Monday, September 13, 2010

Three Years ago Today: "Bank of England to bail out Northern Rock"

The news in August 2007 had been bad, with Goldman CFO Viniar babbling about 25-standard deviaton events.
The fall of Northern Rock was enough to tell anyone paying attention that something very bad was coming. The market went on to set it's all-time high on October 9, seemignly oblivious to what was happening in the credit markets.

Although the BBC's Robert Peston got the scoop, FT Alphaville bulldogged the story.
From the BBC:
21:03 GMT (22:03 UK)
Northern Rock gets bank bail out
I just happened to be in the office the evening of the 13th and apparently one of the FT Alphaville staffers happened to be  at their office at 23:22 British Summer Time!
Here's the post, the first of many:
As a follow-up to the post immediately below.
Talk about a dynamic situation. Whatever happened to 3-6-3 banking?

From FT Alphaville:
All Chauffeur Alert! Bank of England Court convenes
It’s not the sort of invitation you’d turn down: 9.30 pm, Threadneedle Street, don’t be late. FT Alphaville understands that the governor, Mervyn King, his two deputies and the 16 non-executive members of the Bank of England’s Court of Directors convened on Thursday evening.
Needless to say, this will have been quite a confab, attendees ranging from Arun Sarin of Vodafone to Sir Callum McCarthy of the FSA, along with the in-house Bank team and the rest of the gang.
Top of the agenda, of course, was Northern Rock - known by another name to regular readers of Markets Live. News that the mortgage bank has had to seek emergency funding from its lender of last resort was broken by the BBC’s Robert Peston earlier in the evening.
But an All Chauffeur Alert? At 9.30? On a Thursday evening? Surely this must point to something more toxic - or at least something big and bad that we have yet to learn about. Rock is not a shock. The mortgage bank has been looking dangerously brittle for weeks, and when a share price falls by 3/4/5 per cent each and every day, people do tend to talk…
We are assured, however, that Rock is as far as it goes. For now.
The convening of the Council was a technical matter, required to sanction the launch of what is effectively a lifeboat.
Whether the threat of a run on Rock, and perhaps other overly ambitious mortgage lenders with synthetic balance sheets, will be treated as something technical remains to be seen.
So if you see one of these
Put it on.
Buy it.
The price of tin hats is going up
And from the Financial Times itself:
The Bank of England will on Friday throw a lifeline to Northern Rock by providing emergency funding to the beleaguered mortgage lender that has fallen victim to the liquidity squeeze in the banking sector.
In an unprecedented move, the Bank, working with the Financial Services Authority and the Treasury, will step in to bail out Northern Rock by providing it with a short-term credit line that will allow it to carry on operating.
The rescue, which has been approved by the Chancellor of the Exchequer, is the most dramatic illustration to date of how the British banking sector is being hit by the wave of turmoil that has paralysed the money markets....MORE at the FT.
On Friday the 14th it was a run on the bank:
Northern Rock: Customers line up to withdraw funds
The morning of Saturday the 15th:
Northern Rock (LON: NRK) Updates
When I read that The City's Stockbrokers and Fund Managers were queuing up to withdraw their deposits, well, it gets your attention....
I was so tired I degenerated to New York Post style headlines:
Rock, Paper, Scissored
Merrill Lynch came out with a buy rec. and a price target of 913 pence. Alphaville commented "We like a ballsy call, here on FT Alphaville, but what's this?
What's a Rock Worth? Lon: NRK; This Could be Awkward
More Post style headlines:
Panic on the streets of Britain: Northern rocked, City shocked 
On Sunday it just got silly:

Northern Rock=Quote of the Day
...The disclosure of the Bank loan was not what we wanted,' he [Applegarth] said.
'The weight of coverage has been absolutely intense and, of course,
it has damaged our brand.'...
-From ThisIsMoney
But, of course.
The media coverage has damaged the brand.
Somewhere along the way [it would have been September 15th, wouldn't it -ed] I just lost it:and posted:
Screw Northern Rock, It's Battle of Britain Day

Followed the next day by the story of the first Barings Bank failure in 1890 [just to cheer people up? -ed]
 All in all an interesting few days.
As part of our December 31, 2008 year-end wrap-up I posted (channeling Defoe's 1722 classic):
Journal of a Plague Year: Faith in Markets Cracks Under [$30 Trillion] Losses
In August 2007 subprime took over the headlines but the equities markets didn't seem to understand and moved higher, with the DJIA setting it's 14,164.53 all-time high on October 9.
On Thursday September 13, 2007 I realized something had changed. The BBC's Robert Peston reported that Northern Rock was seeking emergency funding, the Financial Times relayed the "All Chauffeur Alert" that the limos were pulling into the Bank of England for a 9:30 p.m. meeting.
Depositors started lining up outside of NRK branches and I started putting up linkposts. When
Bear Stearns collapsed in March '08, I said:
A quick word of explanation. During the run on Northern Rock we were thinking of the depositors and how awful the uncertainty must be. There were very few bloggers onto the situation and even the financial journalists didn't seem to grasp how anachronistic a bank run was in the 21st century, at least that first weekend.
So we went out and got what we considered to be reliable sources we could link to and a thousand people got pointed to sites that weren't talking rubbish....
Here's the headline story, from Bloomberg:
It has been a year of record misery: the largest bankruptcy, bank failure and Ponzi scheme in U.S. history; $720 billion in writedowns and losses by financial institutions; $30.1 trillion in market valuation wiped out....

...“We had what was for all intents and purposes a systemic bank run for the first time in 70 years,” said DeRosa, whose fund is up 25 percent this year. “This ended our belief that financial panics were a thing of the past. That’s why this is a transcendent event.” The price tag has been transcendent, too. Global stock markets lost about half of their value in 2008, or $30.1 trillion dollars. In the U.S., $7.2 trillion of shareholder value was wiped off the books, as the Standard & Poor’s 500 Index fell 39 percent through Dec. 30 and the Nasdaq Composite Index dropped 42 percent...MORE
In September of this year, in the days leading up to the failure of Washington Mutual, I started quoting a line from "It's a Wonderful Life":
"Don't look now but there's something funny going on over there at the bank, George..."
Here's a clip: