Saturday, September 15, 2007

Northern Rock n' Roll


Northern Rock remains solid
Guardian, January 24, 2007
Between Rock and a hard place - savers besiege bank
Guardian, September 15, 2007

SOME of my friends on the Left are saying how much capitalism has changed and that we need to change our ideas because workers are enjoying prosperity. Having bought their own house they may not even think of themselves as workers any more (even if they have to work all the hours they can and take extra jobs, just trying to pay their mortgage). I hope friends are not about to follow in the path trodden by Gaitskellites, the Social Democrats, Marxism Today,New Labour and Living Marxism. (Incidentally the 'ultra-Left' Revolutionary Communist Group was also impressed by Thatcherite success, but decided to carve itself a niche by concentrating on "solidarity" -usually its own separate brand - and "marginal" groups). I'm sure it is just a phase brought on by middle age.

Meanwhile I turn nervously to the business pages where the picture isn't looking so rosy.

Yesterday, in scenes reminiscent of Frank Capra's 'Wonderful Life', we saw worried depositors queing outside the Northern Rock bank, a former building society after hearing that the Bank of England had stepped in to rescue it. Northern Rock shares had fallen more than 25 per cent in a day.,,2169786,00.html

Today the Guardian reports:

'Fears that another bank would be forced to follow Northern Rock and reveal huge losses resulting from the credit crunch in global money markets sent shares in the sector tumbling yesterday. Alliance & Leicester and Bradford & Bingley defended their lending strategies while the buy-to-let lender Paragon was forced to put out a statement to allay concerns that it was vulnerable to a combination of falling house prices and tighter rules on corporate borrowing.

'Shares in Alliance & Leicester and B&B were down by between 6% and 7%. The high-street banks HSBC, Lloyds TSB, Royal Bank of Scotland and Barclays also saw their share prices decline as investors took flight.

Barclays said at a meeting with shareholders that it would only press ahead with its planned merger with the Dutch bank ABN Amro if the deal worked for the bank, which many analysts understood to mean that the deal was unlikely in the current circumstances.

'Many brokers felt that, with Northern Rock's future assured, at least for now, the share price falls were overplayed. Darren Winder, equity strategist at Cazenove, said: "People probably have time to reflect on the Northern Rock situation and reflect on the bigger picture. People probably feel, maybe, it was a bit of over-reaction this morning. I guess it's not surprising in the circumstances."

'A&L was considered one of the more vulnerable to a fall in investor sentiment. It has often been bracketed with Northern Rock as a mid-sized operation that must punch above its weight to compete.

'However, it said in a statement that it was business as usual. "Alliance & Leicester's strategy is very different to that of Northern Rock ... Alliance & Leicester is far less reliant than Northern Rock for funding from the world financial markets, whose unusual trading conditions triggered Northern Rock's announcement."

'A&L pointed out the ratio of loans to deposits at Northern Rock was 314% compared with its own of 165%. The main deposit-taking banks - HSBC, Barclays, RBS/Natwest and Lloyds TSB - have ratios averaging 110%.
(By the way, what happened those adverts that used to say "You get a better class of investor, at the Alliance and Leicester"?)

'Paragon Group, one of yesterdays biggest fallers, was forced to bring forward a funding announcement that had been due next week in a bid to calm City nerves. The company, which is the UK's third-largest buy-to-let lender with £9bn of buy-to-let assets, saw its shares fall yesterday as dealers looked for other vulnerable lenders.

'Speaking last night, Nigel Terrington, Paragon's chief executive, said the company had had the foresight to borrow £1bn from Royal Bank of Scotland on July 19 - well ahead of the credit crunch - and at just "two basis points extra" above the inter-bank rate. "We have sufficient cash in our reserves to fund all our lending well into next year," he said.

'Adam Applegarth, Northern Rock's chief executive, said it had been forced to ditch its mortgage lending strategy until credit became more freely available. "The business model is not appropriate and we will have to evolve and change," he said. "Though we will not be the only ones."

'He said he expected to see a tightening of lending criteria and higher interest rates across all mortgage lenders. "Whatever the bank base rate is, you are going to see higher mortgage interest rates," he said.
Banking shares suffer amid fears of another Northern Rock,,2169847,00.html
For other effects, see e.g.

After experience with a 'Marxist' guru who was always foreseeing imminent slump and the final crisis of capitalism, not to mention claiming Britain had eneterd a "revolutionary situation" (soon after which Margaret Thatcher got in, and went on, and on...), some of us are naturally cautious about reading too much into this or that turn. But we should not go to the opposite extreme, and have to pretend nothing is happening. We don't need to have more faith in capitalism than the capitalists.

We have seen the effect in the United States of massive "irresponsible lending", creating debts on the basis of which fictitious capital was generated for investment. The US crisis has had international repercussions, but we could see a fresh shock detonated in Britain, where more people are in more debt than anywhere else in Europe., and there have been a record number of bankruptcies declared.

Yesterday's Daily Mail front-page, in a change from house prices or blaming immigrants, was largely taken up with a headline about the Bank of England being unable to control mortgage rates. It was Margaret Thatcher who claimed she was freeing the people to buy their own homes and also said "you can't buck the market". One day people woke from the property-owning dream to the nightmare of negative equityand repossessions. It was Gordon Brown who gave the Bank of England its independence, and invited private capital into running services, with a little help from the taxpayers.

We have just seen the effect of the latter in the collapse of Metronet, paying its directors then leaving the workers to worry about jobs and pensions, and the public to pick up the rest of the bills. Maybe those middle class commuters who were angrily complaining about the tube workers action, and bleating that "no one can have a job for life", will soon have something to really get angry about, and then I suspect they may get more militant than any tube workers.
The really worrying thought is not whether there will be a crisis, there could be several, but how unfit and unprepared the Left is to take advantage of it.



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