Tuesday, March 18, 2008
Dismantling The Crock
Given the dire circs, Ron Sandler's plan to dismantle Northern Rock is the best taxpayers can expect.
He plans to shrink the operation drastically, halving the asset base in three years, repaying the Bank of England loans, and cutting staff by one-third. It's certainly the right direction, but before popping any champagne corks taxpayers should remember the following.
First, selling mortgage books in current market conditions will not be easy. Sandler should make sure he holds out for full value.
Second, the easiest assets to sell will be the best. Which also applies to the NR mortgagees who will be persuaded to remortgage elsewhere. In three years time, taxpayers could find themselves left with the problematic rump.
Third, it's not at all clear how he proposes to unravel the offshore Granite funding vehicle (see previous blogs eg here).
Fourth, the NR statement talks of rebuilding its retail deposit base so it can reduce its reliance on fickle wholesale funding. Right now, with the Rock's market leading rates, that's probably going quite well. But that's because the HMG guarantee remains in place, which, as we've blogged many times, that's the deal of the year (if you haven't yet switched all your funds to NR, get on with it*).
What happens when the government guarantee goes? Yup, most of the deposits go too. Or to put it another way, taxpayers will have to go on guaranteeing NR's deposits into the forseeable future.
We are a very long way from being home and dry.
PS I've reminded myself of some details from the US S&L crisis. There are some spooky similarities, including how, during the Go-Go Gekko 80s, the S&Ls diversified their funding sources from boring old retail savings accounts to wholesale funding via an array of intermediating sharks. Small town S&L managements were way out of their depth. Oh, and the subsequent bail out cost $160.1 billion, of which $124.6 billion was directly paid for the U.S. taxpayer.
*Disclosure statement: in recommending Northern Rock deposits, Tyler Investments (Cayman) hereby asserts and affirms it is not in the slightest bit qualified to offer any such advice.