With Northern Rock shares falling like a stone (so much for Alistair Darling's reassurances yesterday), it seems a second mortgage lender is also on the skids. Paragon, Britain's third biggest buy to let mortgage lender has seen its shares dip from 250p to 111p in the last 24 hours after it disclosed that it would not pay a dividend until it had secured a refinancing agreement.
I am not an economist and won't dream of trying to assess the wider economic implications of this, but politically it could be devastating if Northern Rock and Paragon are but the first of several. Can the Bank of England really come to the rescue of them all?
36 comments:
it is quite likeley that there will be further casualties beyond NR.
Perhaps now it could be worse as the Government is not going to step in to save them all.
The credit crunch has worsened again this week and the finance companies with the weakest balance sheets are in trouble.
It is though not the end of the world if people lose money in business; NR was rescued to save the depositors and Paragon is not in the same category with billions of voters saving's at stake in key Labour heartlands....
In the sub prime industry all the lenders are already tightening their lending criteria, I really suspect that this could be the tip of the iceberg.
Picture Loans has already pulled out of the sub prime broker market. Nemo has been struggling for a while and were counting on an upturn in business from the gap left by Picture.
Now Paragon, who are the first choice lender for several of the large brokers, looks like they're on the ropes as well. Dark days ahead!
Buy to let specialist? You are not trying to confuse us between a retail mortgage lender - which also holds many people's savings and through demutualisation has lots of small investors - and a backer of landlords are you Iain?
The whole buy to let needs a big stick taken to it. It damages the first time buyer market. It creates house price inflation. Many of its perpetrators don't look after their properties properly. Although they are businesses they don't pay business rates and they certainly don't pay council tax and I'm told on income tax and VAT there is a high level of evasion.
Paragon may be a wonderful company. I don't know. But this is not comparable with Northern Rock now is it?
It has been shown that with a bit of thought by the Treasury and Bank of England, Northern Rock was avoidable.
Now that public money is being pledged like confetti to underwrite failures, different precendents are being set that put the burden of mis-management on the taxpayer.
The BofE cannot sustain the sort of pressure the government's recent action will invite.
Labour is learnig again that it cannot control the market. They bankrupted the country in the 60s and had to go to the IMF to bail them out. The sooner they are out of office the better and bring back the Tories to sort it out as Mrs Thatcher did last time after the Labour mess. Some of you younger people will not remember the 60s as I do. But as now Labour is incapable of running anything in the long term. The mis manage and spend to much.
If the housing market does collapse then Conservative negative equity will return.
Britain has been running on the hope of debt and lending throughout the rise of China and the Global economy.
Gordon Brown is considered a genius everywhere for his steady hand on the tiller.
This is out of his hands (almost) but if there is a crash in the USA, then it will come here and then what?
Who wants loans and who needs loans to survive.
My guess it is the people that feed us in many ways right at the beginning of the chain and in every department.
Mervyn King is surely being instructed (instructed) to slash and burn interest rates to put money back into people's pockets.
This is horendous and I blame the Conservative of 1979-1997.
Gary
It's actually not the Bank of England which is bailing out Northern Crock - it's our cash which is being spent on these crooks. The BoE should have been allowed to let NR collapse - it has anyway. The situation now is that the taxpayer is picking up the tab for a select few who have all departed the table. This is going to cost you and me a hell of a lot more yet. £40bn and rising.
All this bollocks about 'no one could have predicted....'. Analysts and commenters in America and elsewhere were predicting exactly this scenario two and three years ago. There's none so blind and deaf as those who choose not to see and hear. Darling's just the whipping boy - but he's well enough paid to do the job so he doesn't have my sympathy. After all, he could always have refused the job.
Chris Paul and Gary Elsby, your comments, as usual, are beyond parody.
Elsby & Paul really are an amazing music hall duo aren't they? I bet their theme tune is "Hold my hand, I'm a stranger in parody..."
Word ver: lympgit...!!!
Iain, for Chris Paul and Gary Elsby's delight, shouldn't we have one of your famous lists on the subject of:
'Tragedies that were all Mrs Thatcher's fault'
Could I start off with:
The Great Fire of London
Culloden
The Cholera Epidemic of 1850
The Black Hole of Calcutta
The Fall of the House of Usher.....
Funniest comment I've seen in years - Gary Elsby at 10:51 accuses the Conservatives 1979-1997 of being responsible for current governments unravelling economy!
I'd look bit closer to home if I were you matey. The fingers of blame can all be pointed fairly and squarely at the previous occupant of Number 11 and his merry band of squabbling mongrels.
'Not Flush? Blame Gordon'
The sky is black with chickens...
Judith you forgot the obvious. The birth of Christ!
Those two just cannot believe in Christmas. I believe their patron Saint is Scrooge! Baa Humbug
It sounds as though the 'sub-prime' chickens may be coming home to roost. We've all got so used to relatively low interest rates that it takes some effort to recall days in the '80s and '90s when it wasn't always so.
Sub-prime lending, almost by definition, involves lending to people who are at the margin of affordability or, at best, will struggle to make the payments.In the past, rising property prices have masked this effect. The borrowers depend on low interest rates, particularly 'starter' mortgages, and on refinancing frequently to take advantage of the increase in equity that rising prices produces; and any movement in the interest rate, unexpected bills, changes in circumstances etc has a greater effect on their loans than on 'prime' loans.
Thus the five interest rate rises recently will have seen a greater incidence of arrears leading to repossessions, thus depleting the quality of sub-prime lenders' mortgage books. Thus the sub-prime lenders themselves find it harder to finance their lending.
It's a salutary lesson - sophisticated 'financial engineering' can often mask crucial product defects - such as the 'balloon' mortgaes in the US where an enticing introductory interest rate 'balloons' after two years and suddenly the affordable becomes unaffordable. The same is true of credit cards with 'introductory interest free' credit periods - suckers get the cards, max out their borrowing, then default when the (ruinous) interest kicks in after the interest-free period expires. Suddenly its harder to get a credit card than it was three months ago.
A bucket of cold water is being thrown over the credit industry at the moment: trouble is, it's the wrong people who are getting drowned in the icy torrent.
The question should be why should any of them be saved ?
Have we learnt nothing from the 1970s ?
The savings of depositors at Northern Rock would have been a problem, and maybe government aid should have been provided to help to some degree.
But why should Banks be the only businesses not allowed to go bust ?
Chuck Unsworth said...
"This is going to cost you and me a hell of a lot more yet. £40bn and rising."
It hasn't cost us anything yet. Northern Rock is paying the market interest rate for the £24bn in loans from the Bank of England.
No.
Paragon is not a bank, therefore cannot endure a run. It has short term financing in place (till february) and medium term has secured an agreement for a fully underwritten rights issue, which means one bank (UBS) at least has faith in them. Long term, the securitisation market has not shut down.
If the banking environment improves in the next couple of months, then they will not need the righs issue. If it doesn't this provides leveage to get a better deal than the 6% over libor warehouse currently on offer.
Worst case scenario, the book is put into runoff, not being a bank, this is easier than for NRK.
Simple questions: Does Paragon buy opinion polls from Gordon's favorite polling organisation? Does Paragon make "charitable donations" to Gordon's favorite think tank? Does Paragon have Gordon's favorite banker on the Board?
No? Then the BOE will let them fry.
I blame the Conservatives (and I'm pretty sure we ALL know who killed cock robin, as well).
Anon 11:47
One can see that you must be a victim of a State education system. I know how difficult it can be to recognise the future tense in a sentence, or even understand the concept, but no doubt your remedial literacy lessons are going well.
What concerns me is not so much the stated loan figures (which, incidentally, do not tell the whole story by any means) but the date for final repayment with full commercial interest. Any ideas? Maybe the gifted Mr Darling can help here. Then again....
For Heavens Sake our Gary is just winding you up. He does not believe what he says but gets pleasure from the gullible taking him seriously.
You dont need to be an economist to work out that a credit crunch=recession. Taxes and borrowing will have to rise to meet Brown's profligate expansion of the non productive state sector. He will be remembered as the worst (and most overated Chancellor) in living memory. Our benefits junkie, Gazza and his mates in Stoke will have to get used to a reduction in state handouts as our finances go belly up.
Nice one Gordon.
Iain
You say Chris Paul's comment is "beyond parody". Why on earth can some-one not hold a view that a buy-to-let mortgage company is different from Northern Rock? You might think there's a similarity - they are both suffering from a shortage of source funding - and I'd agree, but Chris Paul's view, presumably, is that the Northern Rock stakeholders deserve to be spared more than do Paragon's. Hardly "beyond parody"!
I can understand why Mr Darling has made such a mess .. and GB before him.
The Labour posters on here show that their grasp of economics and facts are not even rudimentary... and I assume they ape their leaders whom they are trying to protect. :-)
If they realised what a bad job they were doing, they would stop now.
A little education is a dangerous thing in their hands...time to go back to primary school.
Chuck - it was the word "yet" which leads one to believe you were suggesting it had already "cost us". If your parents paid fees, they wasted them. You certainly don't come across as a scholarship boy.
Madasafish
Now THAT was beyond parody!
Anon 12:31
Are you just possibly the same Anon? Who can tell?
In any event, a visit to the OED might help you in understanding my comment. Then again.... However, I'm not in the business of bandying semantics about with nameless trolls.
As to scholarship - or indeed school fees - yes, you're probably right. I always felt that I had a pretty good case for suing for the return of my family's cash.
But at least I have a name.
"Can the Bank of England really come to the rescue of them all?"
No & the only good thing about the Northern Rock debacle is that it is clear Brown's first instinct not to get involved, was right.
Bamkruptcy is the ultimate negative feedback, the "winds of creative destruction", which makes free enterprise better than monopoly capitalism.
Japan, then the world's fastest growing economy, came to a juddering halt, not because a property collapse made most of their banks bankrupt but because their government threw away all other economic calculations to prop these banks up.
Oh, Iain!
It really was a joke you know.
How many times have we heard that Labour had handed to it on a plate the wonderful economy of Major's Government.
And Labour is squandering it!
Anti European Tories did for Thatcher and did it for Major and are doing it for Dave. In all of that the Tories tried to run a Country even though the 'bastards'(as John called them) wanted death.
Gordon Brown is somehow being blamed for a Global credit crunch.
No chance!
Globalisation is something that the Tories have never had to handle and probably never will, so best leave it to the professionals who know what is best all round.
Worst case scenario is negative equity/rising unemployment/credit restrictions.
Think back to your failure, Nigel Lawson ("Let history judge me")
Free flow of money/inflated economy(therefore higher inflation)easy credit/easy mortgage/high employment.
Wow!
Iain, it was Nigel that killed the Tory Party, not John Major.
Gary
Judith, you may mock me but I can prove without a shadow of any doubt, that the person who crucified Jesus was in fact a fully paid up member of the Conservative Party.
Shame on you all.
Or Barclays, or Alliance and Leicester, or HSBC .....
Paragon is a specialist mortgage lender, not a bank. If it fails, it won't be 'propped up' as there is no risk of depositors losing their money (because it doesn't hav any).
And by the way, whatever you think about the credit crunch - it's not Brown's fault. The crunch has been caused by sloppy lending in the US; and UK interest rates are set by the independent Bank of England to tackle inflation, not to prop up inflated property prices.
Neither of these factors are under Brown's control.
Gordon Brown said that Boom & Bust was no more but that was when je was Chancellor of the Exchequer.
hitchenophile
True that bank contagion has its origins in the US. Too many $ in the system following massive increase in petrodollars. In the 70's these surplus $ were lent to SAmerican Govts mostly never to be rapaid. Another event in the credit expansion cycle.
Brown's involvement is this. He transferred interest rate decisions to BoE and as quid pro quo relieved the Bank of its regulatory function and transferred to FSA singularly ill equipped for this complex task.
Brown's problem is that he can work out things in theory but never having worked in The City or in commerce, he does not have the experience to understand the consequences of his actions. This benefits fiasco via tax credits is another example. He is a menace.
chucked my job in one of these banks about 12 months ago on the basis they were heading for disaster. It was all lies and self-deception. $4bn worth of trades that were never confirmed. I made the joke at the time if we kept on the way we did we should all check out how we would look in orange(jump suits). I left.
Unfortunately I suspect this is not a unusual position.
but seriously - there is an enormous problem with banks not taking seriously their control functions - one of the banks who have just written off $4bn had the attitude
- well lets try this "Errmmm you have CDO $4bn of trades in the US which have never been signed off by your control function?".
Answer: "errr well you know thats the way things are."
Question: "Indeed. What if it all goes pear shaped?"
Answer: "Give me a break."
That is what actually happened with one of the banks that recently wrote off several billion.
Gary Elsby said...
"Gordon can't be held responsible for the global credit crunch"
except
1. He presided over the biggest credit boom the UK has seen in history.
2. HE designed the tripartite banking regulation regime with his "genius" stroke of B of E independence. Northern Rock fell between the three stalls of HIS system.
Tone made me do it:
Do what, exactly?
It is true that Gordon has run this Country on slack lending.
Further truth is observed that cheap Chinese goods flowing into the UK (and high quality, I must say) has curbed wage inflation.
To further this aim, enter Stanislav the plumber and his many free moving cousins.
Racists(BNP/back bench Tories) hate Europe for this act of kindness.
It is very true that this is one giant eleastic band that could snap at any moment.
The absolute truth is that George Osborne(as seen on New Labour policies crimewatch BBC 9pm) has nothing in his bag to counter any threat to this economy.
In other words, it isn't only a bank that is busted.The Tories are morally busted by semi retarded racism. I know you won't accept it but take a closer look at any proposal that the current (temporary) louts put out.
Gary
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