£80bn in mortgages outstanding supported by just £2bn of shareholders' equity and £78bn of mostly short-term debt....
Short sellers have made a £1bn profit from the Northern Rock crisis in just five frantic days, according to hedge funds involved. Fleet of foot investors borrowed half the bank's 420m shares when the crisis broke last Friday morning. They then promptly sold them, on the assumption they could buy them back cheaper and bank a sizeable profit. The shares opened last Friday at 639p and then crashed through the floor and kept going, down through the basement before lodging themselves in the sub soil on Thursday night at 185p.The Treasury has been ambiguous about how long its guarantee supporting Northern Rock is for. Will the Government be there for as long as it takes to get Northern Rock, and the money markets, back on their feet? Or will it simply provide the support for the minimum time it takes to find a buyer for Northern Rock's mortgage assets and a new home for its savers?
A fire sale in other words. If it's the latter then there seems little to stop more short selling of the shares, driving the price to rock bottom as is usual in fire sales. The financial authorities, such as they are, say it's savers they care about not shareholders. Hedge fund managers will this weekend be wondering whether to start a concerted shorting of other banks that have similarities to Northern Rock, testing the Treasury's resolve. In these febrile markets, where trust in the Government has broken down, it's not hard to create a sense of panic which could force more savers on to the streets.
The risk is there because of the Treasury's ambiguity – something that international capital markets will relentlessly exploit. If the Treasury is to avoid Northern Rock II it needs to clarify just how long it will stand behind the bank. Its silence sounds like it hasn't decided and that it's hedging its own bets. We now have the markets versus the Treasury and the record of this particular fixture does not bode well for those with political careers.....www.telegraph.co.uk/money/main.jhtml?xml=/...09/22/ccom122.xml