While the media and politicians form a disorderly queue to take pot shots at the Government over the way it handled Northern Rock, it appears they have missed the real, and frankly, horrendous issue.
First let’s be clear. It really is difficult to know what the Government could have done differently. If it had successfully orchestrated the sale of the bank before the whole crisis blew up, then there is a good chance that, right now, its new owner would be staring a full-blown collapse in the face.
The day Lloyds TSB turned away from this deal, must surely rank as one of the best day’s work in that bank’s history.
Some say Northern Rock should have been allowed to go bust – but if that had happened, not only would the city’s reputation have suffered a very nasty blow, the UK may well, as a result, have gone into recession.
Some, however, have taken the opposite angle and have drawn analogies with Ted Heath’s nationalisation of Rolls Royce. But this analogy is wrong – Rolls Royce was a highly valuable brand name with superb technology that had made some mistakes – saving that company was the right thing to do.
Northern Rock is nothing like that.
It’s new boss, Ron Sandler, the man Vince Cable described as the second-best-paid man in Newcastle behind Michael Owen, before bitingly saying, but at least Owen pays tax, talks about “business as usual” at the bank.
And yet here is the oddity. A number of media reports say that Northern Rock is changing itself from a bank that makes 125 per cent mortgages available, to a bank that offers attractive interest on its savings accounts. And as we all know, it has gone from being a bank that few were willing to trust with its money to a bank that is as safe as, well, the Bank of England.
Yet others have homed in on these 125 per cent mortgages.
Now, Ray Boulger, from mortgage brokers John Charcol, has said the bank is planning to cut its mortgage book by 50 per cent over the next two years.
Mr Boulger, or so reports the BBC, reckons 60 percent of the bank’s customers were on two-year fixed rate deals – presumably many of them with mortgages worth 125 per cent of the property’s value. And now, says the John Charcol man, the bank is offering mortgages which are between 1 and 1.5 percentage points higher than those offered by rivals.
So it would appear Northern Rock is running down its mortgage book, that will enable it to repay much of the Government’s money.
But here is the catch; some of these lenders, especially those on 125 per cent mortgages, may not be able to obtain a mortgage from elsewhere.
In other words, all those Northern Rock lenders with good credit records or who are not too-heavily geared will go elsewhere, leaving the bank with the customers who are most likely to default.
And since Northern Rock will, apparently, be charging more for its mortgages than its rivals, the risk of default will rise even further.
The Government, then, in trying to ensure it gets its money back as quickly as possible, could actually create a rise in mortgage possessions, that could in turn bring down house prices.
The Government’s biggest hope lies in the prospect that lenders will soon be able to return to the money markets and use short-term debt to offer long-term mortgages. Something which the FSA, busy locking the stable door some time after the debt horse has bolted, will almost certainly not allow.
If you really want to blame someone or something for this affair – the blame surely sits with the British public’s preoccupation with house prices, and the absurd belief, which seems to have become deeply entrenched in the British Psyche – even the psyche of the people who run banks, that house prices only ever go up. It was that belief that encouraged 125 per cent mortgages in the first place.
Warrren Buffett once said that derivatives are financial weapons of mass destruction – but, for the UK, it seems our extraordinary faith in property is every bit as serious a weapon of mass destruction.
Comments
Trackbacks