Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20
AMD is KILLING Intel as Ryzen Zen 3 Takes Gaming Crown, AMD Set to Achieve CPU Market Dominance - 13th Oct 20
Amazon Prime Day Real or Fake Sales to Get Rid of Dead Stock? - 13th Oct 20
Stock Market Short-term Top Expected - 13th Oct 20
Fun Stuff to Do with a Budgie or Parakeet, a Child's Best Pet Bird Friend - 13th Oct 20
Who Will Win the Race to Open a Casino in Japan? - 13th Oct 20
Fear Grips Stock Market Short-Sellers -- What to Make of It - 12th Oct 20
For Some Remote Workers, It Pays to Stay Home… If Home Stays Local - 12th Oct 20
A Big Move In Silver: Watch The Currency Markets - 12th Oct 20
Precious Metals and Commodities Comprehensive - 11th Oct 20
The Election Does Not Matter, Stick With Stock Winners Like Clean Energy - 11th Oct 20
Gold Stocks Are Cheap, But Not for Long - 11th Oct 20
Gold Miners Ready to Fall Further - 10th Oct 29
What Happens When the Stumble-Through Economy Stalls - 10th Oct 29
This Is What The Stock Market Is Saying About Trump’s Re-Election - 10th Oct 29
Here Is Everything You Must Know About Insolvency - 10th Oct 29
Sheffield Coronavirus Warning - UK Heading for Higher Covid-19 Infections than April Peak! - 10th Oct 29
Q2 Was Disastrous. But What’s Next for the US Economy – and Gold? - 9th Oct 20
Q4 Market Forecast: How to Invest in a World Awash in Debt - 9th Oct 20
A complete paradigm shift will make gold the generational trade - 9th Oct 20
Why You Should Look for Stocks Climbing Out of a “Big Base” - 9th Oct 20
UK Coronavirus Pandemic Wave 2 - Daily Covid-19 Positive Test Cases Forecast - 9th Oct 20
Ryzen ZEN 3: The Final Nail in Intel's Coffin! Cinebench Scores 5300x, 5600x, 5800x, 5900x 5950x - 9th Oct 20
How Soon Will We See Stock Market SPX 4000? - 8th Oct 20
Stock Market Spy ETF Testing March Price Peak – What Do the Charts Say? - 8th Oct 20
5 Consequences of US Debt at $50 Trillion - 8th Oct 20
Long Term Cycles Suggest Stock Price Reversion Pending & Gold Price About To Explode High - 8th Oct 20
AMD Zen 3 Ryzen 5000 Launch - Performance, Prices Skews, Cinebench r20 Scores, 5800x, 5900x, 5950x - 8th Oct 20
Gold vs. Silver – Absolutely No Comparison - 8th Oct 20
Gold: Why You Should Be Wary of the "Consensus" - 8th Oct 20
UK Covid-19 Hospital Admissions and Deaths Since Testing Positive in 28 days Analysis - 7th Oct 20
Amazon Prime Day 2020 Sales Top Tips of How To Get Big Savings! - 7th Oct 20
Want To Win Big In Forex Trading? Leverage Is Your Friend - 7th Oct 20
Why I am Voting for Donald J. Hitler - 6th Oct 20
Markets Chop & Grind: Gold, Stocks & Commodities - 6th Oct 20
Silver Price Great Buy Spot Ahead of Second Big Upleg - 6th Oct 20
Forget RTX 3080 Get Zen 3 Ryzen 5900x / 5950x - GPU vs CPU - PC Bottlenecking - 6th Oct 20
How to Get Budgies / Parakeets to Eat Vegetables for the First Time - 6th Oct 20
How to Pick a Reputable Double Glazing Window Company - 6th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Northern Rock vs. Gold

Commodities / Gold and Silver 2012 Sep 06, 2012 - 02:45 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleFive years on, what does the Northern Rock crisis mean for gold investing...?

EARLY ON the morning of Friday, 14 September 2007, nervous savers formed queues outside several branches of Northern Rock – the former building society then writing 1-in-5 of all new UK mortgages.


Waiting patiently to withdraw their money, the Rock's customers were spooked by news that the bank had taken an emergency loan from the Bank of England, the UK central bank. And once they'd got their cash, at least a few began gold investing. Here at BullionVault, for instance, September 2007 brought more new UK users than the previous 3 months combined.

How did these new gold investors get on? Certainly better than those "contrarians" tempted to back Northern Rock as it fell over. Those who bought and held gold have since made over 200% gains on average. Which outside buying silver, is better than any other asset class over the last 5 years. (Silver's paid 26.7% net of costs.) Northern Rock shares, in contrast, went to zero. Just like gold never does.

By the time TV news carried shots of the queues that Friday lunchtime in fact, shares in the Northern Rock mortgage lender had already dropped 25% for the day – and NRK stood nearly 60% lower from its high of February. Because the Bank of England hadn't acted as "lender of last resort" since 1973, when the collapse of Cedar Holdings – a pioneer of second mortgages to UK home-owners – threatened a crisis in the country's banking industry. The UK hadn't seen a banking run, with people queuing up to withdraw their money, since the collapse of Overend, Gurney & Co. in 1866.

Yes, the turmoil in world credit markets starting June 2007 had hit Northern Rock hard. But it had in truth run head-first into the crisis, making a dash for growth actually known, according to ex-employees from the Rock's Tyneside HQ, as the "Great Leap Forward" when it was introduced in 2004. Instead of Mao's Little Red Book, staff were issued with motivational booklets to peel off and stick to their PC monitors. "Do it now!" urged one motto apparently handed to the mortgage approvals team. Which would be a great way to maintain lending standards.

Externally, the Rock strived to top the newspapers' Best Buy tables for mortgages and loans. Internally, it pushed quarterly targets for new lending. So-called "self cert" mortgages in particular – where the borrower's income wasn't verified – had managers wincing. And to fund all this fun, despite also striving to be Best Buy for savers, the Rock was selling its mortgages onto investors and borrowing from the money markets, rather than waiting for new depositors' money to lend out instead.

So, where net inflows from savers were £1.7bn in the first-half of 2007, wholesale markets lent the Rock £2.0bn. On the other side of the ledger, and with the magic of securitization taking £10.7bn of mortgages off its hands in Jan. to July, that meant it could grow its new loan book by 43% compared with the same period of 2006. So what politicians, economists and analysts both then and since called "excessive risk" wasn't a risk at all. It was nailed on. Northern Rock was the bleeding edge of the financial crisis, even though only 0.24% of its assets were exposed to subprime US housing debt (where the air was already seeping out of the credit bubble).

The first to go, you might imagine the Rock had therefore been the most reckless. Yet incredibly, its creditors were rescued immediately by taxpayer funds. That set the template for the last 5 years, helping the crisis move on from swallowing banks to devouring sovereign governments whole. "Northern Rock is not a reckless lender," Angela Knight, head of the British Bankers Association, claimed on BBC Radio 4 the day the run on the Rock began. Urging the bank's savers not to withdraw their money in panic, "the mortgage lending it does well and it does in a high quality, high calibre way," she added. Knight was in good company, withnational UK newspapers urging their readers to buy Northern Rock's shares throughout the summer of 2007, even as the plumbing of wholesale money markets gurgled and gulped air.

The smartest hedge-fund managers couldn't get enough of it either. Nor could politicians. The UK's then-new chancellor, Alistair Darling, had his mortgage with the Rock. So too all too-many of the bank's 6,300 staff. Indeed, what one ex-member of staff calls "the cult" sought to care for all its employees needs. People had their home-loans, bank accounts, pension savings (via the share-saver scheme) and even gym membership with the firm. North-east England's biggest private-sector employer (a spot since taken by Greggs, the pie shop), it sponsored Newcastle United FC. It sponsored the arts. In 2005 and 2006, it gave more to charity than all but one of the UK's other largest 100 companies.

Roll further back, in fact, and Northern Rock's rise, rise and fall is all too emblematic of the UK and broader financial sector's fortunes. The Northern Counties buillding society first met in 1850, with the boring, unprofitable aim of matching deposits with loans. The Rock was founded 15 years later, but it wasn't until 1965 that they actually got together. Boredom continued. But come the UK housing crash of the early 1990s, the merged building society – "at the invitation of the Building Societies Commission," according to Building the Northern Rock by Stephen Aris (a former Times journalist), published in 2000 – mounted a rescue of the stricken Lancastrian Building Society, a competitor which had in the Rock's internal view, "spent too much money in too short a time." Rather than trying to keep Lancastrian running, however, "shutting it down immediately and incorporating it into Northern Rock would bring substantial benefits," writes Aris. "The reserves were liquidated to pay off current losses: closing branches, eliminating the head office and getting rid of senior staff reduced costs; while the mortgage book added to Northern Rock's strength in the north-west.

"It was, in effect, a government-licensed asset stripping operation."

As the early 1990s crash wore on, Northern Rock expanded further by takeover, swallowing the Surrey in 1993 and North of England Building Society in 1994. And then – with the Rock and the other players still standing getting bigger through consolidation – came 1997. That shake-up of UK banking allowed building societies to float on the stock market, paying off their members (ie, customers, but now known as "carpet baggers") in return for voting "Yes" to the switch.

"I am going to take out the lot, every penny," said one Northern Rock saver to Bloomberg as he queued outside the bank's West End branch in London in September 2007. The ex-building society's customers had said pretty much the same thing a decade before, and any search for the source of the crisis has to look at late '90s deregulation – both in the US and UK, as well as Europe – as a catalyst.

Equity funding, plus access to wholesale capital markets worldwide, eventually led the Rock to call on that other source of bank-only cash – emergency loans from the Bank of England. Anyone choosing silver or gold investing then or now might well wonder who back-stops the lender of last resort. For now, the answer remains the printing press, and behind that remains default.

Those 200% gains might yet have further to run. But in a world where bank shares, mortgage bonds, houses, currencies and government bonds can and do go to zero, gold and silver's real value may have little to do with their nominal price.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules