Click here for link to complete article: http://www.agorafinancial.com/afrude/
Ouzilly, France | 17 September 2007
Joel Bowman, reporting from the Middle East…
When politicians urge you to remain calm, the rational man will realize there is but one reasonable option left— PANIC!
Last Friday politicians, regulators and representatives of Northern Rock (England’s fifth largest mortgage lender) sought to assure customers their savings in the beleaguered bank were safe. Shares of Northern Rock plummetted in Friday’s trading, down almost a third on news it had sought emergency funding from the Bank of England.
Spurred on by the subprime mess in the US, cheap credit has become increasingly scarce around the globe. The rate banks lend to each other in the UK, for example, currently rests a full percent above the base rate of 5.75% set by the Bank of England. The tightening has been particularly painful for Northern Rock as it relies heavily on the capital markets, rather than customer deposits, for its financing. During the first half of this year, 85% of the bank’s net funding came from the capital markets.
In short, the tide [[flood?: normxxx]] of EZ credit has receded, and Northern Rock is the first British bank to be caught swimming naked.
Chief Officer, Adam Applegarth, desperately tried to subdue panic in a written statement on the bank’s website. "Let me now reassure you," Mr. Applegarth began. "Your money is safe with us and if you want some, or all of it back, then you are perfectly entitled to it. Whilst you may have to wait a little longer than usual to receive it[!?!], you will get it..."
Customers duly took this as their cue to panic and raced to their nearest branch to withdraw funds. The Sunday Times estimates Northern Rock may see up to 12 billion pounds (USD$24 billion) march out the door. That’s about half of the bank’s existing deposits. Already over a billion pounds have been withdrawn.
The flailing lender has dropped squarely into acquisition range for larger banks, notably Barclays, HSBC, Lloyds TSB, Royal Bank of Scotland and French bank Credit Agricole. It has even been suggested that the Rock’s mortgage book be cut up and distributed among outside lenders.
While these other banks circle the lamed Northern Rock awaiting a cheap meal, customers are growing increasingly frantic. News pictures of lengthy queues will do little to calm them in the meantime.
For those Brits prone to serious bouts of anxiety, we recommend taking a seat before reading Bill Bonner’s column below…
Wall Street Credit Crisis Spreads to UK
Fantasy Island
By Bill Bonner
You thought the housing crisis was bad in the United States? Wait ’til you see what happens in Britain.
We thought some new top in conceit had been reached when we saw last week’s cover of Country Life magazine in London.
"Why everyone loves England," was the headline.
While the gentry’s rag exalts Britain’s geographic particularities,
- [ Normxxx Here: WRT tourism, of course ]
- [ Normxxx Here: "What, never? No, never!" "What, never? We-e-ell, hardly ever!" G&S, "H.M.S. Pinafore" ]
Today’s worldwide boom has been the greatest ever. Its leading industry is finance. And the financial capital of the world is right here in London.
Ben Bernanke explained the broad outlines of it in his speech in Berlin earlier this week. Over the last few years, he said, oil producers made more money than ever. So too, Asian exporters booked huge surpluses. They were all making so much money they didn’t know what to do with it, ending up with a "glut of savings."
Ben Bernanke modestly declined to mention it, but this wash of foreign savings was heartily pumped up by an extremely liquid and extremely abundant reserve currency— the dollar. Since Paul Volcker left the Fed, dollars have gushed into the world financial system like sewage into a Chinese lake. And, whenever the flow threatened to weaken, central bankers rushed to open the valves yet wider.
What to do with all this money? The stars lined up…the heavens smiled. And nowhere was the smile wider and more sincere than over Wall Street’s counterpart in Britain, the City. Many rich people moved to London to spend their fortunes. Others turned to London to help hold onto them. What better way to invest it than through London’s sleek financial intermediaries? What cooler way to separate a man from his money than with a good accent and an aloof, slightly contemptuous air?
The money flowed; Britain flourished, London flourished, the City flourished. But in Britain as in America, it was a strange, fantastical boom— fueled almost entirely by credit, the financial industry…and by foreign money. While the City slicker made his millions, the average Englishman got his own portion of ruinously good luck. His house went up 200% in the last 10 years…twice as fast as houses in America. And now the poor man is delusional; he thinks it will never end.
"'The City' generates so much wealth," he says.
But what the financial industry really generates is wealth for a few and debt for the many. And now, according to Grant Thornton, British debt has surpassed total GDP— a milestone. Most of the debt is in the housing sector, which has pushed up prices in Britain far higher than those in America, and made the U.K. even more vulnerable to a downturn. The ratio of housing prices to disposable income— a fairly stable figure in the United States— is a rollercoaster in Britain. Today, it is at its highest level ever…with the last major peak in ‘89. And Fitch estimates that U.K. house prices are 20% overvalued, and that Britain is one of the three most vulnerable to a house price crash/correction (after NZ and Denmark).
In America, the National Association of Home Builders says market conditions are the worst in 27 years. Its index of prospective buyers— a leading indicator— is at its lowest level ever. Housing has held up consumer spending and consumer spending has held up the economy. Owners "took out" equity (Mortgage Equity Withdrawal or MEW) in order to continue spending. (Real wages have actually gone down slightly since 2000). Figures are only available through the first quarter, but they show MEW dropping almost in half from a year previously. That represents an amount of money nearly equal to America’s entire GDP growth.
In America, the subprime borrower loses his house…and the whole economy sags along with housing prices.
In Britain, it is the Buy-to-Let speculator who threatens to bring down the price structure. He buys his houses— on credit of course— and counts on rental income to pay off the loans. But lenders are now wary…investors are timid…and rates are rising. The spread of three-month LIBOR (London Inter-Bank Offer Rate) over the UK base rate has leapt to a record high. Without fees for sticking bad credits on dim investors, the financiers’ bonuses are bound to fall and so will the availability of cheap finance. At the margin, the BTL investor is no better off than an American subprime borrower or leveraged hedge-fund hustler. He will have to sell into a declining market in order to stay solvent. Result: falling prices, less MEW, softening sales, rising defaults, failing economy.
A long string of good luck is hard to recover from. But when the Brits finally get over it, they’ll find that everyone won’t love England quite so much— not even the English themselves.
Joel’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century, and Empire of Debt: The Rise of an Epic Financial Crisis.
Normxxx
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