Word on the street today is picking Northern Rock (LON:NRK) for a fall. Despite the UK government’s vote of confidence and the Bank of England’s quick assurances that they would step in with an emergency loan to help the bank, consumers are still rattled. Over the weekend huge lines were seen at numerous Northern Rock branches in a scene that looked like the Savings & Loan crisis from back in the US as consumers sucked out £9600 a second.
While it is unfortunate that some people fear for their deposits and actually feel like they need to put a run on the bank to get their cash, it probably isn’t necessary. Since the government has already said the seemingly insolvent bank is safe, I would seriously doubt the Darling clan would let it fall now.
But what is probably in the cards for Northern Rock is either that they will be acquired by another bank or be split up. It will be interesting to see what truths emerge from that process. Of most concern are the large number of unsecured loans that Northern Rock gives out and then claims they are secured on the borrowers home.
Insolvency Practitioners see this frequently when they approach Northern Rock on behalf of consumers that are having financial problems. The Northern Rock modus operandi is to suddenly claim the loan is secured and then go for a charging order against the property. So that makes me wonder how much of their loan book they are claiming is secured, when in fact it really isn’t.
And while the government is quick to stand behind Northern Rock and give it a vote of confidence, they need to remember that Northern Rock is also the bank that fails, time and time again, to honor the terms of the British Banking Code. This is yet another lingering liability that is slowly working its way towards the Financial Ombudsman. And with fees of £400 per occurrence levied by the Financial Ombudsman Service for each complaint, this could create a large bill for the future Northern Rock owner.
I suspect that the new owners of Northern Rock are going to find some interesting things once they open the cover. What will make this even more interesting is that the UK Government has quickly labeled the bank as safe without really doing their homework.
While Northern Rock is trying to blame the Americans and others for their financial troubles they should put their management team and board in front of a mirror. Guys, you were profiting from the sub-prime market with some risky loans and loan products and you got bit. Suck it up. As one wise investor told me in my younger days, “Steve, those that swim with the sharks and risky loans will get bit, they always do.”
The real question here isn’t that Northern Rock is swirling the bowl, it’s which of the Insolvency Exchange (TIX) clients will be next with their hard line stance on not allowing consumers to fairly repay their debts. Investors might want to take a look ahead at the solidity of HSBC, Bank of Scotland, Halifax, Royal Bank of Scotland and Marks & Spencer Money. These are banks which have banded together to put hurdles in front of consumers like Northern Rock has when it comes to Individual Voluntary Arrangements (IVA).
What these other UK banks have in common with Northern Rock is the same arrogance and disdain for consumers in trouble. This prevailing attitude has created a banking virus that has not only accepted that deep shafts into the sub-prime world are healthy and productive, but that ignoring the British Banking Code is acceptable and not allowing consumers to repay their debts is good business practice.
Probably the best reason it does not make sense to run to draw money out of Northern Rock is that while they are the first to fall, they probably won’t be the last.