Northern Rock - who's to blame?

[TightEnd]

Whilst we're doing a 'Tightend explains it all' City thread, I read an interesting article in the Sunday Times yesterday about hedge funds which, if my reading of the article is right, plans to guarantee steady profits even in times of global downturn by structuring their bets (which, essentially, is all share trading is) so that not only do they buy what they think will outperform the market, but they sell short everything else.

The sums of money these guys make are properly bonkers - annual salaries in the hundreds of millions of pounds. There is a general perception that hedge funds are shady, high-risk things, but the article seemed at pains to point out that is a misconception. Then, near the end, the writer slips in a 'by the way I've started up a hedge fund but there's no money in it yet, otherwise I wouldn't be allowed to write this article' which made me doubt everything I'd read.

What does Tightend know/think about hedge funds?

I was a fund manager 1991-2006. Of that I ran Hedge funds 2004-2006.

It did my head in, burnt me out totally..the pressure and the stress.

The general conclusion the writer refers to is correct..they are there to reduce risk and smooth return not create more risk..but, and there is always a but, its an immature industry that sometimes lacks management controls and of course wrong bets can be taken..witness LTCM the most famous example

The main advantage is that you can benefit from falling markets if the fund manager has correctly positioned for such, for example by "shorting" stock/markets or selling futures which you do by finding an investment bank which, for a fee, takes on the position of other side of the trade

I used to manage $425,000,000 of hedge fund assets which I grew from $0 by attracting investors.

My funds acheived c 10% growth pa, but a short term track record because, as I said, its an all consuming thing.

 

[AndrewT]

I ran Hedge funds 2004-2006.

[...]

My funds acheived c 10% growth pa, but a short term track record because, as I said, its an all consuming thing.

Variance - you were just a runhothedgetard.

[TightEnd]

NRK borrowers pay interest at x%

NRK funds the lending by borrowing from other banks at y%

x% is above y%, so NRK makes money, and lends more, and etc etc

The US economy operates in exactly the same way

but, it gets overdone and in mid 2007 the funding rate..y%..rises and credit is crunched..fewer people offer that funding

so no longer does x% exceed y% and NRK is stuffed

NRK's problem is not the assets, its the funding....hence it sought help

but, the effect of the credit crunch can now be seen in the avaialbility of credit in personal and corporate markets..

look at current mortgage or credit card deals, a world away from 2006...

that in turn feeds through to confidence, activity and in the end leads to house price falls (demand lower, supply constant)

Personal borrowing is extremely high too

I am gloomy for 2008-09

[TightEnd]

I ran Hedge funds 2004-2006.

[...]

My funds acheived c 10% growth pa, but a short term track record because, as I said, its an all consuming thing.

Variance - you were just a runhothedgetard.

I was a hedgenit


could have shot for the moon, settled for much less but more predictability..hence the assets grew and my compnay earned more

[b4matt]

I ran Hedge funds 2004-2006.

[...]

My funds acheived c 10% growth pa, but a short term track record because, as I said, its an all consuming thing.

Variance - you were just a runhothedgetard.

potw

[TheChipPrince]

                >>>>>>>>>>>>>>>>>>>>>>
       
                                  MY HEAD

[boldie]

There is no doubt in my mind that that 25 billion is gone

so you are saying that everyone who has a NR mortgage has stopped making payments?

the Property forums on the motley fool have been taking the piss out of NR for years, at the height of the housing market they were doing 130% mortgages to the shediest of customers. however the mortgages are backed by property which must have some value although obv not all of the 25 bill, so even if nobody made another payment from today onwards they will still get some back by repossesing and auctioning off the properties.

no, not at all. but anyone who buys Northern Rock (wooly jumper and co) will never pay that 25 billion back. That money is gone, that debt will be sold to consolidation companies who will aybe pay 50% of that money back..and even than we'd be lucky. This has nothing to do with people who have a Northern Rock mortgage.

[TightEnd]

http://news.bbc.co.uk/1/hi/business/7199552.stm

ouch

[jizzemm]

http://news.bbc.co.uk/1/hi/business/7199552.stm

ouch

I was wondering why my google finance bit on my homepage was all in red... Now i know.. watch everyone panick sell all their shares etc etc..

Time to by Tighty?

[TightEnd]

http://news.bbc.co.uk/1/hi/business/7199552.stm

ouch

I was wondering why my google finance bit on my homepage was all in red... Now i know.. watch everyone panick sell all their shares etc etc..

Time to by Tighty?

not yet, it will get worse first

but don't panic sell..never panic sell...be long term and patient if you can afford to be

[neeko]

There is no doubt in my mind that that 25 billion is gone

so you are saying that everyone who has a NR mortgage has stopped making payments?

the Property forums on the motley fool have been taking the piss out of NR for years, at the height of the housing market they were doing 130% mortgages to the shadiest of customers. however the mortgages are backed by property which must have some value although obv not all of the 25 bill, so even if nobody made another payment from today on-wards they will still get some back by repossessing and auctioning off the properties.

no, not at all. but anyone who buys Northern Rock (woolly jumper and co) will never pay that 25 billion back. That money is gone, that debt will be sold to consolidation companies who will maybe pay 50% of that money back..and even than we'd be lucky. This has nothing to do with people who have a Northern Rock mortgage.

Er no

NR have lent about £100bn in mortgages and personal loans etc.

£50bn of this is "paid for" by a subsidiary in Jersey (which has borrowed long and therefore not suffering finacing problems).

About £25bn came from savings accounts from borrowers off the street and the rest from short term loans from other banks. The other banks decided that they would rather lend money to any bank other than NR so this source of funding dried up, Retail savers heard of problems so they took their money out as well.

The govt / BoE has had to now step in and lend NR £25-30 bn to cover what NR cannot get privately. Obv the govt does not have £25bn lying around in its back pocket so it has borrowed exactly the same money that was going direct to NR, in the govt's name and then forwarded that money to NR.

If we could just let time take its course then the govt could just wait 25 years for all the mortgages to get paid off and its money would be repaid.

The issue is now one of how one of how the govt :

1. retains public confidence in the banking system. (prob by giving a gtee of all bank savings of up to £100k) -(plus banks made £37bn in profit last year so it is not like banks are without capital)
2. Keep house prices up (or at least not fall a lot) so that there is not a problem of negative equity (prob by lowering interest rates and praying inflation does not happen).
3. Avoid state aid problems from the EU, (a real problem but prob going to be overlooked cos of the desire to keep NR alive)
4. Keep '000's of good jobs in the north east alive (if the jobs were in London the result would prob have been different)
5. Get re-elected (the prime job of any govt) - (er can give no hope to this one - just a shame the alternative is almost the same)
6. Get the money back (this is the easiest of them all - most of the mortgages are of good quality and will get paid back - it is just a question of the price paid for it - interest rate and the amount of "face" lost by actually doing it.)
7. The brand NR - (er its dead - i know people in the North East still like it but long term it will need a re-brand)
8. Find someone to blame - the press always need a scapegoat (this is more of a problem, ultimately it is the chancellor that was in charge of noticing that NR was acting like a 19 year old woman who had taken out 14 store cards and was buying too many shoes)

[edit point 8 to make sense]

[ACE2M]

i don't know much about this but i understand the new plans basically nationalise the potential losses and privatise any profits, thats why it's taking so long for the deal to get done, no private group is going to get involved without guranteeing a profit out of it in some way.

Who does the bank of england borrow the money from? the treasury?

[LLevan]

As a novice with regards to this whole affair, my understanding as I read between the lines is BOE have lent NR 26 Billion at an interest rate above base rate. Surely at the worst the interest only is being repaid on this 26 Billion. If the BOE have money sitting in its vaults doing nothing then surely its in the taxpayers interest to loan this money out and earn a yield on it, however I expect in order to lend NR 26 Billion the BOE have in fact literally printed more money although in effect this money has not actually been pulled up as such but just shown in ledgers etc.
As for the other 25 odd billion as guarantees I guess Gordon Brown et al are confident that the assets in NR will more than cover this figure if NR was put into administration/liquidation so we Joe Public shouldnt really have to fret over this amount.
As for Wooly Jumper trying to get on the band wagon, no doubt any deal Virgin do will be their shareholders favour or else why would they want to get involved, however this doesnt neccessarily mean it would be a bad deal for the taxpayers given the other open options.

[Ironside]

it's Ironsides fault..












proberly

sorry

i didnt realise that cashing in my isa would have this effect

i will try and let you guys know before hand next time

[TightEnd]

US Fed cuts rates by 0.75% inter-meeting

they're worried for sure!