Adam Sandler, chairman of Nationalized Rock, had a warning to UK taxpayers. He said "If house prices were to decline 5, 10, or 15 percent, that would seriously impede fulfilling the plan" to repay the Treasury.This is a gruesome revelation. We have about ₤24 billion of our money currently propping up the beleaguered lender.
Well, the last time I looked, house prices are already down over 5 percent from the peak. Does that mean that the plan is now officially "impeded?" Or would imploded be a better description?
11 comments:
Oh dear, you can see what is coming next.
OT, but we have finally got around to linking with you, Alice !
Nick drew, many thanks, it is greatly appreciated. Great blog BTW.
Alice
NRK; will it ever end....?
You omit the good news. Northern Rock expect to repay 25% of the emergency loan this year.
This is just Ron playing the necessary political game. Losses were absolutely inevitable - only a fool would think otherwise. Now is the right time to prime public and official expectations... so that, in a couple of years Ron isn't blamed when a sudden loss of, say £8bn turns out to blind-side the economy and take us into a spiralling depression.
Best that government are aware of the problems up-front, really.
Northern Rock is going to cost billions. Their loan portfolio is crap. Except it is the taxpayer's portfolio now.
Northern Rock is so last year.
NIAGTTB!
I think it's in the UK's interest to get burned now. It means King can't do a Bernanke and swap out too many more dodgy assets.
Have you thought about the difference between how the BoE only accepts crap from 2007 vintage or earlier whereas the fed accepts securities created specifically for the purpose of pawning them at the Fed? Mish has been writing about the US stuff for a while.
I'm interested to know the details, namely:
1) Is it true no 2008 securities have been accepted
2) Is anyone trying to repackage 2008 under a 2007 wrapper
3) How good is the overcollateralisation the Boe requires
4) Is there a market price for anything the BoE accepted and how does that compare to the price they swapped at
If King is doing his job (and I'm inclined to think he is) then they are following the central bank creed of "in crisis lend freely at penalty rates against good collateral"
I'd like to know if the details agree with the speeches.
Nick
The USA can adopt a more inflationary policy than can the UK because it has greater capacity to impose itself on the world's commodity markets. The only credible threat to the US$ is the Euro. The Fed - almost - have a free hand.
On the details, as far as I'm aware...
1/2. The 2007/2008 distinction is about the mortgages and not the securitisation of those mortgages. There have been stories of securitisation deals to best structure 2007 debt to use the SLS scheme.
3. The level of the haircuts, in my unjustified opinion, is fair. It varies - roughly 10% to 30% for AAA rated mortgage backed securities which were accepted everywhere at face value (or a premium to that) for most of 2007. Defaults are likely to exceed the haircuts if (very approximately) 40-50% of mortgage debt is defaulted within the next 9 months. It is also important to remember that this simply resolves the fact that there is no investor interest whatsoever - it still leaves the lending banks with substantial debt service costs and a medium-term demand for commercial finance - if they intend to turn a profit in future. It is worth noting that recent securitisation of elder debt will not have been sold previously - so attracts a haircut at the upper-end of the severity scale.
4. The BoE will swap AAA MBS without a market price... but the absence of a market price attracts another haircut penalty - placing the haircut closer to 30% than 10%. It is important to remember that to get the AAA rating there needs to be a credible case that there will be zero defaults... The BoE can, at its discretion reject or apply further hair cuts if at any point it is not happy with the securities. The published haircuts require confidence at the BoE in the AAA ratings... and, given the sway of the BoE - it can also influence downgrading of any ratings with which it disagrees.
I'm not aware of any speeches about the SLS - but I did read the announcement. I think that King is doing a spectacular job in the context of fiscal (and, I think, monetary) policies with which he disagrees... while surrounded by counter-productive muppets like Gieve and those with a US-bias like Blanchflower... hampered by the FSA which is not fit for purpose with every senior (and many junior) staff looking to move into the commercial sector ASAP - hence lacking the will, expertise and motivation to regulate the financial markets appropriately.
Interesting. Thanks
Nick
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