# Northern Rock - how badly could foreclosures hit it?



## ionapaul (15 Aug 2007)

Hi all,

I have been quite pessimistic regarding the global economy for a few years and believe rough times are ahead, so last year moved 50% of my net worth from US equities to cash.  Most of this is currently resting in a Northern Rock Demand Online account.  My question is: if the UK (or Europe, or the entire western world) sees a recession, a subsequent rise in unemployment and consequently a rise in foreclosures, how badly would Northern Rock be hit?  I have heard that the majority of its business is mortgages.  Could an ongoing credit crunch adversely affect my savings there?
If we see a bout of deflation for a few years and cash is king, where is the safest place to keep it?

-Paul


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## Godfather (15 Aug 2007)

Hi ionapaul, I think yours is quite a bit of a "philosophical" question that cannot find a certain answer... The great John Maynard Keynes used to say in times of war/huge recession the safest place to put the savings was "under the mattress"...

But are we all so pessimistic nowadays?


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## Persius (15 Aug 2007)

Of course you can't find a certain answer, but hopefully there are some indicators out there. What I would be interested to know is the relationship between NR that operates in ROI and UK. Is NR UK a parent company? Are they both the same company? Are they sister companies? What effect would insolvency in NR UK have on it's ROI operations etc?

Unfortunatly I don't have any answers, but that might be one place to start. 

As to NR's exposure to dodgy mortgages in the UK or all the sub-prime CDOs etc from the US, I'm not sure if the public can get any insight into this unless there is some serious crisis forcing NR to issue a profit warning.


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## GeneralZod (15 Aug 2007)

Persius said:


> Is NR UK a parent company? Are they both the same company? Are they sister companies? What effect would insolvency in NR UK have on it's ROI operations etc?



Their [broken link removed] describe the Irish Branch as part of Northern Rock plc retail funding franchise. No mention of separate companies for the Dublin branch. Their irish deposits on 31 Dec 2006 were STG£1,520 million.
It says the Guernsney branch is in a subsidiary company.


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## Howitzer (15 Aug 2007)

From what I've read NR doesn't have any (?) exposure to foreclosures it's more a case of them not being able to raise finances to loan out at a viable rate, so it's their profits at risk not your deposits.

http://www.ft.com/cms/s/f4fefc80-4b65-11dc-861a-0000779fd2ac.html


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## joe sod (16 Aug 2007)

Northern rock is regulated by the irish financial services authority so basically your savings have the same protection as any deposit account in ireland. That means your deposit account is covered by the government up to 20,000 euros any savings above this level are not covered.


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## ionapaul (16 Aug 2007)

In that case, if one wanted to be 'extra safe' with regards their savings, one could spread the (admittedly very low level of risk!) by opening accounts with NR, Rabobank, etc...and putting a maximum of 20,000 euro in each?


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## barryo (16 Aug 2007)

if this becomes an issue we will be all running for the hills - it wont be your deposit you'll need, it will be a gun and some survival skills. 
Northern Rock are bigger than BOI


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## Towger (16 Aug 2007)

ionapaul said:


> In that case, if one wanted to be 'extra safe' with regards their savings, one could spread the (admittedly very low level of risk!) by opening accounts with NR, Rabobank, etc...and putting a maximum of 20,000 euro in each?



90% of savings up to a max of 20,000 per person. 

More details at : [broken link removed]

Towger


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## Godfather (16 Aug 2007)

Jeee... I'm having a panic attack...   But sorry how do I know how NR is doing? From the stock market only sorry? Or are there any quarterly reports from the company?


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## whattheheck (18 Aug 2007)

for those that have decided to cut down to 20,000 where are you going to invest the rest of your money?


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## MugsGame (18 Aug 2007)

> 90% of savings up to a max of 20,000 per person.
> 
> More details at : [broken link removed]



This doesn't apply. NR are regulated by the UK FSA and "passported" into Ireland under EU regulations. Irish NR depositors are protected by the UK FSA scheme, which is similar to the Irish one but (IIRC) slightly more generous.


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## oldtimer (19 Aug 2007)

Does the 90% of savings up to €20,000 apply to An Post? Their saving bonds and saving certificates are 'state guaranteed.' Does this mean An Post savings are totally safe?  By the way the rates on saving bonds and saving certs, which are tax free, have improved lately but still not as high as Rabo, NR, First Active, Anglo etc.


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## Sunny (20 Aug 2007)

oldtimer said:


> Does the 90% of savings up to €20,000 apply to An Post? Their saving bonds and saving certificates are 'state guaranteed.' Does this mean An Post savings are totally safe? By the way the rates on saving bonds and saving certs, which are tax free, have improved lately but still not as high as Rabo, NR, First Active, Anglo etc.


 

An Post bonds are like lending to the government so yes they are totally safe. Unless Ireland goes bankrupt


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## Jethro Tull (20 Aug 2007)

MugsGame said:


> This doesn't apply. NR are regulated by the UK FSA and "passported" into Ireland under EU regulations. Irish NR depositors are protected by the UK FSA scheme, which is similar to the Irish one but (IIRC) slightly more generous.


 
do you have a link about the details of this scheme? I have a sizable whack of my net assets deposited in NR and am probably completetly over reacting but would be lying if I said this wasn't worrying me.


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## command (20 Aug 2007)

I believe Northern Roack have sold on a lot of their debt and therefore their exposure is small enough. However the issues seems to be that the people who would normally buy the debt from Northern Rock are now exposed and also have no cash. As a result NR have had to go to the wholesale market to raise cash. 

If they can't get it on the wholesale market the other option ther have to raise liquidity is to get more deposits. To get more deposits they will have to raise the rates they are paying for them. 

So far form running for the hills on NR I would expect that there is a chance that deposit interest rates will become even more attractive over the next few weeks as NR and everyone else try to get cash in.


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## Jethro Tull (20 Aug 2007)

Their moody's credit rating is Aa3 but their credit default swap implied rating is only Ba1. 

A friend of mine trades credit derivatives in Dublin and told me that its 'unusual' for to see credit default swaps being traded on Northern Rock. Also what they are trading at is pretty wide for a financial instituton according to him. 

According to conventional risk/return theory surely their deposit rates should increase to counter this?


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## MugsGame (20 Aug 2007)

> do you have a link about the details of this scheme?



As at 2000 the [broken link removed] was


> £18,000 (90% of £20,000)


though there was talk then of raising this to


> £31,700 (100% of £2,000 and 90%
> of £33,000)


either of which is significantly more than the Irish scheme. 

However... I think there was a case a few years ago where Irish insurance customers were compensated under the UK FSA insurers scheme, and it took Mary Harney's intervention to get the FSA to payout to Irish policyhoders. Even then, the FSA may have tried to match the equivalent Irish cover, rather than payout on the higher limits. So it may be greyer than I made out above. Not that I think NR customers will ever be in a position to find out definitively.


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## Sarsfield (21 Aug 2007)

Jethro Tull said:


> Their moody's credit rating is...


 
Hmmm.  Given that Moodys are taking some of the flak for causing these problems in the first place, I'd be reluctant to give their ratings much weight right now.


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## Jethro Tull (22 Aug 2007)

Maybe so but the bottom line is I've been reliably informed that credit default swaps on securities issued by a company with NR's rating should be trading at about 50 basis points. Was trading at rougly 3 times that on friday and 2.5 times that monday.


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## room305 (22 Aug 2007)

Jethro Tull said:


> Maybe so but the bottom line is I've been reliably informed that credit default swaps on securities issued by a company with NR's rating should be trading at about 50 basis points. Was trading at rougly 3 times that on friday and 2.5 times that monday.



Just make sure that this reliable informant is fully aware that the spread on corporate swaps has been absurdly low for quite a long time. That may well now be at an end, with a reversion to the mean taking place.

However, fortune favours the brave and a 1.5% spread seems reasonable if you trust Moody's rating.


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## Jethro Tull (22 Aug 2007)

room305 said:


> Just make sure that this reliable informant is fully aware that the spread on corporate swaps has been absurdly low for quite a long time. That may well now be at an end, with a reversion to the mean taking place.


 
He's worked trading them for about 3 years so I'm sure he's aware of that.


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## Riddler (23 Aug 2007)

Why was this thread started ? Seems to me to be scare mongering. Ask the same question of BOI, AIB and why not the local credit union. There's less than 2bn in NR which is largely guaranteed : BUT there's 14bn in the unprotected, non-guaranteed, partially regulated credit union sector. Have you read the Indo...seems to me the real concern is flying under the radar screen right now..with all the potential of creating a real S***t storm for everyone regardless of their Moody rating. Damage to public confidence etc looms larger.


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## z109 (23 Aug 2007)

Riddler said:


> Why was this thread started ? Seems to me to be scare mongering. Ask the same question of BOI, AIB and whay not the local credit union. There's only 1.5bn in NR but 14bn in the unprotected, non-guranteed, partially regualted credit union sector.



Northern Rock have an exposure to sub-prime (100% mortgage) in the UK (24% of their books, if memory serves me correctly). They are heavily leveraged and rely on the money markets for short-term cash to continue lending.


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## jpd (23 Aug 2007)

Not all 100% mortgages are sub-prime


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## z109 (24 Aug 2007)

jpd said:


> Not all 100% mortgages are sub-prime


No, and not all sub-prime debt is going to default, but on the balance of risk, a 100% mortgage is more risky.


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## ionapaul (24 Aug 2007)

Riddler said:


> Why was this thread started ? Seems to me to be scare mongering. Ask the same question of BOI, AIB and why not the local credit union. There's less than 2bn in NR which is largely guaranteed : BUT there's 14bn in the unprotected, non-guaranteed, partially regulated credit union sector. Have you read the Indo...seems to me the real concern is flying under the radar screen right now..with all the potential of creating a real S***t storm for everyone regardless of their Moody rating. Damage to public confidence etc looms larger.


I started the thread as I have far more than €20k on deposit with NR and far less than €20k on deposit with BOI, AIB, etc...!  I am a happy customer, not trying to scaremonger, just curious about their exposure and the risk to my deposit - TBH I don't care as much about other people's savings with other banks, it ain't mine!


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## Jethro Tull (6 Sep 2007)

share price has lost about 10% in the last 3 days...

http://uk.finance.yahoo.com/q/bc?s=NRK.L&t=5d


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## carpedeum (9 Sep 2007)

ionapaul said:


> I started the thread as I have far more than €20k on deposit with NR and far less than €20k on deposit with BOI, AIB, etc...! I am a happy customer, not trying to scaremonger, just curious about their exposure and the risk to my deposit - TBH I don't care as much about other people's savings with other banks, it ain't mine!


 
I am like Ionapaul and a happy customer, to date, of *Northern Rock*. The following quote comes from today's *Time Online* article headlined: *Worst crisis for 20 years, say banks*

http://business.timesonline.co.uk/t...ectors/banking_and_finance/article2412740.ece 

_"The crisis is having a huge impact on the way banks conduct their business. *Northern Rock*, the troubled bank, is facing a battle to raise up to £3 billion in funding it needs from the debt markets in the next three months. _
_Northern Rock has been particularly vulnerable because it relies on the credit markets for about 70% of the funds it needs to finance its aggressive mortgage lending. Some debt analysts believe that the bank may need to raise up to £8 billion if it is to sustain its ambitious targets and take mortgages that have been written several months ago off its balance sheet. There have also been suggestions that the funding pressures could force Northern Rock to issue a second profit warning. In June the bank said that £180m to £200m in income had been wiped out after it failed to pass on higher-than-expected borrowing costs to customers rapidly enough. Other banks, including *Anglo Irish*, another big user of securitisations, also face a credit squeeze."_

I think we just need to keep an eye on things, or am I not being prudent enough?


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## Jethro Tull (13 Sep 2007)

The share price is still in freefall, lost almost 5% today. 

Is it a case of worries about how they raise funds or something more sinister?


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## Brendan Burgess (14 Sep 2007)

I have moved the posts from last night to a new thread


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