What caused Northern Rock to ..

[whiteowl]

The amount of money in savers accounts in Northern Rock was a small relative to its business but had a massive psychological effect on confidence of those lending millions to it. NR had already passed the tipping point before the first panic. As Ann says it had made a fatal error of judgement in its drive to become a "big operator".

 

At the time very few borrowers could take out more than £250 at a time and anyway the first £2,000 was protected and 90% of the next £30,000 by HMG. It's actually quite scary to know that your bank only had 2% of your money in the safe, 98% has been lent out.

 

Passing NR daily at 07.30 each day I saw, mainly pensioners, queuing in their dozens on day 1 and 2. On the third day there was a solitary flat cap, with folding chair and flask!

 

The guarantee is now £75 000/£150 000 for couples, up to a maximum fund of £40 billion.

 

It's actually gone up to £85,000 these days, just for info

 

https://www.bbc.co.uk/news/business-38770907

[Anna B]

It has made me think about what we say has 'caused' something and peoples lack of information.

Maybe the NR would have been saved, had it not been for people withdrawing their money.

 

The banking system is complex and full of technical terminology, acronyms and jargon shrouding it in obfuscation and mystery, understandable only to the banking elite. Mere mortals like us are not meant to understand it. That is the way the bankers like it, it allows them to do some very dodgy deals, get enormous bonuses, and get away with murder, as the sub-prime market demonstrates.

 

However, what really annoyed me at the time of the crash and ever since, is that the Tories jumped on the band wagon immediately, and started blaming Labour for 'getting us into this (financial) mess' when it was a world wide problem endemic within the global banking system, but that few ordinary people understood.

 

Said at every possible opportunity; 'Labour got us into this mess,' so persistant was this simplistic Tory lie /sound bite, it allowed them to win the following elections and bring in full blown Austerity with devastating consequences, from which we are still suffering, and arguably has led to the rise of Corbyn and Brexit.

Edited August 28, 2018 by Anna B

[hauxwell]

The amount of money in savers accounts in Northern Rock was a small relative to its business but had a massive psychological effect on confidence of those lending millions to it. NR had already passed the tipping point before the first panic. As Ann says it had made a fatal error of judgement in its drive to become a "big operator".

 

At the time very few borrowers could take out more than £250 at a time and anyway the first £2,000 was protected and 90% of the next £30,000 by HMG. It's actually quite scary to know that your bank only had 2% of your money in the safe, 98% has been lent out.

 

Passing NR daily at 07.30 each day I saw, mainly pensioners, queuing in their dozens on day 1 and 2. On the third day there was a solitary flat cap, with folding chair and flask!

 

The guarantee is now £75 000/£150 000 for couples, up to a maximum fund of £40 billion.

 

I thought the guarantee had gone back up to £85000 again, which is what it use to be. I was in the bank last week and was told about the increase from someone who worked there. Check it out and see if it is correct.

I have just seen Whiteowls post, yes it has just gone back up

Edited August 28, 2018 by hauxwell

[alchresearch]

I'm very surprised that TSB didn't go the same way when they mucked up a few months back.

[Jeffrey Shaw]

All banks and building societies work on the basis of 'borrow short-term, lend long-term'.

That's fine for so long as investors/depositors are confident about their money's security.

When they're not, problems arise. The N.R. street-queues oddly echoed those in "It's A Wonderful Life" [https://www.imdb.com/title/tt0038650/]

[El Cid]

I'm very surprised that TSB didn't go the same way when they mucked up a few months back.

 

Had there been a queue outside their door, with many investors wanting to withdraw their savings; perhaps they would have gone bust too?

[old tup]

This thread is a reminder of a bad decision on my part instead of selling my £2000 worth of shares in Northern Rock I stuck with them,big mistake,years later I received a nice letter informing me I was to get sweet f.a. in compensation!.You pay to learn and no mistake!.

[sheffbag]

The banking system is complex and full of technical terminology, acronyms and jargon shrouding it in obfuscation and mystery, understandable only to the banking elite. Mere mortals like us are not meant to understand it. That is the way the bankers like it, it allows them to do some very dodgy deals, get enormous bonuses, and get away with murder, as the sub-prime market demonstrates.

 

However, what really annoyed me at the time of the crash and ever since, is that the Tories jumped on the band wagon immediately, and started blaming Labour for 'getting us into this (financial) mess' when it was a world wide problem endemic within the global banking system, but that few ordinary people understood.

 

Said at every possible opportunity; 'Labour got us into this mess,' so persistant was this simplistic Tory lie /sound bite, it allowed them to win the following elections and bring in full blown Austerity with devastating consequences, from which we are still suffering, and arguably has led to the rise of Corbyn and Brexit.

 

Jesus Anna, do you have to get austerity or your hatred of anything Tory into every post you make?

[Obelix]

As soon as people heard their money in Northern Rock Bank might be lost, they began queuing to try and get their deposits out.

No bank holds enough money to cover all the deposits at any one time, so eventually it has to close its doors to customers, to stop any more going out, or because it simply doesn't have any money left. This causes panic in the financial markets. It's called 'a run on the banks.'

 

But the original cause (why customers thought their money might be lost in the first place,) began in America, and was very much to do with bad lending.

 

Put simply, Banks make money from lending money as loans and getting it back with interest. In the 1980s the banks were deregulated, meaning the safeguards were abandoned and the brakes were taken off lending. Margaret Thatcher did the same thing here.

 

The banks saturated the market with 'fiat' money. Fiat money isn't backed up with gold or anything substantial, it's simply created at will on a computer, then it's paid back in real money by the borrower, with interest, making it very lucrative for the banks. They couldn't lend it fast enough.

 

Eventually they started lending it to very risky people, called the 'sub-prime market.' They knew that some of these people would not be able to pay it back, so they bundled these dodgy loans up with other 'good' loans and sold them on to other banks, infecting the whole money market system. Eventually the system overheated wth too many people defaulting on repayments, and there was a frantic rush to sell the packages on (think pass the parcel) and not get stuck with them on their books.

 

This started a massive devaluation, bank shares began to crash and there was a run on American banks, particularly Mac and Fannie May, this led to the fall of Lehman Brothers, a sprawling Global bank that was thought to be invincible, starting a major worldwide banking crash in 2008. The rest followed like toppling dominoes.

 

The banks were saved by massive 'Quantatitive Easing' ie printing money to the tune of hundreds of billions to pay off the debts. The ripples from the crash continue today, we are still in a terrible mess, with everything from Austerity, the bloated property market, and 0% interest. And still the banks haven't learned their lesson, there could be another crash round the corner, and this time they probably wouldn't get a bailout so heaven knows what will happen.

 

This is very simplified of course, but there's loads about it on the net. Try this for a start.

https://www.economist.com/schools-brief/2013/09/07/crash-course

 

Northern Rocks problems were not to do with bad lending by them, it was their poor choice of capital provision that caused them problems. They had short term borrowing from a source that was closed off and so they couldnt roll over their borrowing to meet the amount they had lent out.

 

Your description of fist money is not correct either - fiat money is backed by a government, not by specie. To claim it's different when it's paid back by "real money" - what is this real money? It's just the same as the money they left, it's fiat money just like that which was borrowed. You are conflating perhaps differnet sources of money supply? M0, M1 all that? Even so that still doenst answer the question...

 

Freddie Mac and Fannie Mae are not banks... if you want to sound authoritative on this please learn what they are Anna rather than spout utterly incorrect rubbish like this.

 

---------- Post added 30-08-2018 at 22:11 ----------

 

The banking system is complex and full of technical terminology, acronyms and jargon shrouding it in obfuscation and mystery, understandable only to the banking elite. Mere mortals like us are not meant to understand it.

 

Yet somehow you manage it?

[El Cid]

The run on the bank was a symptom, not a cause.

 

 

September 15 Customers besiege the bank to withdraw money, ignoring official reassurance. Two days later the Government steps in to guarantee deposits in a bid to stop the run.

 

February 17 Government rejects offers, deciding to take Northern Rock into temporary public ownership.

 

https://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11032772/The-rise-and-fall-of-Northern-Rock.html