The sub-prime mortgage lending bubble continues to bite back, with the news of Northern Rock’s misfortune – a temporary cash flow problem which arose because they expected the market to recover sooner than it did. Indeed – I’ve got news for you lads, the market won’t recover for a long time yet. Commentators this evening were speculating that it would be taken over, rather than close down, but I don’t think there will be much to take over. Apparently Rock had cash of about 24bn and ‘assets and loans’ of about 113bn – but that was last night.
Tonight I imagine Northern Rock has rather less cash on deposit from savers, some of whom will have fled to safer investments today. The ‘assets’ are amusing. I am sure that to an accountant, the money loaned out as mortgages, is an asset, but in the real world, it ain’t so hot. Suppose they loaned out 400,000 to John Doe to buy a 400,000 pound house, secured against the property, back when interest rates are lower. John Doe got the loan based on his ability to pay, which often included the idea that he would rent out the spare room, wouldn’t he? Well, now the spare room is his den, interest rates are up, his payments as up, inflation is up and property prices in most places – Ireland, England, the US – have stalled at best, and even gone back in some places. His house cost 400,000 last year, it should be worth, I dunno, 425,000 if it was keeping up with inflation, but it would only sell for 380,00 now.
I’d say a lot of that 113bn in ‘assets’ on the book in Northern Rock (and in other lenders) would not actually sell for 113bn on the street. It might be ‘worth’ 113bn to an accountant, but to not to you and me. There will be some hard market ‘adjustments’ over the next few months, as shares in mortgage lenders continue to fall. Even if you aren’t stuck in the mortgage market, you probably have a pension fund which is invested for you in the markets, or in property. You might work in a financial services company, or in a company that provides services to a finance house – everything from ‘net access to delivery pizza to mowing the corporate lawns will all face a squeeze. All those people who pushed hard over the past decade to increase ‘shareholder value’ at any price, including sub-prime mortgage lending, are going to look pretty stupid.
Don’t call a third pint – put it in the piggy bank. You might need it.
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