Referendums and the Northern Rock Lemmings

These clowns queuing up to get their deposits from the Northern Rock Bank are proof, it it were necessary, that politicians should offer the electors referendums with great care.
Even though the Bank of England have written a blank cheque in favour of the Bank, and it would be political suicide for the government to allow the bank to go under, many depositors, against all reason   are still hell bent on following the herd and rejecting what must be obvious if they engage their brains for one moment

Yet some  politicians have offered them a vote on the EU Constitutional Treaty. This is a complex document which very few will read and fewer will understand. The idea that their votes will be based on careful consideration of the issues is plain barmy.

Comments

[ziz]

Yoy should carefully examine what the Treasury website reports of the Chancellor's "guarantee" ..

"I want to put the matter beyond doubt. In the current market circumstances, and because of the importance I place on maintaining a stable banking system and public confidence in it, I can announce today that following discussions with the Governor and the Chairman of the FSA, should it be necessary, we, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets."

You might explain - or even better get Mr Darling (another damn Scotsman)what the conditions are that fulfill the condition "should it be necessary," before " we, with the Bank of England, would put in place arrangements that would "guarantee" all the existing deposits"

You might then ask him how this would be done - by Statute, by order in Council , or by simply signing a blank cheque ? If the latter how does this accord with the belief in the "independence" of the BOE ?

You might then ask in what circumstances this "guarantee" might extend to other depositors in other banks.

One might also ask why darling keeps parotting the view that the FSA takes that Northern Rock is solvent.

There are two tests of solvency ;

1. Inability to pay debts as they become due.
2. Insufficient assets to cover liabilities.

Northern Rock borrows money wholesale and lends it to people to buy houses. Due to the interbank rate (LIBOR) now exceeding Base Rate by over 1 % their sums don't add up. Loans are due for repayment and cannot be replaced = without recuorse to the BOE. Can they pay their debts as they become due ? - NO . Then they are insolvent.

In UK law, the people who decide that a company is solvent / insolvent are the Directors. When they judge themselves insolvent they are obliged by Company Law, to undertake certain legally prescribed steps, which effectively places control of the company out of their hands - into those of receivers, administrators.

If the BOE hadn't stumped up, the Directors would have had to file for Administrators to be called in. Period.

If the BOE hadn't stumped up, the Directors could not continue in business as they had lost their ability (and confidence of lenders) to raise capital to continue to fund their loans. Period.

It is not the job of the FSA to determine solvency they do not have the othority to determine or proclaim such a view (other than a simply anecdotal comment such as you or I might make) they do not have the staff, time or the information - which in any case must come from the Directors.

I note that at no time have the Directors claimed they are either solvent/insolvent , but it is evident that they could repay loans as they fall due - which is why they approached the BOE.

The further removal of funds can only increase the level of insolvency - the BOE loan simply increases their labilities ahainst rapidly declining assets.

Further more it is evident that respectably financed Joint Stock Banks will not touch Northern Rock with a very lengthy barge pole in its current condition.

If the Directors had declared insolvency, called in the Administrators,it could have all been quietly tucked up and no-one would have been panicked.

As it is major investors have been carefully examining the other limp (if not lame) ducks and removing them from their portfolios. The huge late afternoon drop in A&L is proof that it must have been massive sales, not yer Mom & Pop investors who moved the market so much.

Far from providing stability on the market the BOE (through no doubt the efforts of Sir John Gieve Director of Stability (Ho.Ho.Ho.)) they have monumentally failed and increased uncertainty both in private investors, potential mortgagees with consequent fall out on the property market and building companies.

Quite an acheivement - perhaps as well they don't have Director for inducing instability in the markets at the BOE.

[ziz]

IT is interesting to note that the Director of Northern Wreck isued accounts made up to June 30th 2007 towards end July.(and declared a handsome divvy payable any day now)

This implies solvency as at the date of prearing and publishing the accounts - what has changed since end July / today to have affected their solvency so dramatically ?.

The shares have now touched £2 and no rescuers / white Knights have come forward (nor black horses as frequently leaked).