Northern Rock…remember them?
Yes, the company that seems to be especially good at losing/wasting lots of money.
Now our beloved Government is giving Northern Rock even more financial support after they had run up more losses totaling nearly £600 million in the first half of this year.
That’s on top of the £25 billion they owe the Treasury already.
In its first trading results since it was nationalised Northern Rock warned that the weakening economy has pushed more of its borrowers into arrears and said it would be "significantly loss-making" throughout 2008.
It’s no surprise though, considering they spent most of 2007 making losses…
In a further sign that the UK housing market is getting worse (oh really?), the bank said that 7,800 of you that are mortgage customers are now at least three months behind in your monthly payments. That is 1.2% of all of its borrowers, up from 0.38% a year ago. Also, Northern Rock have announced that 3,710 of you have already had your homes repossessed.
Worried about repossession? Read our 10 steps to lower your risk of repossession
The increase in mortgage defaulters means that Northern Rock's credit losses are greater than expected. Their pre-tax loss of £585.4 million is worse than analysts had expected, and will add to concerns that us taxpayers will end up paying for Northern Rock's failures yet again.
The only bit of good news in their announcement was that Northern Rock was ahead of schedule in repaying its huge Government loan. Having peaked at nearly £27 billion, the debt is now down to £17.5 billion; as more of you than expected moved your mortgage to another lender.
The worry is that as better quality borrowers depart, Northern Rock will be left with those of you who are trapped in negative equity and who cannot borrow elsewhere. It conceded today that the average quality of the Company's credit portfolio is deteriorating, as the "higher-quality end" remortgage elsewhere.
So, bearing all of this in mind, why has the Government put more money into Northern Rock?
A very good question!
Under banking rules, Northern Rock has to have a certain amount of money in its reserves so it can keep operating. It needs more capital and therefore the Government has agreed to swap more than £3 billion of loans for shares in the bank.
In a word, no. When the money was loaned to the bank it was secured against assets owned by Northern Rock. Therefore, as taxpayers we had some security that the money would be repaid. However, the Government now has no security for the money.
That’s deeply comforting isn’t it?
- Will the money be repaid?
Experts think it is very unlikely as Northern Rock will either have to be sold or refloated on the stock market and another investor will have to buy the Government’s shares.
- What is the Government’s plan for Northern Rock?
A Government plan…what’s that?
The bank is being dramatically reduced in size and mortgage customers are being urged to take their business elsewhere. However, fears are now growing that repossessions will continue to rise sharply as the bank’s remaining customers run into trouble.
- Does anyone have to approve the extra money?
The Government has to seek approval from the European Commission as technically it is state aid. If the Commission refuses to allow the Government to bail out Northern Rock it’s likely to go bankrupt.
So, despite being able to pay back nearly £10 billion of Treasury money, Northern Rock are still making massive losses. And yet again the Government is stepping in to bail them out.
But is this the right thing? Why not let us know in the comments?