Friday, 2 November 2007
Problems for the Bank
We have done a few posts here on the Northern Rock (NR) Crisis and this is yet another.
However, I have been thinking a little today about the future. Currently NR is set to be funded to unlimited amounts by the Bank of England (BoE) for until February. Currently some estimates are that the BoE has put up £23 billion fund NR.
This money may have to come straight from the printing presses; I am going to keep a firm eye on the money supply figures.
This could have a detrimental effect (in a small way) in trying to keep the inflation rate down. As money supply continues to be pushed at a very high level, inflation is an inevitable side effect.
With the Economy in the state that it is, i.e. heading south, this is a very uncomfortable position.
In addition, the BoE needs to find a new owner for NR. Currently, JC Flowers is working on a buyout and so are Virgin Money. But what will they pay? JC Flowers' consortium is in trouble after GMAC fell to heavy losses on sub-prime woe this week.
There are the shareholders to consider and NR is still valued at just over £750 million. Then there are the debts; the BoE £23 billion needs re-financing in a difficult market. Plus who knows what collateral the BoE has accepted? It had no choice after the Government enforced nationalisation.
I see little incentive for the prospective buyers to offer anything to the shareholders or to want to repay the BoE at full cost. Why should they? They know the Bank can't hold on forever to NR. They can more or less force the BoE to take a huge hit on the interest payments in return for taking the problem off our hands.
Ouch...this is of course taxpayer money in the end.
A sorry situation.
Posted by CityUnslicker