upwards*

[downsouth]

lozzyloz - my point being that mortgages are premised on them being solvent in respect of their asset value, however cyclically the market value of the mortgaged properties will fall below the amount of the mortgage loans - especially when bought at the peak of a cycle. It's nothing new. The newness is the sub-prime issue and some of what you have said. But were the offers by these institutions helpful in getting some onto the property ladder who would not have been able to before? - remember all the cries about average joes being left behind. It was alright for those on the ladder but not the ones coming after. I am grateful to NR for getting me on in the first place. I watched for 3 years, prior to me buying, the value of housing go through the roof. If I was on the same money (with discount for inflation) then I'd be living in a good sized house on a nice road. As it is my wages afford me a flat. And without trying to sound smug or anything of the sort I am not on a pittance.

In reality house prices galloped away because of the buy to let phenomenon and because others had access to capital through equity release and perhaps the most destructive of forces - the private developer making 8 flats from one house or converting it to 3 flats. Therefore families can't afford houses as they are competing with developers and buy to letters who stand to make large profits so can put up more money.

This has led us to where we are. Interest rates and inflation have definitely played a huge part but demographics and sharp business practice is really why property inflation has far outstripped that of wages.

In terms of where willthe government raise the money - it's from us.

[AB]

Not sure I agree with lollyloz. There's no evidence of a sub-prime problem in the UK leading to any problems with Northern Rock - it's just Le Crunch has stopped them lending in line with their business model. A bit like if ED Deli couldn't get enough cheese to sell.

Also, inflation is on the way down at the moment (2.8% announced today I think).

[SeanMacGabhann]

Collective action saves the day - yay us

[downsouth]

@ Sean - I thought you might like that :)

AB - I agree, the credit crunch is what has affected NR but that was their business model and the model of others sanctioned by the FSA which to be fair is quite stringent as regards solvency and liquidity ratios.

A good cartoon from the Telegraph today (before you say it I read allfour of the traditional broadsheets!)

http://www.telegraph.co.uk/opinion/graphics/2007/09/18/ixd18big.jpg

[lozzyloz]

Nice cartoon DS!

Not sure I believe the inflation rate in the way its calculated and how handy that it comes in just under target so that the BoE has an excuse not to raise interest rates. The US will probably drop rates today in an effort to delay a recession as I mentioned before. Once jobs are hit in this country it is precisely those that have tried desperately to get into home ownership that will suffer as they default on loans that were too easily given. Agreed that house prices are far too high and even the most conservative forecasts say flat growth in next few years.

[ChavWivaLawDegree]

Something I find dodgy about the whole of this is fractional reserve banking, which allows banks to electronically put money into peoples accounts based on 1/10 of the assets they actually hold. The whole system is a house of cards and I feels a twister is a coming. Better run for them thar hills!

[mockney piers]

I think that's pretty much been the case for the last 500 odd years chav, so pretty tried ant tested.

Sub-Prime mortgages, an amoeba could work out that charging more to people less able to pay is stupid, no matter how well you think you cover yourself.

Northern Rock were just sailing too close to the wind with their operating model, mind you I see large chunks of the populace doing exactly the same, so they weren't alone in thinking the good times will roll on.

And do the gov't honestly have the tax pounds spare for this? Oh well, there go the flood defences again!!

[ChavWivaLawDegree]

I'm sure the Brits sold their gold reserves that were the basis for their banking ages ago, but the Americans kept the dollar as hard currency until relatively recently. I'm not an economist, but I'm sure the reason countries with mad currency like the old Lira and Escuda had hundreds to the pound was because they had no reserves left and just printed more money. Same thing with Argentina when their economy collapsed. I don't trust banks and their bits of paper, I want my money in Gold and Silver coins mate. Anyone have change of a dubloon?

[lozzyloz]

CWLD will you accept two Guinea Pigs and a Courgette?

[mockney piers]

If the value of coinage is intrinsic to the value of the metal of which it's comprised, then all you do is get people nipping stuff of the edges and/or debasing the currency, so you end up with the same problems, inflation and lack of confidence/trust in the currency, so there's no great improvement.

The moment you've moved to paper money it's all about abstraction; this ain't the problem; papaer money is essentially smoke and mirrirs and based on confidence, but as i said its a tried and tested trick, whether it's backed up by gold reserves, currency reserves or just sound financials (ie, don't keep printing the stuff to get out of trouble).

The problem is when financiers believe in alchemy as has happened over and over again. Nutmeg, tulips, dot coms, sub prime mortgages, yadda yadda yadda. Reality will always catch up in the end.

[ChavWivaLawDegree]

Ok, stuff the money, lets get back to barter! I'm gona go try to buy a kitkat with a couple of my homegrown tomatoes, I'll let you know how I get on.

[mockney piers]

I'm all for that!

I'll dance for crusts; I do a marvellous bugs bunny style soft shoe shuffle.

Anybody need Halo 2 completed on the hardest setting? anyone .. anyone .. Bueller?

[Brendan]

Will swap smartarse comments for beer.

[SeanMacGabhann]

Did you really trudge through that?? Bleedin snipers

Or are you just paraphrasing The Streets and quoting Ferris at the same time?

[downsouth]

We're not in Kansas anymore.

[mockney piers]

If I can take down a Big Daddy called Rosie, Toto.....

[Keef]

Piers, did you complete Eternal Darkness THREE times THREE times THREE times? ;-)