Posted on 09/14/2007 4:04:03 AM PDT by shrinkermd
In one of the highest-profile instances of a central bank coming directly to the rescue of a commercial bank in the current credit crisis, the Bank of England agreed to provide emergency funding to Northern Rock PLC, the United Kingdom's fourth-largest mortgage lender.
Northern Rock shares plunged at the opening of the trading session, falling 21% after the lender confirmed it will get a short-term credit line to offset a "severe liquidity squeeze" that cut off its access to capital. (See related article.)
If current conditions persist through year-end, "there will clearly be an impact on Northern Rock's 2007 asset growth and, therefore, on profits," the Newcastle, England-based bank said in a statement. Pretax earnings will be between £500 million ($1.02 billion) and £540 million, missing analysts' estimates of £647 million.
The Bank of England's move -- the first time it has acted as a lender of last resort in this way since gaining independence on interest-rate policy in 1997 -- comes two days after its governor, Mervyn King, condemned some of the liquidity-providing measures other central banks have taken in the last month as needlessly encouraging risk-taking. In written testimony to the U.K. Parliament's Treasury Committee, Mr. King said the bank stood ready to take action in case of a severe shock to the banking system, but also warned that "if risk continues to be underpriced, the next period of turmoil will be on an even bigger scale."
A three-way statement from the U.K. Treasury and the Financial Services Authority Friday, though, included a reference to the Bank of England's role as a lender of last resort, saying "the moral hazard of an increase in risk-taking resulting from the provision of [lender of last resortlending] is reduced by making liquidity available only at a penalty rate."
(Excerpt) Read more at online.wsj.com ...
The market just had two big up days.
This is stated to be an exceptional measure, which only needs to be short-term. If it spreads, then the Bank of England cannot bail everyone out, and it becomes very serious.
The market is merely going through an overdue correction and the weak players are being weeded out (as it should be).
In the end the free market should prevail - businesses that made risky/foolish loans to people who couldn’t afford them (subprime borrowers) should suffer the consequences of their actions without government intervention and cash injections.
Created from thin air, to be paid back by taxpayers with interest.
Or bailed out with taxpayers funds, as the case may be.
Rival banks were handing out fliers to anxious Northern Rock customers today as they queued on the street outside some branches to withdraw money.Northern Rock, which has confirmed it has received emergency funding from the Bank of England, has stressed that investors' money is safe and Downing Street said the Financial Services Authority had judged the bank was solvent.
But some customers were concerned at the bank's future and were withdrawing funds online and at branches, particularly in the north, where the majority of Northern Rock's customers are based.
Central Bankers have all the answers, right? Trying a little currency manipulation is a good thing for economy, right? No big deal. It's only green paper, right?
Lenders loan out all of their money in their mortgage departments each month. To get new money to make new loans, they bundle their old loan notes from last month, get them rated by an Agency, get them insured (called "wrapping") as a package, and then they sell those bundles of notes on the Secondary market (traditionally to conservative pension funds and insurance companies, but lately to agressive hedge funds and foreign Buyers who are flush with Dollars from their trade surplusses).
So every month you loan out all of your money, then you get new money from the Secondary market by selling all of those loans that you made last month...which gives you the money to make new loans this month.
The kink in the liquidity hose, however, occurs when the Buyers in the Secondary market "go on strike."
When you are unable to sell your loans from last month, you suddenly find yourself unable to make the new loans this month that you've signed yourself up to close.
Immediately the problem with hedge funds going under and foreign Buyers cutting off their spending becomes *your* problem.
So you've got to come up with your own cash...in a hurry...to meet your commitments. You could have been profitable up until today, yet suddenly find yourself unable to produce the funds required to meet all of the loan closings that you've contracted yourself to over the course of the month.
So here you are profitable up until today, yet insolvent!
(this is of course an oversimplification, but the core concept holds true)
I checked my credit union is well capitalized and my accounts are insured. Just in case.
Quick, excise the wound, hit it with hydrogen peroxide, iodine, and sulfa; sew it up, patch it over, and put the patient on anti-biotics.
< / short crash>
Perhaps one of the dumbest things in the world is a central bank taking orders from politicos. Right behind Wall Street selling mortgages over and over again hidden beneath piles of paper with fake A+ ratings.
Yep, but wha tis dumber is the fed listening to Wall Street on lowering rates.
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