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KidTechnical | Why are Northern Rock being bailed out? |
Banks & building societies skin us alive. Their charges have been proven illegal. If a small company was facing insolvency the Northern Rock & The Bank of England would be waving tar tar to the poor sods... so how come when the Northern Rock are facing insolvency the Bank of England bail them out with a big wedge of cash? What's that about! |
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Paul L
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"old know all" has the right idea. Instead of exclusively taking deposits from savers to fund the mortgage lending (a la old style building societies) Northern Rock has primarily borrowed money from the wholesale markets instead. Very simple principal, you borrow money at one rate and re-lend it at a higher one and live off the difference, and apparently fantastic business when the going is good.
The crisis in America is that banks have lent risky mortgages but then resold that risk to other banks (who've then resold it again and again) each with the promise of spreading the risk further and further and everyone will get rich eventually. Unfortunately what this has meant in practice is the banks now don't know who holds what risk or what that risk is actually worth so they are unwilling to lend money to one another as anyone of them could suddenly find they're holding the lion's share and go under (and therefore be unable to pay any loans back).
In Northern Rock's case this means they simply cannot borrow more money to fund new mortgages. They are *not* insolvent (they have more than enough money to cover the all the money they've borrowed and re-lent) they are having a problem with *liquidity* - a cash flow problem if you like.
This is a really important distinction that seems to have been lost in the media, it simply means that to continue the business model they have they need to find someone to borrow more money from (or a sudden influx of wealthy savers - not likely) so the Bank of England has agreed to lend them some until the normal markets sort themselves out.
It's vital to note that if Northern Rock couldn't get any money at all then they would simply be unable to offer any new mortgages. Only if they didn't borrow some cash AND continued to offer new mortgages then the savings people had placed with them would become in jeopardy.
Unfortunately the loss of confidence is a self-fulfilling prophecy, the more people withdraw the greater the imbalance between the money they hold compared with the borrowings they owe and eventually people will tip that balance to the point where it does become insolvent and those that are left will lose out. |
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Away With The Fairies
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Read what it says on any British notes (Sterling currency): "For the Governors and Companies of the Bank of England" and "Bank of England - I Promise to Pay the Bearer on Demand the Sum of ... £10, £20 whatever"
That's why - it's the duty of the Bank of England. |
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Charlie Babbage
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All the above are correct and, of course, it is politically expedient to do so! |
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Lia A
 |
Big banks = Many customers & shareholders.
Bailing banks out (specially the big ones) is part of the vicious circle of financial co-dependency... to "protect" customers, the bank and the system from turning to mush. |
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Jayne6385
 |
Because banks and building societies raise money on the money market- namely, the banks borrow from one another, then the interest rate they charge us is their profit after they pay them bank. The bank of England is the banker to the government, and also the 'lender of last resort.' Because of mistrust between the banks, and the situation in America and so on pushing up the money market borrowing rate, the Northern Rock had to ask the lender of last resort for money. However, people with savings accounts etc and not in danger. Money borrowing goes on all the time, the only difference this time is that they have borrowed from the bank of England, but it is mostly to do with the interbank offering rate |
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old know all
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Northern Rock are a retail bank. They borrow money from the wholesale market and lend it out again as mortgages. Because the mortgage business in America has gone badly wrong, the wholesale money markets have gone off the idea of mortgages in a big way causing Northern Rock cash flow problems. They haven't gone broke, but without help from the Bank of England, they'd have to start calling in people's mortgages. |
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loanshark
 |
Dabbling in the Sub-Prime Market has left a lot of people with a cold. The end spin off is Northern Rock.
Life for Banks and Building Societies should be simple, acquire money at a rate below what you lend it out at against security, ie property.
Playing around in the sub-prime market where they have little expertise means they are exposing themselves to much higher risks.
Prediction... the Government is not a benevolent institution, anything but, so they will lend Northern Rock money to bail them out and obviously want it back with interest. When the immediate rush has died down they will want their recompense, so, the mortgages that N.R. hold will be sold off to other lenders , the Govt. will be repaid and Northern Rock will fade into Antiquity. |
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Peter Bro
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Simply because Gordon Brown and his cronies have made a complete mess of the country's finances, encouraging people to borrow well beyond their means to repay. They have encouraged people to buy homes and take out mortgages far in excess of the amount they should borrow. Building societies and banks such as Northern Rock made more loans from money they, in turn, borrowed. from overseas, the US in particular. The US economy is not doing so well at the moment so they have stopped lending to people like Northern Rock. But the money is still needed so they had to go to the Government and beg for financial support. If the Government had not given a guarantee that they would pay savers if the bank went bust, the bank might have failed. And that would have made Gordon Brown even more unpopular than he is. The money he promises comes, of course, from the taxes we pay.
The only good thing to come out of this is to reveal to voters the mess that Blair, Brown and their Scottish mafia have created.
It also reveals the fact that neither Brown, nor any of his cabinet have ever held a real job. They have all worked as researchers, Trades Union secretaries and assistants to MPs and waited until they could be shoved into a nice safe seat. None has ever had to do a real job in the real world. |
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