Northern Rock

26th September 2007

Managing Director, Worldwide Financial Planning, Writes:

It would be hard not to have noticed the ‘minor’ blip in the last week or so with northern rock. It should serve as a reminder to us all how fragile a company can become if a business model has a gaping hole in it. It should also serve as a reminder to look at situations with foresight rather than hindsight.

On a flight from London six months ago, I sat next to a mergers and acquisitions expert who warned of the potential liquidity issues in the credit markets. “The minute banks stop trusting each other we have a problem”

You aren’t kidding.

Northern Rock’s situation isn’t isolated and a number of other lenders namely Alliance and Leicester, Paragon and Bradford and Bingley will clearly be under similar scrutiny.

Northern rock’s issue arose from its policy of borrowing and lending. Unlike most banks which take savers’ money and lend it back to borrowers, Northern rock borrows from other banks and institutions and then lends out to borrowers.

Concerned about the extent of bad credit in the UK, banks decided not to lend to each other temporarily. This is still not a problem. The Bank of England, FSA and the UK government have all stated that Northern Rock is solvent and fine. The bank of England agreed to support Northern rock, a support only offered to the most secure of organisations.

It didn’t stop the panic and the media machines put a large hole in 8% of savers’ confidence who queued early for the cash.

Alastair Darling moved to control the issue and said that all investor’s cash will be protected.

I expect most savers’ cash was fine in any event. The current protection scheme would protect 100% of the first £2,000 and 90% of the next £33,000. Whilst this has its limitations it would probably protect most people.

The FSA chief executive Hector Sants has admitted that the protection scheme needs improvement so we can expect to see some changes here to protect investments over £35,000.

In the meantime I would recommend all investors should not be exposed to more than £35,000 in any bank as the protection is limited per institution. Be careful not to expose yourself to a bank that is a subsidiary of another who you are with, as you will not be afforded the protection twice.

The media have been hot on the case with so called experts talking about this issue and also the housing market. An Independent ‘property expert’ (whatever that means) explained that the only way property will be affected is if we have high unemployment and soaring interest rates. They were backed up on the television by another so-called expert who said that it was a matter of supply and demand. What a load of twaddle!

Whilst supply and demand is an issue, sentiment alone is the biggest driver to the market. Once it turns, it’s too late. It’ll be a bit like trying to get off a greased slide halfway down. Hindsight comments like the above are unhelpful in planning.

In any event, public sector employment has been falling every single quarter since Q2 2005.(1) Repossessions are soaring and we have yet to see the fallout of the reason for the whole credit crisis – bad debt.

Once the current rate increases hit home, repossessions will soar higher still, thereby increasing supply. Demand has already been hit with completions at the land registry for May 2007 down 8.5% on May 2006.(2) The statistics for the last quarter aren’t out yet but reports are showing slower sales and demand.

The ‘property expert’ pointed to a sale in London of a house last week by her friend who bought at £1 million and there were four other interested parties! So what? This is where house prices can become distorted. Freak top end sales in London and other areas, when some are prepared to pay a premium, do not account for the market as a whole, and that selected journalism does nothing to help protect the consumer in a potential financial storm. 


If you have a financial query call Peter on        0845 230 9876               or email peter@wwfp.net


(1) http://www.statistics.gov.uk
(2) http://www.landregistry.gov.uk



Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.