A Piece of the Rock

[Daveparts]

A Piece of the Rock
By David Glenn Cox




Northern Rock Bank in the United Kingdom is in trouble and it’s been bailed out to the tune of 1Billion Euro’s and is still far from weathering the storm. The story is starting to become familiar one to us all but this is a story with a twist.

Northern Rock isn’t in trouble because of sub prime mortgage loans or wild adventures in hedge funds. Northern Rock has grown from a provincial building society in Newcastle or what we in the US call a savings and loan into Britain's fifth biggest mortgage lender at breakneck speed.

What began at Northern Rock was new for the UK but old hat in the US we call it bundling, the taking of mortgage loans and bundling them in to increments and then selling them wholesale. The bank can then take the capital and offer more mortgages taking their profit on the front end. Here’s where the paths diverge from Northern Rock and her Yankee cousins.

Northern Rock’s investments are solid but her liquid assets are 12.3 billion and the bank has funded 10.3 billion in mortgage loans with money borrowed from other banks. Now due to the sub prime crisis banks are holding on to their liquid assets and not wanting to lend even to other banks. Between July and September 1st depositors withdrew 1 billion leaving the bank in a tight spot as predictions are that depositors might withdraw up to half of the banks total assets.

Their growth was fueled by easy lending but now that river is drying up on both ends
Slowing demand for mortgages and evaporation of easy credit have left the bank high on the sandbar and depositors lined up around the block. There is anger enough to go round, the management, the bank of England and even the new government is being blamed but most fingers in the crowd are pointing across the seas to America.

Pointing has become the order of the day, Wall Street points to the Federal Reserve the banks point at Wall Street Greenspan points at Bush while Bush blames the consumer. The same people the President pointed to just two years ago when he ran for election, when he said the high rate of home ownership was proof of his economic policies success. Today he blames their recklessness and carelessness.

Maybe this administration will go down in history with their own epoch like the Victorian age or the Guilded age this shall be the finger pointing age

But pointing fingers is the easy part and they are missing the point, the fire has jumped the firebreak the sub prime crisis has moved into virgin forest. Affecting banks not affiliated with bad loans but with too many loans from money borrowed short term and that money is gone. They have a satchel full of promises but no coins in their pockets.

The world’s bankers are playing a game of musical chairs and when the music stops someone is going to be left out in the cold holding the bag. Too many loans not enough cash, too many bad loans and no one fool enough to try and make them good.
Capitalism reverts to its basic mantra; “I got mine, too bad for you sucker!” Let this be our mantra for the week!

On Tuesday the Fed will meet to decide the fate of Wall Street, will they cut rates a quarter point or even a half point or saints in heaven even a whole point? Because it makes the case even clearer of a total misunderstanding of the issue in it’s entirety. Cutting interest rates doesn’t change the fundamental dynamic. It won’t save one sub prime homeowner nor have any effect on the sub prime mortgage market.

It’s not the cost of credit it’s the availability of credit and this is nothing but a new credit card for Wall Street to try and keep the party going and the day of reckoning from coming. The ledges will be crowded but no one will jump, they will be pushed.

1 in 7 US mortgages are in arrears, home prices are falling as banks tighten up on lending standards. Record rates of foreclosures have flooded the market with almost 6 million existing homes unsold up from 2.2 million twelve months ago. Will a rate cut repair this situation? Not hardly, but that is where we are at Wall Street traders are like cast aways and they see the rate cut like smoke on the horizon and dream of rescue. If they get their rate cut they will be giddy as school girls but it will be short lived and when they realize it’s not rescue despair will set in.

This has been their one shining hope that a rate cut would save them and if they don’t get one they will despair and if they do they will realize that it was a false hope after all and despair will set in anyway. Then the time of finger pointing will be over and the time of cannibalism will begin, some will eat and some will be eaten.

[fasttense]

1. The "free market" and unregulated capitalism revealed for what it really is.

"I got mine, too bad for you sucker!”

"The time of cannibalism will begin, some will eat and some will be eaten."

Will the rate cut keep the sucker from suffering or being eaten? Wall Street wishes it would be so but I don't see how the rate cut will help clean out the sub-prime problems.