Friday, September 14, 2007; Posted: 04:19 PM
Northern Rock has come crashing down on its borrowers who can't repay their debts. Thus says iva.co.uk, which describes itself as "the UK's biggest on-line IVA community", or bunch of overborrowed whingers. It asserts that experts who can assemble "perfectly viable" Individual Voluntary Arrangements are not bothering to do so if they know Northern Rock is a big creditor, because the Rockers are so likely to reject them.
IVAs, where lenders agree to wipe out all debts for a fraction of what's owed, are the latest manifestation of the culture which has encouraged people to believe that nothing is an unfortunate accident or their fault. Originally invented to encourage enterprise by allowing failed entrepreneurs to make a fresh start, IVAs have been hijacked by organisations offering to save overstretched consumers from their own folly.
Even a "perfectly viable" IVA will not get the lender his money back, and in Northern Rock's case, its shareholders would pay. They might feel they've already paid enough; as the chart shows, their shares have halved this year, and at 670p they yield a net 5.9 percent on the latest dividends. Northern's bad debts (so far) are no rockier than those of other banks, but it has lent more enthusiastically than most, funding its growth by borrowing in the money markets and bundling up the mortgages to sell on to provide funds for more loans.
This dependence on wholesale money is suddenly very expensive, and the slump in its share price reflects the sharp rise in its financing costs, with three-month Libor, the rate off which loans are typically priced, now hovering around 6.9 percent. Banks that would normally lend happily to Northern are hoarding cash to meet guarantees given earlier to opaque financial vehicles which are no longer able to renew their short-term loans in the money market.
This crisis looks increasingly like a tropical storm that will sweep right through the financial system within 90 days (the typical term of a money-market loan) from its start at the beginning of August. It will carry away lots of obscure financial structures like Victoria Mortgages, which handed its keys back this week, but in October Libor will subside towards base rate as the storm passes. While it may take some tiles off Northern Rock's roof, the damage will be superficial. Structural damage would follow only if dearer mortgages cause house prices to fall significantly.
The latest lending figures bring that prospect a little nearer, with first-time buyers spending nearly 20 percent of their income on mortgage payments, the highest since 1991, when monthly payments effectively included a slug of capital repayment. If this storm becomes a hurricane, even Northern's well-covered dividend might be exposed, but that looks unlikely. The share price is discounting much worse weather, which is why they look a good bet if you believe this financial storm is not, after all, Hurricane Katrina.
YOU HAVE TO RESPECT ASHLEY'S GAME PLAN: I must admit to a grudging admiration for Mike Ashley, the curmudgeon behind Sports Direct, that modern equivalent of Burtons the Gentleman's Outfitter. His refusal to assume the position makes him stand out from the crowd.
Today's chief executives face constant demands from fund managers, analysts and (of course) the meeja, and it often seems that running the business is something they do in their spare time.
The institutions who demand instant obeisance reserve the right to sell out at any time without notice, and some are not even shareholders at all in the conventional sense, merely holding a fistful of derivatives giving them the right to buy.
Ashley, you will recall, stuffed the big boys with half his company at 300p a share only seven months ago. They're just 130p today. Since then, he's lost a chairman, bought Newcastle United, agreed to sell the company some properties that somehow got left on the shelf during the offer, and dabbled in adidas shares.
He's clearly much too busy to schmooze City institutions or atone for turning their GBP928 million into GBP400 million. He's quietly buying the firm back, with another 6.7 million shares going into treasury this week, taking the total past 50 million.
He's also kicking the big boys in their finances again, revealing stakebuilding in Umbro, supplier of those replica England football shirts that haven't been flying off the shelves, and posting sales figures without like-for-like comparisons.
Thus starved of raw material, the analysts have been knocking out "sell" recommendations -- sober analysis, of course, not sour grapes. They should remember that even the middle-aged couch potatoes who buy Ashley's overpriced "sports" clothing and shoes know there's a price where something's cheap.
DOLING OUT SHORT RATIONS COULD BRING TUCKER A PRINCELY REWARD: This man has Britain's toughest job. Paul Tucker is Executive Director, Markets, at the Bank of England, and one of the dwindling band there who understand markets.
Such expertise used to run through the Bank like the metal stripe in a GBP10 note, but since Gordon Brown capriciously gave bank regulation and the gilt-edged market to the Financial Services Authority 10 years ago, much of this almost instinctive knowledge has gone. Tucker has been at the Bank for 18 years, and is the man who must deal with those who are dying of thirst in the money markets.
Please give us cash to drink, they plead. Never mind that we made a killing in the good times, you've got to rescue us now or there will be terrible consequences. So far, as Tucker's boss, Governor Mervyn King, spelt out in his letter to the Treasury Select Committee yesterday, the response has been: you took the risk, you bear the consequences.
This is surely the right policy, even if not all the pain falls on those who've made the gains. After all, those now in distress can't say they weren't warned. Time after time, Bank officials have made speeches about the pricing of risk, but nobody took any notice. Well, they're noticing now. Tucker may be short of troops to back him up, but he should stick to his guns. If he wins this battle, he'll be a stone-cold cert for the top job when Merv swerves off to Dungovernin.
MICHAEL TRIES TO MAKE THE GRADE -- AGAIN: Michael Grade wants to introduce "fresher, better, higher-quality programmes" to ITV, the station he now runs. Gosh, who'd have thought it? I don't remember his predecessor, Sir Peter Burt, saying he wanted to introduce staler, worse and poorer-quality programmes when he took the job.
That's what he'd said in an earlier post, as chief executive of Bank of Scotland, when his ambition was to make banking dull. He failed miserably by bidding for NatWest, missing a bargain only because his Edinburgh neighbours had deeper pockets.
Every new TV executive, newspaper editor, magazine buyer or movie-maker has to repeat this meaningless mantra. History, and especially Grade's own history in the private sector, suggests it's much easier said than done. How about a fresher, better, higher-quality chief executive, for a start?
To see more of the Evening Standard, or to subscribe to the newspaper, go to http://www.thisislondon.co.uk. Copyright (c) 2007, Evening Standard, London Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
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