Rock's rocky valuation

It might have been better if the Rock had been placed in Administration, its value to the shareholders would then have been assessed without Government interference.

But then I am more concerned about what this politically expedient "fag packet" decision to nationalise the bank have actually cost the taxpayer. With Lloyds TSB offering mortgages to people who's mortgage is less than 80% of current valuation (probably 60% of original NR valuation of anything taken out in the last 2 years) we the taxpayers are going to underwrite the dodgy and dross that remains. The sound of keys "clunking" through the letter box at Number 10 will grow louder.
Now when is the election due? NR Chickens, economic chickens, public sector pay chickens.

It's funny really, this is evidence of yet another U-turn by the government. For months they were telling every Tom, Dick and Harry that Northern Rock was solvent, and a going concern. Now that Gordon Brown's "economic cycle" rules are in jeopardy they are saying it's not a going concern. Especially after he messed up the budget and double the tax of low earners.

If that is the case, then why is the government using tax payer money to back an insolvent business? Surely they should just be giving it over to an administrator and be done with it?

Northern Rock has been insolvent since last September when the run occurred and was primarily the fault of the tripartite and the government for not having in place safeguards to stop any potential runs.

Even when/if Northern Rock shrinks it's balance sheet down it will be left as a lender that has a balance sheet containing primarily sub-prime loans at a time when house prices are falling. Northern Rock is no longer a viable business and there should just be a fire sale. It will not survive this issue.

There may be a sting in the valuation. The valuer has to pretend that the Rock is in administration:

Northern Rock would have some protection from creditors, at least for a few months. This period would be easily extendable by the administrator via the courts. During this time creditors (depositors, interbank lenders etc) would be unable to withdraw their money. This would give the administrator plenty of time and some positive cash flow to sort things out; fire sales might not need to feature. Because it cannot be rescued as a going concern, the administrator's priority would be to maximise value for creditors, last of which are the shareholders. The value of the assets are shown in the accounts, there would be a few (1 or 2 billion pounds) extra expenses and write downs, and the liabilities owed to the creditors are also shown in the accounts - but with a glaring exception. The granite bond holders. They are not creditors of the Rock, so the administrator could buy the bonds back at market prices rather than having to pay them book value. Due to the credit crunch this would yield billions for the shareholders. Which would be very ironic.

What can I say but what I've been saying all along! The governement should have let the rock fold, and compensated the losers, as opposed to bailing out a bank which lent irresponsibly. It only encourages bad pratice. I wonder who, in a year's time, will get a bargain basement deal on the Rock?

Really, remember prudence. Home ownership should not be the bee-all and end-all. Maybe a cultural shift? Oh dear, I'm pipe-dreaming again. I really am a very small minority.

I don't see this as being difficult. The Govt took the company into management. Assuming this to be in the interest of all then the Govt should not make a profit. When they decide the 'problem' is over the Govt can return it to shareholders less any Govt costs. The shares are merely suspended for a period of time.

KISS - Keep it simple stupid. If NR had not been bailed out it would have gone bust (as would several other institutions in a cascade along with many depositors.) This scenario of course has to be tested in court. NR's valuation when it was taken over was essentially zero or negative (Liabilities exceeded its assets) and thus the shareholders will get nothing, but thanks limited liability they will not have to make up the deficit - for which they should be grateful. This is the position in UK company insolvency law - any other position is not provided for in law.

Almost any independent qualified experienced accountant could do the job provided they are prepared to sit in court or lawyer's offices for the next five years - boring but lucrative.

'Independent' will be a problem given that the only accountants that get hired by the state work for the big firms and as they work for the state they cannot be said to be independent.

No accountant who wants to work after finishing the job will want the 'poison chalice' so it must be an accountant at the end of their career and about to retire.

I (and many others) could be persuaded for the right range of incentives!!!! Isn't the man running NR getting £80,000 + a month - seems reasonable to me!!! (Why should footballers be the only ones to get such fees!!)

#3 ThomasOnTheRock

I like your reasoning, especially about the granite bond holders. As mentioned by others, on insolvency – even before bankruptcy – the fiduciary duty of directors changes from looking after the interests of shareholders to those of creditors.

The funds used to guarantee the continuation of NR was a loan by the state on behalf of taxpayers. Therefore taxpayers are effectively the creditors and should receive any surplus.

It would create too big a precedent for shareholders to receive anything. Other banks are likely to fail in the next few years. Thanks to the astute guarantees granted to the banks by Mr King, their failure will not be a source of systemic risk. All that will happen is their equity will disappear and they will be swallowed by another bank.

In time, as shareholders wake up to the fact that policy makers are in general relaxed about bank shareholders losing all their equity, they will run for the exits. They will also experience shareholder rage. Future litigation costs at the hands of NR shareholders as a result of giving NR shareholders zip, will be less than litigation costs at the hands of bank-shareholders-at-large should they give NR shareholders more than zip.

This is yet another instance where the guiding principle should be to minimise the downside rather than attempt to maximise the probabilities on the upside.

No doubt there will be a compromise, like there was with Bear Stearns. But they must proceed carefully because the other stakeholders, the legal fraternity, will want to keep this ball in the air for as many years as possible.

6 How can liabilities exceed assets if shareholders funds are 1.7 billion?

If you actually bothered to read the accounts you will see that this is a solvent business with underlying profits in the region of 450 million per year.

The problem Northern Rock had was that it was illquid rather than insolvent. Unlike most businesses banks do not carry sufficient liquidity to see them through when markets fail. In times of market failure it is the job of the Bank of England in its unique position of always having access to liquidity to act as market maker.

This is because the Bank of England can issue government bonds that are effectively risk free to ensure liquidity. The Bank of England are now doing this and analysts expect that 700 billion will be lent to British banks under the special liquidity scheme.

In my opinion the special liquidity scheme is the correct response to the wholesale markets drying up unfortunately it only began in April 08 for the period from June 08 to April 09 the Bank of England were in denial that there was a problem and instead with Northern rock we had a rather silly attempt to sell the bank as if any other bank had a spare 28 billion kicking about in the middle of a liquidity crisis.

We now have two solutions to the same problem:

One involves shrinking the mortgage book and sacking staff so that funding is wholly from deposits. The other is borrowing from Bank of England under special liquidity until money markets reopen. What a mess!

Back to the valuation under normal valuation methods which are income based or asset based Northern Rock is worth a lot. Further during the nationalisation of Railtrack a leaked memo warned the government that under EU law could mean that the government have to pay an average of the last five years share price which is over £7.

Whoever values these shares and I am sure the government will find someone will basically be ignoring normal valuation techniques and indeed the definition of fair market value actually states that the business should be treated as a going concern whether or not this is the case.

In the business world there is a saying that assumption is the mother of all foul ups and in this case the assumption that Northern Rock was worthless was a huge mistake.

#7 knoseykneel

Thanks for your kind words and interesting post.

Technically it was the Bank of England acting under its duty as "lender of last resort to solvent banks" that lent the Rock the money, not the government and not the taxpayer. The B of E is one of the creditors and would have to have been fully paid off, including the subordinated punitive part of the interest rate it charged, before the shareholders could receive anything. But if there were a surplus, it would belong to the shareholders, and the level of compensation actually paid would reflect this, whatever the powers that be may wish.

I agree wih you that policy makers dont seem to realise that the UK needs investors that are willing to be shareholders of banks. There is rarely a kind word said about shareholders; but they are needed and they deserve more respect.

If we are going to have a free market and not welfare for the rich then surely failure is part of that? There was a false economy in Northern Rock shares for months in what was effectively a bust bank. The government saved the bank and the economy; but, why should people benefit from a badly run bank? Especially hedge funds whose gamble didn't pay off?

[Unsuitable/Broken URL removed by Moderator] Here is link to job ad for valuer it reads like the kind of thing you would expect in Stalins Russia. It basically says that independent valuer should value shares as the treasury says!

It is not unreasonable that NR shareholders should share in a little of the value that was saved to shareholders of other banks that would have gone bust if there was a complete meltdown. So, pay them a nominal something.

I would also like to see the board of NR sued for incompetence, and for them to personally lose all the wealth they gained. The same should go for a few other institutions as well.

On 6 August, American Home Mortgages, one of the US independent home loan providers, filed for bankruptancy after laying off the majority of its staff. The company said it was a victim of the slump in the US housing market that had caught out many subprime borrowers and lenders.

On August 9, short term credit markets froze up after a large French bank, BNP Paribas, suspended three of its investment funds worth 2 billion euros, citing problems in the US subprime mortgage sector. BNP said it could not value the assets in the funds because the market had disapeared. The ECB pumped 95 billion euros into the eurozone banking system to ease the subprime credit crunch. The US fed and the Bank of Japan took similar steps.

On August 10, the ECB provided an extra 61 billion euros of funds for banks. The US federal reserve said it would provide as much overnight money as would be needed to combat the credit crunch.

On August 13, the ECB pumped 47.7 billion euros into the money markets, its third cash injection in as many days.


Whilst all this was going on Bank of England did nothing. Northern Rock as UK only mortgage provider was reliant on the Bank of England and they did nothing the rest is history

#9 ThomasOnTheRock

You are quite correct. A creditor should be repaid no more than the outstanding amount plus punitive interest. Shareholders should receive any surplus. The law must be upheld. Thank you for pointing out this technicality.

Perhaps the way to tackle it is through the method of valuation. Presumably the book value of assets is not cut and dried. Otherwise there would be no debate. Presumably assets include securitised mortgages. If so, valuation is a moveable feast, and any reasonably astute valuer would be able to cut the book value to shreds. Hopefully it would be just sufficient to repay the outstanding amount to the B of E including punitive interest.

The valuer may find it useful that the process of downgrading monolines has started. This will have a knock-on effect on balance sheet book values of CDOs.

Bank shareholders deserve no more respect than shareholders of any other company. A punter is a punter. Be nice to them when they are at the tables, usher them out firmly when they have had a spell of bad luck.

I would have appreciated your view about my point concerning policy makers and moral hazard, but possibly it was unclear. One Catch-22 hitherto faced by regulators is if they fail to act as a lender of last resort in the case of a specific bank this may be a source of systemic risk, that is, it may result in market failure of some kind.

This may explain the position taken by investors who swooped in at a late stage and bet on NR, obviously banking on the above.

However, I suspect that, as a consequence of the helping hand that Mr King extended to banks, it no longer matters if an individual bank runs out of equity. Some other helpful bank will be there on the sidelines to take over and thereby depositors will be protected. And there will be no systemic market failure.

If so, a major milestone has been reached in free market regulation, for which we should all be eternally grateful, even those speculators who bet otherwise on this occasion. Bank shareholders will become like shareholders of all other companies, at risk.

Do not be concerned about getting investors for banks. Even if all individuals cash in their chips immediately, institutions will continue to invest in shares, even if they drop by 80 percent. Why? Well, where else? The training and fee structure of institutional money managers will ensure they follow the market like lemmings, even if it means pouring the pension savings of a generation into the abyss.

#8 Your point about shareholders funds is not well made and is mostly not entirely relevant. The values in the accounts are irrelevant in an administration or receivership . What matters is the realizable value. All the accounts provide is an indication of the nature of the assets and liabilities of the concern - these have to be realized and evaluated in light of the circumstances.

I have to disagree with the points that you have made on thre basis that they are not in accordance with the law. If 'assets' as recorded in a balance sheet are unrealizable at the value in the balance sheet they are not available in a receivership or administration - it is the value that is realizable in the circumstances and at the time that matters. It is all very well having a gold watch valued at £1000 but if the porn broker may only give you £10, or in the case of NR nothing, then that it what it is worth.

Nobody would bail NR out (except the lender of last resort). The shares are worthless because nobody would buy them at any price. The value to equity shareholders of a company in a receivership is the value left after all of the assets have been realized and all of the liabilities and creditors (including the cost of administration) have been satisfied in accordance with the established precedence of such parties. Shareholders are last. This is the law.

to #8 continued

I do not see that you have any possible course action that is likely to be successful against HMG. It will cost millions and will yield nothing.

There may be the possibility that you could argue that the directors (that you appointed!) acted wrongly - but all that would result in if successful is that the assets of the directors personally could be used to satisfy your need for recovering value - but this will probably yield less than the lawyers fees.

I do not see that you could argue that HMG acted wrongly and in any other way then if good faith. The directors (who you appointed) sold (gave) HMG the company n exchange for not going bust.

There is another possibility for action against the FSA who owed a duty of care in the supervision of NR. You could sue them I suppose.

But the one thing that I feel certain about is that the valuation of your shares at the time of the transfer to HMG is almost certainly zero.

I agree with the commentators who say 'go ahead waste your money'. I would not try to stop you but I do not believe, given the facts to hand, that you are likely to succeed against HMG on the basis of the valuation. The FSA case possibly shows more possibility of achieving some compensation but it will not be on the basis of the valuation of the shares.

Action against the directors for causing the problem may also be possible, but you did elect them and they were acting (as far as I am aware) within the powers that you had provide for them. My best bet would be the FSA but I am not aware of anybody being very successful with this type of action (although I have not been through the court reports - perhaps someone who reads this could?)

Also see "Three Rivers vs. Bank of England" .

Why has my comments not been posted???

#15. You obviously have some knowledge of company law however i believe you have missed a key point.

The company was not in receivership, it was nationalised and there is a world of difference.

As i understand it, under EU law a company nationalised should be valued at fair value on the basis it is a going concern!

Also if HM Gov have decided it is a gone concern then why were the accounts prepared (by a reputable firm of independant accountants) on the basis of a going concern?

Surely they should be arguing that accounts and tax return submitted to HMRC is incorrect???

to #18

You could try to argue that I suppose, but I doubt if your will succeed as the directors decided to give the company away. That is how the agreement on the Treasury's web site reads. It was the directors responsibility that they exercised. They did so to protect what they could of the company and this in itself is an act of bankruptcy - a composition with ones creditors. So they of their own volition committed and act of bankruptcy the composition with their creditors - in this case the Bank of England. NR was bust at that point, if not before.


This is why I contend that there is little or no chance of succeeding in any legal action over the value of the company. The chance of succeeding in a claim for negligent supervision by the FSA could have more chance perhaps, but it is very much more difficult to prove and thus just as likely to be an expensive failure. Most of these arguments have been well rehearsed in the BCCI case as I say see "Three Rivers vs. Bank of England".

This looks like a licence for the lawyers to print themselves even more money. Good luck to them!

The argument proposed by the valuer will be a remarkable and ground breaking document as will be any consequential court judgement. This is going to be interesting to watch.

It would have been so much more simple if all this had been taken into consideration when the new regulatory framework was put in place in 1997.

We all know who that is down to, don't we?

As the govt was a major creditor at the time it took over, is this nationalisation or simply repossession? This is exactly like a bank repossessing your house. In which case the govt should continue tryingt o release it's loans from the business and then return the remaining company back to the shareholders.

Compensation - none as none is required.

Sure, they probably should have gone through the courts properly, but isnce when has that stopped the banks!

to #20

Obviously the only ones who truly know what happened are the directors and HM Gov, however if the directors decided to "hand over" the company then why did they submit their own application in continuing to run the comapny and how the loans would be repaid?

The arguments made above are incomparable. If a bank demands repayment of say an overdraft from a company, and this company can not repay, then the bank can apply for bankrupcy, they can not confiscate that companies shares, hence in all senses this is nationalisation and not bankrupcy.

to #22

Your argument on repossession is an interesting point however the point still stands.

If a house is repossessed, it is sold, the morgage, interest and all legal costs are paid from the proceeds, then any remaining balance is returned to the previous owner.

Therefore the companies value should be returned to the former shareholders.

I hope people remember the majority of the Shares were owned by Pension funds, not a mysterious idle rich.

It is interesting that the Bank of England had its head in the sand whilst the ECB and Federal reserve were bailing like mad.

The big question has to be, why hasn't the Credit Market been re opened yet ?

What remains as the problem ?

The Banking (Special Provisions) Act 2008 sets out is Section 5(4) assumptions to be made in determining the amount of any compensation payable by the Treasury.

Further section 9 of the same act (the"Compensation Scheme Order") makes additional valuation assumptions to be made about Northern Rock - namely that Northern Rock is unable to continue as a going concern, and that it is in administration.

That is the law - of course you could challenge that by judicial review - but again I do not see much chance of winning.

All this went through on 22nd February 2008 so continuing to work on any other basis requires, or will require, some considerable funds to support the litigation.

My best guess (only superficially informed, without having full access to the books of NR) is that there will be nothing left for distribution to the shareholders.

The rock should have been allowed to close as a failing business would, the shareholders should lose everything as dealing in shares of a company is nothing more than glorified betting, [if you can't afford to lose the money then just don't place the bet].
As a 40% tax payer i am proud to pay my full amount of taxes but you can bet i am not happy at the way in which they are spent/squandered.

I do hope i am not alone here.

#27. I agree completely

seems pretty straighforward to me...bank went bust = zero shareholder value. the hedge funds - the red teeth of capitalism as has been said to me - get there teeth blunted for once - speculation is a 2 way street...not a guaranteed upside! i especially like the idea of prosecuting the board for being cavalier with their risk taking - this is long overdue again these guys get rewarded for gains and sacked with massive compensation when they screw up...heads i win...tails ...oh i win again!!

Like most people posting here, I think Northern Rock was worth nothing when nationalised.

However, in order to avoid wasting public money on futile (for the shareholders) court cases, I would offer the shareholders a token amount on a successful sale of the Rock by the government (say 5% of any profit made by the gov.) PROVIDED they do not take legal action. Any shareholder that did go to the courts would get nothing.

To RF ...blah blah blah.

You might say that the problem was liquidity but the truth is that is that the bank lent way more than it should on mortgages that were effectively sub-prime in order to try and carve out the biggest niche of the mortgage market.

What the Northern Rock directors, and I suspect other establishments will also be revealed, is that they lent more than was safe in the mistaken belief that property prices would rise as they have done forever. As every bubble bursts and property had for quite some time, grown to a point where it outstripped income, this course of action was at best foolhardy and at worst down-right dangerous.

The truth is that when property prices started plummeting it meant that the banks assets were than worth less than it's liabilities, which was a situation that would only get worse over time.

The directors made this situation for the bank by having it's staff act like a bunch of Leeson's and to take rsisks with little punitive measures if errors occurred.

Having worked for a company that specialises in Insolvency, the Rock has been sinking in the sand for some time and it came as little surprise when the water finally rose over thr top of it.

Take what the Governent offer as, from what I've, there may be evidence that suggests it was the Directors who may have acted negligently, and not the Govermnent.

Much love

Em.

to #26

I can understand your point that it is currently the law, however this was rushed through in an attempt to pay shareholders nothing, therefore appears somewhat unfair.

In theory HM could repossess any land she wishes, as i believe the law states, however again if your home was confiscated you too would feel this is unfair.

Does no one else have any oppinion on why HM Gov accepted accounts and tax returns prepared on the going concern basis??? Appears to me that they want the best of both worlds!

Thanks Em but i believe you will find the assets in NR were the mortgages, not the actual house values, and as the customers who were behind on their repayments were lower than the industry average, any impairment of these assets would unlikely reach £1.7 billion.

I believe you are right about the directors actions however this (in my oppinion) still does not give HM Gov the right to open a wallet, take a £10 note and give you 20p for it.

to #32

The 'going concern basis' of accounting represents an overall view that there are sufficient sources of funds to allow the company to continue to run. Plainly when the state underwrote the liabilities and provided unlimited liquidity on 28 February the organization was able to meet the requirements of being a 'going concern'.

NR was not worth 20p/£10 before that date - it was worth nothing as nobody was prepared in the free market to provide the funds for it to continue and in the directors' (as elected by the shareholders) opinions, and they acted (in the name of the shareholders) as they did.

I go back to my point that if anybody has any degree of responsibilities, apart from the directors (as elected by the shareholders) it may be the FSA - but suing the FSA as shown in Three Rivers vs The Bank of England has little chance of success.

Equity limited liability shareholdings are like this - would you prefer the situation where the shareholder were jointly and severally liable for the activities of companies? - I think not. They gambled and they lost.

The bank receive funds of xxx, lends out x amount of money for someone else to buy a house, that house is worth xx. However the Northern Rock model ran with xxx is deposited xxx is lent out for house worth xxx.00000x.

As soon as these mortgages started to falter they could not get xxx back in their vaults, hence the runs on the bank, and with repossesions going through the roof and property prices falling it meant that was little chance of them being able to get xxx back in the bank. In reality this is the problem.

Speaking candidly I'm not sure what you want. Had the government let the Rock die you would have got nothing. which is 0 x X, wheras you may get back 0.x.

Shares are gambling, some you win some you lose, if you do not like losing may I suggest buried treasure as that always has a high value upon being dug up.

Much love

Em.

I have to dissagree somewhat in the fact that there were 3 offers for NR on the table (with 2 remaining at the time of nationalisation).

The reason these were rejected was that he offer was not "in the best interests of the treasury".

Correct me if i am wrong but i believe the companies act states that the directors are supposed to act in the best interests of shareholders.

Further to this the shares were still being traded at approx 75p prior to nationalisation so the idea that they are worthless is complete nonesense!

Finally i would like to point out that shareholders are not "gamblers", many of the shareholders had the shares from when the bank demutualised, with several more shareholders being the penion funds (perhaps your pension fund), are these the groups of people you would describe as gamblers???

to #34

You're conflating value and price.

Nobody was willing (or able?) to pay for NR, but that would only correlate to its worth in a liquid market, which wasn't the case. Even if the market were liquid, the run had caused NR to become undervalued relative to its assets - a classic target for being bought and stripped, which is apparently what the government is doing.

For the bank to be insolvent, it'd need more than 2.1% of its mortgage book to default, assuming the houses on which the mortgages are secured were worthless... and considerably more than that if they're able to hold/sell repossessed properties. 7% is probably a reasonable ballpark number of defaults before NR would become insolvent.

Once again you've missed key points Em, the run on the bank was caused by scaremongering by the press.

Your points (from knowledge) appear incorrect as the origional problem arose from the drying up of the money markets. NR (as stated by the FSA all along) has never been insolvent, at any time.

The repossessions and losses on some houses were minimal, it was the shortage of liquid funds that were the problem, an item which has now been addressed by BOE.

Interestingly NR did not have to use any "emergency" funding from BOE untill after this was leaked to the press and the run began.

This again has since been adressed and any bank short of liquid resources can borrow in confidence.

Couple of points:

Firstly, the loan-to-asset ratios on Northern Rock’s whole mortgage book are 60% and on new mortgages 80%. In other words, house prices have to fall by over 20% before Northern Rock’s borrowers lose an incentive to repay in order to keep their homes. Even then Northern Rock would not be insolvent, because most people with negative equity would continue to service their debts and in any case Northern Rock has a cushion of equity.

Secondly the government provided a loan to Northern Rock and the reward for providing this loan was interest and this was being paid by Northern Rock at a punitive rate and under normal circumstances this would be the end of the matter.

Unfortunately it became a political issue and the decision to nationalise Northern Rock was made to ensure that the loan was repaid before the election rather than allowing it to be repaid over a longer period of time. The opportunity cost of this decision was pain for shareholders, staff and mortgage customers.

Couple of legal points:

Firstly the valuation is to treat Northern Rock as it was not a going concern and in administration. The date that Northern Rock was nationalised was in February 08 and surely this is the key date as to determining whether the bank was a going concern or not and clearly at that date it was a going concern.

Secondly If shareholders are not satisfied with the amount of compensation offered they could make a claim for expropriation of property under the Convention. Article 1 of Protocol 1 states: "Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law." So the government is allowed to acquire property if it is both in the public interest and if reasonable compensation is offered with Northern Rock this is clearly not the case.

Not sure if many of you are aware but applications for judicial review has already been filed by UKSA (UK shareholders association), the unliked hedge funds and i believe legal and general (pension fund).

These applications are basically the same and will be treated as one. This aplication has not been apposed by HM Gov.

It appears this will certainly drag on over a number of years to me.

The shareholders took a risk investing in Northern Rock in the same way any shareholder takes a risk by investing in a company. You can make lots of money, but if it goes bad you can lose the lot.

They now claim they should be compensated, arguing that if the government had continued to lend to Northern Rock (because no one else would) then it was a going concern.

On this definition any failed company would be worth something - if the government was prepared to lend it cash when no one else would.

There isn't much I agree with the government on, in this case they are correct.

No one else would lend Northern Rock money - that is why it was in trouble. The tax payer stepped in to stop it collapsing when no one else would. Without the tax payer it would have collapsed, and the shares would be zero.

It would be perverse if because of its rescue of the doomed and worthless Rock, the taxpayer now had to compensate shareholders that would have received nothing had the Rock been allowed to collapse. If such a finding was made, the government would have no alternative next time but to let a bank fail entirely rather than start to give it emergency loans.

I suggest as many of us as are interested in this debacle apply for this job.

If cvs look interesting enough then you will be invited to the next stage.

Even if you're not it will be fun to see the Treasury spin doctors boast the huge interest from well-qualified applicants

42 Correcting market failure (illiquidity is a manifestation of loss of confidence and trust and constitutes market failure) is why we have public institutions like the Bank and the FSA. The Bank is the only institution that can create any amount of liquid assets for the private sector, at any time and at no cost. The private provision of liquidity in times of crisis is not an option. Requiring private institutions to hold intrinsically liquid securities on their balance sheets in sufficient amounts to allow them to live through periods of market turbulence, disruption and illiquidity is possible but socially ineffecient. Liquidity is a public good. The private provision of public goods is as silly and inefficient as the public provision of private goods.

Therefore there was nothing peculiar in Northern Rock receiving a loan from the Bank of England and as interest was being charged at a commercial rate this loan did not even qualify as state aid.

It should make no difference to the compensation payment that the Bank of England provided the loan as opposed to another source and the fact that the Bank of England did provide the loan means that no alternative funding source had to be found.

It is therefore entirely subjective as to whether the hypothetical conditions the government are imposing on the valuations are correct and it is also clear that there is a conflict of interests between the govt acting as purchaser and also setting the terms of the valuation and it is to there discredit that they are willing to take advantage of this dual role to steal shares from shareholders.

#42

It is incorrect to assume that no one would lend to NR, in fact the rescue packages that were rejected included a loan to repay arround £10 billion of the loan immediately.

Maybe HM Gov decided to take the £1.7billion free of charge to cover the cost of MP "expenses" for a few months.

Further to the comments on the value of the assets, PWC when auditing the financial statements will have spent considerable time on the recoverability of the assets, therefore it is likely that the assets held are infact likely to be recovered.

I've had a quick look at the figures as available on the Internet.

For there to be any value left for shareholders in an administration / receivership the loan book would have had to able to be sold at over 98% of its book value (£100bn). This kind of return in a 'fire sale' (as any liquidation would be) is unknown.

The books showed a notional shareholder value of £1.7 bn as at 31 Dec 2007 with a loan book at £100 bn. Now nobody was willing to buy the company at that price. The question is what discount would have had to be notionally offered to sell the debt? 10% would I guess be the minimum - such a discount wipes out all shareholder value. - So no chance of compensation from this route.

That sounds about right, however there would also be a considerable loss to creditors this way.

The administrator would probably insist the best return for the creditors would be not a fire sale but to continue trading under the administrator, thereby collecting all repayments from mortgages and paying off the creditors in full. (As happens at several football clubs when in trouble).

Given the choice (if i was a creditor) would be to support this idea, however as this was never the actual case we will never know for sure.

#46 John from Hendon

You have supplied the relevant missing information. It looks like that should be the last word on the subject but, bearing in mind that there were many individual shareholders who hold out some forlorn hope, I guess it wont be.

#36 RF2684, last paragraph

I dont quite know how to put this to you, but youve been had. All shareholders in any public company on any stock exchange are gambling, by definition. This has always been the case, despite the PR releases you may have read over the years from various stakeholders who, for obvious reasons, want you to believe otherwise.

First google: indicia William f sharpe, and read the first Stanford.edu result. Published in 1978, this remains the clearest practical description of the theory.

Everyone would have remained quite happy but then, during the nineties, over 10000 snake-oil salesmen arrived en masse, calling themselves, quite blatantly, hedge-funds. Can you believe it? They came from all sources, including money managers from individual institutions, journalists and other assorted tipsters.

After reading Mark Twain you will learn the best way to treat snake-oil salespeople: clap. And never actually to buy the nostrums from the rostrums!

Obviously no normal individual will be taken in by the fee, two percent each year plus twenty percent of the profit. But institutional fund managers have always been quite happy to bet with money which was never theirs in the first place. This is why the hedge fund movement grew and grew.

So the spivs now run the joint.

But no need to believe the theory. Take an empirical approach. Read the papers. Do some googling.

A third proof is that people absolutely love to bet. Remember cricket? Well, look at it today. Same name. Different game. But I maintain the purest gambling market is the share market because it lets you, with the appropriate qualification, gamble with money that is not your own, and offers the straight-faced endorsement by all the usual suspects: the economists, politicians, and crony capitalist financiers.

A fourth proof that share markets are gambling dens reveals the real, underlying reason. People always gamble on commoditised products. Take the futures market in coffee beans. Units are all similar. They are commodities. Public company shares are similar in many respects in that they are subject to the same rules of corporate governance. You do not have to know anything about them in order to trade them. This is what many people called technical analysts or chartists actually do, believe it or not.

All this nonsense happening in the financial economy will severely damage the real economy and is why the free market system is nearly out of the window, unfortunately.

So you have been had in a number of ways. We all have. Count the ways. That is, count the interest groups.

A last point. Only when the last bit of illusion (trust in these institutions) has seeped out of every individual investor, will the asset bubble disappear. Every remaining hedge-fund is your marker that the bubble is still there, lurking. Unfortunately, this may need deep recession or even depression, because the illusions are still rife, evidently. And the fuel which drives the financial economy ultimately comes from a single source: the consumer.

Policy makers will desperately try to reflate the economies, but they will fail because they cannot reflate the loss of trust. Partially it is that people no longer trust in buy to flip, or illogical capital appreciation as a substitute for income. Yet the real cruncher is they are over-borrowed. So they could not pony up any more even if they wanted to.

Quite a simplistic view that all shareholdes are gamblers, if so then why do so many let pension funds gamble with their retirement?

I admit i took a gamble on NR (ive never denied that), but what i object to is that HM Gov can acquire a company with significant value for free.

If this stands surely there will no longer be any shareholders (as why own shares when theres the risk they can be taken away for free).

This would end the LSE and cause more problems than the market is currently experiencing!

50 At the end of the day the bank did not need new owners it needed a loan.

This loan was given and there was never any doubt that it would be repaid.

At some point the government lost the plot and started insisting that as well as receiving interest (which is the normal reward for providing a loan) it should also be able to help itself to the company.

Exactly but if this is allowed because they quickly passed a law saying they could then where do we draw the line!

The big mistake that the Government made was not letting a large chunk of the banking sector fall like the dominoes that they are so as to avoid people whinging about compensation like some American wearing a fake neck brace.

This entire situation reminds me of the Railtrack debacle in which the same shareholders where whinging over the company collapsing and the government stepping in.

The reason the Government stepped in rightly or wrongly, was to stop a widespread banking collapse, which still looks like it might happen in one way or another anyway.

Personally I wish they hadn't as the shareholders would not be on here whingeing about compensation although I doubt an of these hard done by shareholders raised a hand of concern while the directors were throwing money out like confetti, and handing out huge fat dividends.

The mistake the Government made was helping a company whose business plan was based on a house price bubble.

Much love

Em

Just for the record Em, profits in 2006 were £395million, the dividend in 2006 was £132million, i would hardly describe this as "throwing money out like confetti" but again thats my oppinion.

#50 RF2684

I agree. Very few Nobel winners seem to be able to communicate complex ideas as simply as Sharpe.

I agree that many people let pension funds gamble with their retirement money. Forty years ago it was all money purchase, which was safe yet subject to inflation. Equity-linked pension schemes entered the scene very gradually. But commissions were far more attractive in the linked schemes, because they could be easily accommodated within the pie-in-the-sky projections. So that is what agents sold.

As to why we have allowed it: ignorance and trust. The consumer is clever, but ignorant and trusting. We cannot know about everything. And, lets face it, we want the future to look good. If we dont know about something we tend to believe everything is for the best in the best of all possible worlds. Until we dont.

Blame the usual suspects: they each have their own reasons to say things which are inaccurate. They need gullible customers. Without consumers handing over their hard-earned money from the real economy, there would be no financial economy to speak of. No casino. Boo-hoo.

I dont entirely agree with your conclusion. The share market will continue, boom and bust, all over again. Plenty of new punters come on stream all the time. Even a full-on depression only slows things up for a decade or two. Not everyone suffers hardship. If a depression happens in the Anglo-Saxon world not more than a couple of hundred million will suffer hardship, probably none of them policy-makers.

The question remains though?

Did ther shareholders complain about the direction the company was taking.

I don't see the share details ...I see a vast amount of dubious lending practices every single week.

That's what I meant about throwng money about and there was no other lender that was as bad as the Rock, they were the worst of the mainstream lenders to carry out what I believe was questionable business practices.

But that's my opinion from the other side of the fence.

Many Thanks as ever

Em.

All good me thinks - it's about time the 'Government robbed business' especially after so many years of 'businesses robbing government. What goes around comes around I say - lets pull some more banks down and really brown the pin-stripe trouser mob. Sure a few pensioners might get hit, but it's mainly unregulated hedge funds and big money shareholders who are making all the noise - possibly because the national press are happy to take a bung to promote the unfairness of the situation. I have some advice for all those involved - LIFE ISN'T FAIR - LIVE WITH IT - as I have had to learn over the years...

Having read the 3 way discussion between RF, John and EM it seems that RF is slightly miffed about the situation. You need to look at it pragmatically, if this really were stalinist Russia then you wouldn't even be allowed to complain about the actions, let alone watch a legal challenge for the money.
EM is right - it's a gamble investing in shares, no-one can complain if it all goes wrong, and in this case any anger should be aimed at the board and not the government for this debacle. RM's point of view seems to be if you're a manager of a football club it's OK to complain about the referee sending off your player, despite the fact that your player punched another in the face!
Is the ref (the FSA) really at fault for not stopping it happening? How much can you blame the rule makers - and how much is the banks (players) own responsibility. If you can answer that one - then you have your dilemna solved.
The way I see it the Government (The Ref) were forced to take action, I'm sure they would rather have not - however if it had been left and ignored then many other players would have got involved and there would have been a punch up and 22 men would have been sent off!

Really - everything in life can be related back to sport.

Even better, the FSA solution will be to increase (regulation) the use of the third eye (cameras) for such decisions, but alas - this will intefere with the enjoyment and progress of the game.

I could go on all day...

#57 True live isn't fair, but since when have businesses been robbing the Gov?

As i understand it they usualy pay 17.5% Vat and 30% (now 28%) Corporation Tax on profits.

And they dont get a lot in return for it.

As for the "few pensioners", i think you will find Legal and General were a major shareholder, so major infact that they submitted their own separate application for judicial review.

Plus the national press appear (in general) to have remained neutral in the valuing of the shares.

#58

This isn't stalinist russia and that was never the issue.

Plus your comparison with football is incomparable. If a player is sent off then there is a short term loss (misses game, which may be lost, and maybe misses next few).

What has happened in this case is the player (who is worth several million pounds) is taken by the FA without compensation to the club.

You are correct that i feel slightly miffed, my main concern is that i work hard, pay my taxes, and what money i dont spend is taken from me to prob pay for MP expenses.

I'm also concerned about what other laws can be passed where my assets can be taken free of charge.

It is a sad fact that The Rock would have been out of business if it had not been nationalised.

What it needed to be worth its book value (1.7 billion or whatever) was a white night with very deep pockets to guarantee its survival until enough of its mortgage book had been repaid to make it liquid and so a going concern.

The only such white night was the UK Govt.

If the white night had been a private company, they would have expected a big return for a potentially risky guarantee. Betting around 80 billion for a profit of 1.7 billion is only for punters with really Big Balls (or those playing with other people's money!)

As the UK Govt was the only punter in town with the Balls, it should be the one who takes the profit when NR is sold, having shrunk the mortgage book, of course.

I feel sympathy for the small shareholders, but it would be unfair on the rest of us if the Govt did not benefit from bailing out NR and taking a big old bet (albeit a near cert) at the same time.

I think Robert is quite correct when he says that the treasury cannot afford to buy Northern Rock.

Perhaps Gordon Brown should have thought about that before he nationalised Northern Rock.

The 1.7 billion of shareholders funds represent monies due to shareholders. If the treasury gets away with paying say 90 pence per share compensation it will be buying an obligation to pay 1.7 billion for about 0.4 billion.

As the treasury already has previous in paying 0.13 billion for its professional advice direct from Northern Rock, then i suspect that any payment to shareholders will again be made direct from Northern Rock and therefore any payment less than the £1.7 billion that is due to shareholders is tantamount to theft.

Should the pension funds be investing in banks with no guarantee on returns of capital? Or in shopping malls, for that matter? Surely pension funds should be funding real capital, not excessively risky capital. Remeber this: if all the gold mined in the last 6000 years were on one of those massive oiltankers which will crumble on our beaches one day, there wouldn't be any more gold to go around. It's time to trim the hedges and face down reality. Still pipe dreaming, I'll do it till I die.

By the way, profit for profit or profit for social investment? Lokk at the Victorians. Some of them had the right idea.

#61

Technically it is not a bet of £80b for a return of £1.7b, your forgetting that interest is also being paid on the £80b.

Im not aware of the rate but say if this is 6% (not particually high) then there is also interest of £4.8b PA being received.

No doubt Mr Brown was rubbing his hands together at the thought of this!

#63 nonvisiblehand

One nail, one head, you got it. Our pension fund money should have been and should still all be going into gilts right now, to protect their value. No way will that happen for a long time.

They have no intention of looking after the interests of the pension fund contributors. Too many vested interests need the cash to shore up their silly little equity market.

Wonderful amount of insight into the problem with Northern Rock in the blogs today.
I think that whoever does the valuation could do a lot worse than start by reading the blogs

The straitjacket imposed on the valuer is incredibly restrictive and, from my point of view, entirely pointless. The question is this: what would have been the value of NR shares had the BoE and HMG not intervened?

That's right: zero. A company that cannot pay its way is bust. Any other conclusion is an accounting trick, but accounting tricks don't pay the bills. So the shareholders should get nothing.

Shareholders are not in need of protection. They want greater returns than a savings account provides. The price for their access to greater rewards is greater risk, including the risk of the company going bust. I don't think I'm being heartless here: it's simply an inevitable consequence of investing in shares.

Firstly I’ll admit to not having read every comment on this blog so, if what I am about to say has already been said I apologise.
I have seen many comments that talk about the value of the NR assets, it seems to me that many are confusing the BOOK value of these assets before the crisis with their actual value at the time (or even before ) the B of E stepped in. These so called assets are not readily tradable and therefore any value is subjective and that assumes you could find someone to buy them, I would argue that in order to capitalise these assets they would have to be sold at a heavy discount, after all who would be willing/able to buy them at anywhere near face value when, they would then be faced with similar funding difficulties in a market where banks are reluctant to lend to each other and are particularly reluctant to lend to banks/companies with large exposure to anything but the top tier of mortgage lending.
Because of the way NR ran its business (gearing up using borrowed money) that would leave NR with liabilities in excess of the cash it raised from the sale of its assets and therefore there would be nothing left for shareholders and I say that as a shareholder.
As for the illiquid as opposed to insolvent argument, if you cannot get your hands on enough cash (illiquid ?) to cover the payments you have to make (repayment of loans to other banks which have been called) in my book you are insolvent.

#68

I have to disagree with your idea that shareholdes do not deserve protection.

What shareholders do require protection from, is that the purchaser (HM Gov) can decide the selling price and not the owner.

Hence whether there is value or not (thats not for us to decide) that can not be allowed.

#69

You are correct in that Book Value is not actual value, however:

- The book value has been established by an independant firm of qualified accountants (who would have spent significant time ensuring these are not overstated)

- Also as mentioned previously the most efficient way would be for an administrator to continue running the company to ensure maximum return for creditors.

This would therefore ensure the Book Value is the actual value achieved (less any future unknown changes).

to #68, #69 and #70

I have discussed this earlier in this blog - the value of something is what someone will pay you for it. If you become a forced seller as is the case of a receivership/bankruptcy then you never (in my experience) achieve the 'book' value.

As I pointed out earlier if anything less than 98% of the book value is achieved for the notional selling of NR's mortgage portfolio of (100bn) then all equity is wiped out.

Now, no one would buy the bank at book even with BoE support so at least 10% or 20% discount would need to be offered - hence NR is worthless.

I watched dispatches last night about the downfall of Gordon Brown, during the program Alistair Darling, made a point that the offers they received for Northern Rock were below its value".

My first point to him is that the government are creditors not the owners so I don't know why he was trying to sell something he didn't own and any sale would ultimately require to be ratified by shareholders.

The second is if the value of Northern Rock is higher than the offers they received from the private sector then why should the government as only a creditor be able to acquire the company at below this value.

Also regarding the silly post from 72 the conditions you are talking about were not the conditions at the date of nationalisation. There was no prospect of bankruptcy, a firesale of assets, administration or any other matter.

Furthermore people were able to trade in the shares for five months since the government provided the loan and if we are going to ask the valuer to go back in time to a date that suits the government why can't we go back in time to a date say January 07 that suit the shareholders.

I think its interesting to try to understand the motives behind certain posts. I submit that in general, regular posters will fall into one of two broad catergories - People sympathetic to Shareholder Interests which of course include Northern Rock Shareholders and those that are not. I think the motives behind the former are quite clear - when have you heard a NRK Shareholder state that there is no case for compensation. The motives behind the later group are less clear and infinitely more interesting.

Look for example at posts 6, 15, 16........46 etc - all from the same poster, generally very well written and all clearly articulating why Northern Rock shares are worth zero.

I'm on the fence with this one as clearly there are valid arguments for either angle - my question though is, whats in it for poster 6,15,16.........46 ?

I thought an interesting comment from Chancellor last night on th Channel 4 Gordon Brown documentary. When commenting that the government had tried to sell rather than nationalise N Rock he commented that 'the offers we had unfortunately only valued the company at a fraction of what it was worth.....' I wonder if this comment will come back to haunt the government when the valaution is done for shareholder compensation/

to #74

What's in it? Let me ask a question myself? If 2 and 2 make 4 is saying so expressing an opinion that has to have a side?

Surely when there are established accounting methodologies and laws that relate to a particular issue then not to state them succinctly is itself a grave error of character.

If I was lawyer wishing to act for one side or another I could surely argue that 2 and 2 make 5 or 3 if by doing so I could persuade a (gullible) potential client to hire my services. Have we as a society become so corrupt that to state the facts of a case is taken to imply that there must be something in it?

It may be unfashionable but one owes a duty to honesty to state the facts as one sees them and to support them with appropriate argument and I do not see that that can be in error, can it?.

I do not see how a disinterested observer can be on the fence from a legal and accounting stand point. I have I believe correctly applied the law to the situation and have concluded the NR shares have no value.

If I am in error in law please point out my error. If I am in error in the popper application of the generally accepted professional standards of valuing assets and companies please point out my error.

You will note however I am not saying that there is no argument to be made about compensation. I am however stating my well founded opinion that the shareholders have no value in a notional receivership or administration of NR. (See FSA comments.)

I have tried to apply the Laws of England as enacted by our parliament and modified by preceident by our judges in the common law. Can this require that I have something in it?

One can be sympathetic, but if the legal situation prevents any reasonable possibility of achieving any beneficial outcome is it wrong to say so?

Would you advocate leading on the unfortunate shareholders so as not to hurt them in the short term but to inflict further lasting financial damage in the long term?

I might as well ask you what is in it for you to mislead shareholders with false hopes?

I hope that neither of us has anything 'in it' to cause us to present one argument or another.

to # 76

With the greatest of respect, Northern Rocks situation is not as straight forward a problem as the solution to 2 + 2 as you may have us believe. You are in danger of confusing your opinion with fact As you might expect, I am not a disinterested observer - I have a colleague that has been caught up in this mess and have taken the opportunity to debate the merits of his case over a pint.

Just to take you up on a couple of points:

"there are established accounting methodologies" - yes there are and the more generally accepted methods of valuation are based on income and assets. Valuation based on other criteria particularly under Nationalisation legislation is just about unprecedented in the UK. I find it hard therefore that you can state with any certainty that the shares are worth zero under current law including possible European Law.

It is my colleagues opinion that the valuation methodology by the Goverment will ultimately not stand up to legal challenge.

to #76

If UK bankruptcy/receivership methodologies had been allowed to take their course then NR would have been subject to a fire sale and as has been well documented nobody was willing to buy NR so in that case NR would have had no value.

The UK state chose to prevent the chaos of NR's liquidation from spreading to a far wider circle of parties.

Whilst NR's situation is without direct precedent it is difficult to argue that HMG's actions (in February ) were for the general good.

I cannot directly think of any European legislation that directly impinges on the NR situation. Indeed in so far as European legislation touches the matter HMG might have been prevented from stepping in as its aid might have been and might be deemed an illegal state aid.

The consequence of this being the case would I believe been a far more serious disruption to the British financial system.

Once again I am firmly of the belief that UK receivership law would value NR in such as way as there being no vale left to distribute to the shareholders.

Now what I am not saying is that there are no other courses of action that shareholders might choose to take, such as the possible negligent regulation by the FSA, but again I cite the precedent of Three Rivers vs The BOE (the BCCI case) the implication of this is that even after many years and hundreds of millions of pounds the BOE won and looked for costs from the appellants.

Overall the chance of success for any action that I can think of in UK or European courts is very small - would you finance such an action on a 'No Win No Fee' basis - I certainly would not take on such a case on such a basis.

I must also take issue with your assertion that valuation is based upon "income and assets". That statement I believe to be contrary to my understanding of insolvency law, particularly with regard to the process of carrying out a receivership.

The assets are collected together and realized at what ever price can be achieved and a similar process is required to prove the liabilities. Then the proceeds are used to satisfy the cost of the process, the taxman and the various creditors according to established precedent and lastly if anything is left over a distribution can be made to the shareholders. This has only a passing relationship with 'income and assets'. This is how it works in almost all of the legislations in the World as far as I am aware. On this basis the shareholder value of NR is zero. If you are to maintain your view please will you provide the basis upon which it is founded

Can you explain "why the valuation methodology by the government will ultimately not stand up to legal challenge?" I think cannot think of specific evidence, or laws and precedent on your side to support such an assertion and I believe to maintain it is offering false hope. I believe your colleague was being nice to you and a good friend (as one does over beer I recall) and giving you comfort, (but ultimately a false comfort.)

I have found in the past that legal opinion obtained over a pint may be a comfort but, in the cold light of day, erroneous.

78 You talk a good game but your understanding of the law and business valuations is rather ropey, so let me enlighten you.

In response to your comment that you cannot think of any EU legislation that effects the valuation of Northern Rock:

As the shareholders' grounds of claim states: "The statutory scheme established by the Treasury to compensate shareholders for the expropriation of their shares is in violation of Article 1 of the First Protocol of the European Convention on Human Rights.

"In short, the Treasury has wrongfully legislated to take ownership of a solvent business, on terms which ensure that it will make a profit in due course, at shareholders' expense."

I also believe the case you quote regarding BCCI pre dates the human rights act 1998 so is irrelevant. Perhaps you need to update your knowledge of the law by a decade or so.

Regarding your comment that you do not believe that the normal manner of valueing shares is on an income or asset basis: I can assure you that this is the case and the most common method would be the discounted cash flow which would value this company at billions of pounds.

Regarding your comments about insolvency law etc, again at the date of nationalisation which is the relevent date in any valuation process the company was solvent.

Also UK law is based on facts and not what might have happened if a different course of action had been taken. The facts of this case are that Northern Rock has always been solvent and a going concern.

to 79

This blog is about the valuation of NR shares at the time it was taken over. This is the process that I have been examining in detail and about which I believe I am correctly reflecting the current legal position.

I do not believe that the claims by the shareholders have yet been subject to any form of legal examination.

I am also of the opinion that the NR situation was that it was bankrupt at the date of HMG transfer of the business. The directors agreed with the takeover. These directors were appointed by the shareholders and in effect made a composition with their creditors, further no other party other than the HMG was prepared to take on the business.

It is also usual in such cases that even before a receiver is appointed the directors will do their best to preserve what they can of a business and this is what the directors did. NR was not solvent as it could no longer continue to run its business. The act of the directors in agreeing to transfer the business to HMG shows in itself that it was not able to continue. The directors chose the course of action that they took. The shareholders gave the directors the powers to act in such a way and if I recall the shareholders agreed to the transfer.

Also note that I did not say that there is no possible avenue to pursue a claim, just that in my view the valuation of NR would produce nothing for the shareholders.

As to the BCCI case - it is directly relevant as it is one of the very few instance that appellants have attempted to show that poor regulatory supervision is a cause for compensation - and they failed. I am also of the opinion that all the human rights act will do is to increase the costs of failure. The human rights act did not throw away all precedent as you seem to imply.

I do however tend to agree with the expression 'go on waste your money' and in a free society you can do that if your wish.

Could Robert comment on this extract from a members comment please


"Back to the valuation under normal valuation methods which are income based or asset based Northern Rock is worth a lot.

Further during the nationalisation of Railtrack a leaked memo warned the government that under EU law could mean that the government have to pay an average of the last five years share price which is over ?7."

The directors of NR are to blame for this fiasco, and therefore the shareholders too, (they appointed them). Supported by the BoE and the FSA, by not regulating the banks properly.
Incompetance at every institution and level.

Let the shareholders take the directors to court by all means. But the only grounds can be fraud or incompetance.

As far as I know, there is no law against incompetant directors.
The only winners will be the lawyers, as per usual.

ps: We may not be finished yet. Bradford and Bingley are looking for a silver medal.

#80

I am somewhat confused by your comment "the shareholders agreed to the transfer" - when and how did this happen???

Further the BCCI case i do not beleive is particually relevant as this relates to a claim against regulatory supervision.

As i am aware no one is claiming this, instead it is the valuation that is being disputed.

#78 John from Hendon

I observed the sympathetic but principled debate between you and some others, especially RF2684.

This blog is like a pub, where we are all protected by beeb the bouncer.

Sometimes a newcomer in a pub may want to join a particular conversation. One way is to impugn the motives of one of the debaters who may slip into self-defence mode.

Obviously, one should rather ignore the barb. Stick to the merits, not the motive. But it is easy to be caught unawares. The rituals are different from a pub and nobody knows our credentials. We rely on what people say not who they are.

(Mind you, although we do not know what anyone else may be drinking or smoking, at least we do not have to pay for the next round).

Commenters on this blog have wildly divergent views. Because the beeb is the national broadcaster, Robert cannot overtly take a particular viewpoint, as may be required of anyone writing for the national dailies. His personal ironic style allows him to introduce provocative topics without giving offence.

The result is that commenters have strong views, expressed politely.

Newcomers may not know the etiquette of a particular blog. However, it does not need great discernment in reading any of your comments to conclude that you strive to look at things on their merits. Anyone who fails to detect this may lack such discernment or has another agenda.

What is also interesting is to note the number of comments on this (especially compared with other reports on this site).

It just goes to show the number of people this has affected and no matter what the outcome, there are going to be a heck of a lot of people unhappy with Mr Browns actions.

to #84

Many participants in this blog conflate getting compensation with the 'valuation' of NR at 20 something of Feb 2008 (Which the blog was about.). I have tried to separate the topics, without much success it must be said.

I can fully comprehend why people who had shares valued at many pounds feel 'robbed', but that is capitalism - shares can go down as well as up.

I do not believe that pursuing the 'valuation' of 1.7 bn is very likely to be successful. (or stands much chance of success.) Why not argue that the negligent supervision occurred the previous year when the share price was much higher?

However, if the human rights act does alter anything in th judgment in the BCCI case then perhaps - but it is a very long and very slow and very very expensive shot. Particularly as they are up against established precedent as well.

I can well understand that aggrieved former shareholders need to express their unhappiness and can forgive their perhaps somethings barbed comments.

86 The compensation amount of 1.7 billion is the minimum amount a suitably independent valuer would value the shares at using an asset basis (which tends to produce a lower value than on an income basis).

With underlying profits of more than 400 million per year, on an income basis the likely compensation would be closer to 3 billion. This is why the government cannot let the valuer value the shares in the normal manner that their training and experience would allow.

The government has stated on a number of occasions that it expects to make a profit on this deal.

This would be fair enough if it is because they have added value to the company, however their plan is to run the company down and make the profit because they have robbed the current owners of their shares. So any price they sell the company at would ensure a profit as the cost is effectively nil.

I would further add that the rumoured price that Lloyds TSB were willing to pay for Northern Rock was 5 pounds per share.

to #87

I know I have been though this before but...

Asset or income valuation only apply in going concern situations and were there is a market in the assets (such as the stock market). There plainly was no market for the assets as no one would buy NR.

Asset or income valuation can not be the basis of valuation in a receivership or administration which is the case for NR as it was not a going concern. Then one has to (quasi in this case) wind up the business. You can only use either of your 'valuation' techniques if it was a going concern, which plainly NR was not.

If you properly do an (quasi) administration of NR then you have to find a buyer for the assets and realize them and to prove the creditors and pay them out of the recovered assets and after all this is done then if there is anything left it is the property of the shareholders.

Other methods of book valuations on income multiple or assets are only applicable in there is a business which is still running and there is a market. NR did a deal with HMG to avoid going bust and by doing so went bust and was rescued at that instant. In my opinion your valuation techniques do not apply.

If you aspire to recover value from your ownership of shares in NR you will need a methodology that will not fail at the first hurdle.

Also consider this: If your valuation technique is eventually accepted then I would expect HMG to renege on the whole deal as plainly NR was going to cost them far more than they expected and it is only equitable that the deal as a whole should be null and void ab-initio. Then the shareholders would be left with a bankrupt company (probably of no net value at all) or at least where the valuation technique will be the one I have previously outlined - resulting in a zero value.

You can't have it both ways I am afraid. You either get a company back and it immediately collapses into receivership or you see the company continue but get no value for your investment.

I reiterate, that other forms of legal action may offer better prospect of yielding some sort of return - but I doubt it.

I am confident that based on the facts that Northern Rock is a going concern.

The most obvious way of deciding whether a business is a going concern is whether it will still exist in a years time and there is no doubt that Northern Rock will be in business in a years time.

The facts are that the money that Northern Rock borrowed from the Bank of England has interest charged on it at a commercial rate, is secured against collateral and does not represent state aid. Further other UK banks are now receiving similar assistance from the Bank of England under the "special liquidity scheme".

So the BOE loan should be treated as any other loan. If the government had actually withdrawn the loan they would have acquired the company in a much worse state than the one they did acquire. Instead it was very much business as usual.

Back to the valuation, under EU law the govt must pay "fair market value" for the property it acquires. If you look at the definition of "fair market value", the definition specifically states that the valuer should assume that the business is a going concern whether or not this is the case.

to #89

I am confident that NR was not a going concern based upon the facts.

Nobody in the market wanted to buy NR at any price.

(This is absolutely critical as NR was a 'desperate' seller and there was no market for it. 'Fair market value' can only apply when there is a 'market' and quite obviously there was no 'market'. How it was allowed to get into this condition is another subject.)

You are in my opinion based upon the facts in for a long and protracted and very expensive and, I believe in the end, fruitless legal battle which is of-course your right and you may also have to pay the respondent's costs as well as your own if your fail to win.

#91

We appear to be going around in circles here, i'm sure i have mentioned before that there were offers for NR, therefore people in the market did want to buy NR.

to #91

as to the 'offers' everybody withdrew.

#92

As i am aware this is not true, the Olivant offer was withdrawn after the repayment terms were shorterned from 5 to 3 years(very last minute by HM Gov), but the offers from Branson/Virgin and an offer from the existing NR management were still on the table at the time of nationalisation.

The external offer from Virgin valued the company at significantly less than book value but never the less offers were there at the time.

to #93

But were any of the offers accepted? All of the offers had strings attached I recall (if your have the texts of the formal offers to hand perhaps you could check.)

I doubt if contingent offers are real 'offers' in a legal sense. After all anyone could make an offer that attached unreasonable contingent strings, for example insisting that some third party continued to support NR as a condition of the offer. This was the final state of the offers as reported in the media I believe, but I am willing to be corrected if you have the final formal texts of the offers to hand which contradicts this.

John_from_hendon


The article below could prove a bit problematic for the Goverment if it turns out true. As a tax payer, i'ts got to be of some concern if the Goverment have vetoed an offer of 500p per share for the bank and then ploughed ahead and Nationalised the bank. Potentially this could expose them to having to payout 500p per share could it not ?

"Northern Rock’s rescue rubbished
Story by: Emma Ann Hughes Magazine: FTAdviser Published Wednesday , June 11, 2008
Congratulations to Lloyds TSB. The banking giant has never admitted it put a rescue bid in for Northern Rock prior to the Newcastle-based bank having to call on the Bank of England’s emergency reserves.

Advertising
However, many industry insiders are willing to stake their reputations on it was Lloyds TSB that was prepared to cough up £5 a share for the now nationalised lender.

Lloyds TSB’s offer was rejected because the government was too scared to tell Northern Rock shareholders, or rather voters, the shares they thought were worth £12 were now only worth £5.

As a result the lender had to turn to the Bank of England, savers queued up to pull out their cash, the rest is now history and egg all over the face of Gordon Brown plus his Badger-like pal Alistair Darling."

to #95

Many journalists report many things but in the end it is not what might have happened but what did happen.

I don't think anybody comes out of the NR situation very well. But in the end it is what happened and what was actually done that matters not what even the most respected journalist in the most august journal writes - and this is a very good thing.

This blog is about the valuation as at the date that NR moved ownership. I have given my views as to its value and responded to a large number of questions and suggestions. I believe that my valuation methodology is sound, given the facts of what actually happened at that date.

I am not saying that NR was not worth more at a previous date and even that some parties might have been thinking of paying more - however these offers were conditional, as far as I am aware, and the provider of the liquidity was not prepared as was their absolute and legal right to meet that condition and thus as history relates no firm unconditional offer was made and nor was one accepted.

If NR should have been permitted to get into this condition is another matter outside the scope of its valuation on the date of transfer.

I believe that the FSA has acknowledged that havering so few and so junior people looking at the risk profiles of its charges was, in hindsight, unwise, but in so doing it was doing no more than the shreholders. Also the shareholders were as I understand it quite happy with the business model of NR and supported the actions of the directors.

I do not share your feeling that Gordon Brown is totally culpable - as after all we elected him a number of times and we were quite happy with his economic policies when all was going well. He was also only following the policy lead of the previous Tory government except he devised a way of having low (disastrously low in my view) interest rates (for far too long) that built up the financial pressure cooker that would give us the (inevitable) credit crunch even without the intervention of the US market.

I have been convinced that our permanent government also has questions to answer. (For many years I have advocated sacking Permanent Secretaries to ensure that they take responsibility for their actions, but like the City they too get a fat bonus and move on - it seems traditional and embedded in our society.) We have to suffer but they escape! (Rather like Generals running the First World War and the private soldier.)

I was always unhappy with the synthetic financial instrument valuation methodologies that underly the credit boom, but I will freely admit that like most I did nothing about it (save writing on several occasions to the Governor to express my concern about the probable consequences.)

I am sorry that you have lost money.

#94

Are copies of the final offers available to members of the public?

If so i wasn't aware of this, the only strings attached i was aware of was that the loan had to be repaid in 5 years (then this was changed to 3 years)

As far as i was informed the offers met this requirement but they were rejected in HM Govs words "because it was in the best interests of taxpayers" ie. to make a significant profit.

To John from Hendon,

A couple of questions for you:

1) The share price of Northern Rock was around 90p when they were suspended and then subsequently expropriated. Earlier in this blog I think you stated that asset value was not an appropriate valuation method since the bank was not solvent in your opinion and that assests were only worth what someone is prepared to pay for them. Using this reasoning, investors were willing to pay 90p at the time the shares were suspended - would this not put a minimum water mark on what the Goverment would have to pay.

2) Picking upon the solvency issue - Many people believe that bank was solvent before, during and after Nationalisation. Indeed the Goverment stated it was solvent with a good loan book weeks prior to nationalisation. Do you not think that the Government are going struggle in a legal proceeding to explain this apparent contradiction in light of the BOE's role as lender of last resort. An interesting follow on from this that has been reported recently is that having extended facilities as lender of last resort, it is unpredented World Wide for this facility to be withdrawn from a profitable bank.

Unfortunately, I think that the Goverment has miscalculated on this one. As a minimum, I think they will end up having to pay 90p a share plus give warrants in the refloated bank. I dont see anyway around this.

To norstrom

The problem is that no unconditional offers were made - if they had been perhaps your arguments might hold water. The key here is that all the offers, such as they were, were conditional. A bit like saying I'll buy your used car for a tenner if a third party chips in a pony.

Did any investor buy all of the shares at 90p? No. 90p was not the share price for the whole company. This only reason that the price was not zero was that the market was relying on Treasury support - without such support - who knows? The fact was that no body would unconditionally take on NR at any price because of its real and contingent liabilities.

I do not see any merit in the points that you make, but there is nothing stopping you from trying to get the courts to take your view. I do not see any miscalculation in HMG's actions except perhaps in not letting NR be wound up. They bailed NR out to save the depositors and the banking system and other banks - a quite reasonable thing to do.

To John from Hendon,

Ive just been looking at some of the earlier posts and noticed that on # 79 you wrote:

"If UK Bankruptcy/Receivership methodologies had been allowed to take their course........then NR would have been subject to a fire sale...so in that case NR would have no value"

Of course NRK is neither Bankrupt or in administation and any argument relying on either of these two cases for determining a valuation is hypothetical as neither situation exist.

In post # 96 you wrote:

"....in the end it is what happened or what was actually done that mattered...........and this is a very good thing"

In the one case you are justifying the zero valuation of NRK based on a hypothetical situation (i.e that NRK is in administration) and in a second case, when it suits your purpose, you are saying that the reported offer of 500p per share from Abbey National is irrelevant because it didnt come to fruition"

This appears to be a shameless U turn.