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Northern Rock, Tax Payer Bailed Out Bankrupt Bank Adds 750Million More Losses

Companies / Credit Crisis Bailouts Aug 04, 2009 - 06:32 AM GMT

By: Nadeem_Walayat

Companies

Best Financial Markets Analysis ArticleToday Northern Rock, the first of a series of tax payer bailed out bankrupt banks announced a further loss of £750 million to be added to the tab picked up by the tax payer that is now approaching in total £1.5 trillion across the banking sector and destined to continue expanding to an eye watering £2 trillion or near 200% of GDP by the end of this year as I originally estimated back in November 08.


Northern Rock epitomises everything that is wrong with Britians banking system which allowed bank officers to bank huge bonuses on the basis of fictitious profits on the basis of mark to market valuations of assets and loan books, that are defaulting in ever larger numbers in the face of rising unemployment.

Now lost in the midst of time were the assurances by the Chancellor Alistair Darling that tax payers would not lose a single penny on the Northern Rock bailout and eventual nationalisation, when in fact total tax payer liability is some £100 billion and losses to date of approx £10 billion despite the creative accounting of capital injections.

The Illusion of Repaying the Government

The mainstream media as epitomised by the BBC is running with the notion that Northern Rock has repaid the government some £18 billion of the original £50+ billion bailout, however what the mainstream media fails to report is that the government is in effect INJECTING capital into Northern Rock and it is THIS capital injection AND reduction of the loan book which is being used to REPAY the government. In effect the tax payer loans to Northern Rock are being converted into pretty much worthless equity but for propaganda purposes the two are treated as separate exercises and therefore creating the illusion of Northern Rock repaying the government. You will NOT hear any of this in the mainstream press either TV or print, (I have searched), well perhaps after reading it here first! Watch for MORE capital injections in the near future as Northern Rocks bad debts continue to mushroom with already 40% of Northern Rock mortgage holders in negative equity.

Yesterday, two of Britains existing big banks HSBC and Barclays, that have only partially been bailed out by the tax payers announced profits of £3 billion each. Tomorrow HBOS, Britians biggest bailed out bankrupt bank as part of LLoyds TSB group will announce losses of £4 billion, with further announcement by the other big bailed out bank RBS due that have collectively swallowed £65 billion in capital injections, losses on which run to the tens of billions. So much for the Labour Governments spin that tax payers would not lose a single penny when it is being burned by the truck load, this leaves aside the liabilities of guaranteeing the deposits against decimated loan books of £1.5 trillion that could result in eventual REAL losses of as much as £500 billion under the the Asset Protection Scheme.

Bankrupt Banks Overcharging Customers

As I have voiced repeatedly over the past 6 months that the lack of market competition due to the creation of an artificial banking market that has in effect created a situation where the bad debt losses are dumped onto the tax payers whilst those banks that have managed to avoid bankruptcy i.e. nationalisation rake in profits at the expense of tax payers and customers as the spreads between the market interest rate 1.1% (LIBOR) and that charged customers on mortgages 5% to 5.5% has widened to historic extremes thus the banks are ignoring a constantly pleading Alistair Darling and Gordon Brown to lend more at rates in line with the base rate whilst the banks put business and ordinary customers under extreme pressure despite the fact that it is these tax payers that are covering all of the losses and injecting capital into the banks.

Typical overcharging is by the banks that have the greatest government stake with nationalised Northern Rock topping the list. The reason for this is that the banks are primarily being run with a view to repaying the government as soon as possible and thus returning to the private market as soon as possible, therefore the banks are being required to squeeze their customers as hard as possible to achieve this goal, which is contrary to the governments public announcements, which lends me to believe that a hidden agenda is at work i.e. publically announcing that the banks should lend more and at better rates whilst privately wanting the banks to maximise earnings so as they can be privatised and stakes sold off as soon as possible for political reasons.

Since the Labour government was hell bent on going down the nationalisation route instead of the natural order of the free market which is to let bankrupt banks go bankrupt, it would have been better to nationalise the whole banking sector and thereby take a more long-term view rather than an apparent rush for re-privatisaton. Wholesale nationalisation would also ensure that profits from some of the banks can offset some of the losses instead of the current situation where all of the losses are bourne by the tax payers whilst all of the profits are retained in an artificially tax payer supported banking system that are funneled out to bank executives with presumably later board positions offered to ex-politicians as a thank you following the outcome of the next general election due within 10 months.

There is no free market, there is no capitalism, there is not even socialism at work, what it all amounts to is simply FRAUD on the tax payers of Britain. FRAUD WITHOUT LIMIT OF LIBAILITIES, FRUAD THAT RISKS BANKRUPTING BRITAIN.

FSA Regulator Failure

The near collapse of the banking sector over the past 3 years illustrates the failure of the financial services authority to regulate. Yes the failure is over 3 years and not since the collapse of Northern Rock some 2 years ago, for the FSA first warned the British banks in 2006 following the peak in the US housing market to STRESS TEST their business models in the event of a 40% crash in house prices, coupled with mortgage defaults of 35% and to reign in excessive risky mortgage lending at too high salary multiples. However as we have seen, a decline in house prices of less than 15% by September 08 had brought virtually all of the British banks to the brink of bankruptcy only prevented by a tax payer bailout now totaling £1.5 trillion of liabilities to date which are expected to grow to £2 trillion !

Unfortunately the FSA talked the talk but DID NOTHING TO PREVENT OR REGULATE THE BANKS and therefore ensured the BOOM during the first 6 months of 2007 followed by the BUST that immediately wiped out Northern Rock in September 2007 and proceeded to wipe out bank after banks capital bases towards zero right upto September and October 08's Financial Armageddon panic that resulted in the across banking sector bailout and panic interest cuts by the Bank of England on the direct orders of the Prime Minster Gordon Brown, who announced the first 0.5% cut himself at Prime Ministers despatch box which sent the signal to the markets of exactly who now is in charge of setting UK interest rates, certainly not the Bank of England who's MPC had been sat twiddling their thumbs for the preceding 12 months of the crisis.

Fast forward to the present and we have recently had the FSA make announcements of regulating house prices lower by means of capping multiples. However the past 3 years have clearly illustrated that the FSA is a fundamentally flawed institutions that is incapable of regulating the UK banking system.

Banking System Reform

The British Banking system needs urgent reform as I have proposed many times over the pasty 18 months that the reform requires real independent regulation along the lines of the courts, until then once the banking system recovers it will be back to business as usual as we are witnessing following the results and the behaviour by the banks to hand out millions in bonuses that CONTINUES the trend towards leaving the banks the bank staff work for as hollow shells for the tax payers to pick up the pieces whenever they go bust.

Bankrupt Banks Bankrupting Britain.

As I have warned several times over the past 12 months and which is now starting to come to pass in that total liabilities are growing from £1.75 trillion at the end of 2007 to more than £3.9 trillion by the end of 2010 as a consequence of the £1.5 to 2 trillion of liabilities of the bankrupt banking sector being ceremoniously dumped onto the tax payers in addition to the public sector deficit spending of £600 billion on which the country will have to pay interest on which worsens the fiscal situation during each subsequent year hence the risk of an out of control debt spiral.

Way back in April 2008 when the bank of England first gave tax payer cash to the banks, I warned that this could eventually lead to a loss of as much as £200 billion to the tax payer, a huge sum of money by any measure, however not collectively Britain could stand to lose as much as £500 billion, that can only be covered by printing money to monetize the debt and hence leads to inflation and probable investors balking at government debt issuances.

Therefore we are looking at £600 billion of deficit spending PLUS £500 billion of bankrupt bank losses leading to a near tripling of Britians debt towards 120% of GDP, whilst total liabilities project to more than 350% of GDP.

The consequences of all this deficit spending and growth in bankrupt bank liabilities is highly inflationary as the Governments Big Idea of "Printing Money" WLL eventually lead to hyperinflation as 1920's Weimar Germany found out, so Britain IS sowing the seeds of much higher inflation, maybe not this year and for the first half of 2010 as recent inflation analysis illustrated, but there will be a deficit spending and quantitative easing day of reckoning in terms of economic stagnation coupled with high inflation that will land on David Cameron's lap.

Double Dip Depression

Total GDP contraction to date now stands at -5.4% on a quarter on quarter basis, which is against my forecast for -6.3% total into Q3 2009, with recent recent analysis suggesting that GDP contraction during the 2nd and 3rd quarters for 2009 is moderating and points to a bounce back in the economy into the 2010 election given the extreme measures adopted of deficit spending of £500 billion+ to generate just £67 billion of additional economic growth, however the post general election tax hikes and deep public spending cuts will my opinion trigger a double dip DEPRESSION 2011 to 2012 as illustrated by the below graph.

Debt Crisis Solutions

The solutions to Britians debt crisis remain as much as voiced in the November 2008 article - Bankrupt Britain Trending Towards Hyper-Inflation?, and expanded upon during February 2009. The really radical long-term solution of privatisation of the large un-productive entities such as the NHS would require a large majority government which does not appear likely at this point, which therefore suggests that the next government will fail to fully address Britain's growing debt problem that for each extra £100 billion borrowed will result in extra annual interest payments of at least £5 billion, therefore £500 billion of new debt will add an extra £25 to £30 billion in interest to Britain's debt mountain which is more than Britain earns from North Sea Oil (£17 billion) and therefore threatens to send debt spiraling out of control unless drastic action is taken to bring public debt under control.

To receive my in depth analysis on the UK economy, interest rates and housing market subscribe to my always free newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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