OverInflated

‘Independence’ given to Bank of England
May 6th 1997: Brown sets Bank of England free
The Chancellor, Gordon Brown, has given the Bank of England independence from political control.

The Proof it was a lie
Mervyn King, the governor of the Bank Of England, has recently been forced to bail out the lender Northern Rock 1 day after declaring he would not do so. Alistair Darling “Authorized” the Bank Of England to, well basically, do as they’re told, which resulted in Northern Rock being bailed out.

Surely Northern Rock were NOT a threat to UK financial stability, if so, surely the governor would not have said he would not bail out the lenders!

Please review the reports below taken from the Independent. The Bail out occurred the day after he pledged not to intervene.

The Pledge

http://news.independent.co.uk/business/news/article2956467.ece

King firm on refusing to bail out banks
ECB pumps another €75bn into money markets, BoE warns of moral hazard, Libor rate eases
By Sean Farrell, Financial Editor
Published: 13 September 2007

The Bank of England’s Governor spelt out the reasons for his hardline stance on the liquidity crisis yesterday, saying that unless the economy was in danger an injection of funds to encourage banks to lend to each other would reward reckless behaviour. Mervyn King said the closure of the money markets was the result of the mis-pricing of risk in the financial system rather than the state of the economy, though he warned that the supply of credit to households and businesses may tighten and borrowing costs would rise.

Only if the effect on the wider economy was severe enough would the Bank inject extra liquidity to ensure the financial system operates effectively, he said. If the Bank acted without a clear threat to the economy, it would be providing after-the-event insurance for risky behaviour. “The provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises,” Mr King said. “The current turmoil, which has at its heart the earlier mis-pricing of risk, has disturbed the unusual serenity of recent years but, managed properly, it should not threaten our long-run economic stability.”

Banks are hoarding cash to make sure they have enough reserves to meet unforeseen obligations caused by the panic in credit markets, including supporting their structured credit conduit funds if they cannot issue debt in the commercial paper market.

Some bankers, including Barclays’ president Bob Diamond, have been calling for the Bank to inject funds into the system to ease the strain in the three-month lending market. Willem Buiter, a former member of the Bank’s Monetary Policy Committee, has argued the Bank of England should accept a wider range of collateral for loans to banks.

Mr King said that accepting illiquid collateral would undermine efficient pricing of risk and that if the Bank did inject liquidity it would do so against good collateral at a penalty rate. He added that banks’ balance sheets were strong enough to absorb the structured vehicle funds, though the process would be awkward. Mr King has taken the toughest stance of the world’s major central bankers to the crisis. His position contrasts with the more interventionist approach of Jean-Claude Trichet, the president of the European Central Bank, which yesterday lent banks an extra €75bn (£51bn) for three months to reduce the cost of longer-term credit in money markets.

The Bank of England wants banks to take responsibility for sorting out the crisis. British banks last week increased their reserve requirements with the Bank of England, giving them more room to borrow overnight secured against Government bonds. The Bank will decide today whether to exercise its option to make up to £4.4bn of extra funds available in the overnight secured market.

Mr King set out his position in a paper to the House of Commons Treasury Committee ahead of a session next Thursday when the committee will ask Mr King and his deputy Sir John Gieve about a potential resolution of the crisis. Three-month Libor, the rate at which banks lend to each other, came down fractionally for the first time this month, falling to 6.90250 per cent from 6.90375 per cent.

Moody’s, the credit rating agency, said bank-sponsored conduit funds would ride out the disruption and would be the earliest of such funds to recover because investors retained confidence in them. It said at the end of June there were more than 200 such conduits worldwide, with approximately $900bn (£443bn) of commercial paper outstanding.

And the bailout

http://news.independent.co.uk/business/news/article2961343.ece

Northern Rock given emergency bail out by Bank
By Sean O’Grady, Economics Editor
Published: 14 September 2007

Northern Rock became the first high profile British victim last night of the crisis that has swept credit markets, after admitting that it has received a financial bail out from the Bank of England.

This is believed to be the first such rescue since the secondary banking crisis of the mid-Seventies. It is the largest banking debacle since the collapse of Barings in 1995.

Sources close to Northern Rock are keen to stress that the Newcastle-based mortgage bank had suffered a “liquidity” rather than a “solvency” crisis, and that depositors’ funds were entirely safe. Nonetheless the fear must now be that Northern Rock may be the subject of an old fashioned run on the bank as worried customers withdraw money.

The Bank of England with the agreement of the Financial Services Authority and the Treasury is providing an emergency facility, at a penalty rate of interest. The Bank’s move comes only two days after the Governor of the Bank of England, Mervyn King, declared “the provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises”.

However it is in line with the Governor’s undertaking then that he would provide liquidity against good collateral. In this case the collateral offered is believed to be Northern Rock’s mortgage book.

Of the main lenders in the UK mortgage market, Northern Rock seems peculiarly exposed to the wholesale money market to fund its business, rather than via retail savings gathered through branches and other channels. It has thus been more adversely affected than most by the seizing up of credit markets.

Indeed there have been indications of trouble to come ever since the bank issued an effective profits warning with its results at the end of June, at which point the shares fell by 10 per cent. They have been falling almost continuously ever since. It was the biggest loser in the FTSE 100 yesterday, closing down 4.9 per cent.

Even in the summer Northern Rock was forced to declare that it was suffering from a “structural mismatch between Libor [London inter-bank offered rate] and bank base rates”. Since then Libor has risen much more than the Bank of England’s base rate.

In the first six months of this year, Northern Rock made pre-tax profits of just under £300m, barely changed from the previous year.

However it hugely increased its share of the mortgage market, taking 18.9 per cent of all net mortgage lending against its previous peak of 14.5 per cent, in the second half of 2006. At that point, Adam Applegarth, the chief executive, said the mortgage market remained “robust” and that the group was continuing to trade strongly. Most of its book is mainstream, but it also originates subprime loans for Lehman Brothers. It is an important player in the market, with obvious signs it is having difficulty financing its activities.

Northern Rock has loans and other assets on its balance sheet of £113bn. The value of deposits placed with it by retail customers is £24bn. Formerly the Northern Rock Building Society, it demutualised in 1997.

Routinely spoken of recently as a takeover target, its best hope now may be that someone, possibly prompted by the Bank of England, now sees value in the ongoing business and brings Northern Rock’s brief career as an independent quoted bank to a close.