DateMonday 17 December 2007

Why Northern Rock hit the rocks but no other UK lender did

I was talking to a neighbour at a Christmas party about finance and business and forex and that sort of thing, because that’s his line of work, and he told me something that I’ve not seen mentioned anywhere else.

It goes like this. Northern Rock was funded by lending money on long-term mortgages, and then borrowing short-term money (to make up the difference, because otherwise it would be running at too low a liquidity ratio) at a lower rate from banks. As long as it could keep borrowing from other banks at that lower rate, its business model was fine – booming, even.

But when the credit crunch began, because banks suddenly started worrying about all the CDOs and SIVs and their *real* values (if they have such a thing), it suddenly became very difficult – no, impossible – for Northern Rock to borrow money from those other UK banks. Which meant that suddenly it had a serious cashflow problem: all those short-term borrowings had to be paid back, but it had nobody else to borrow it from again (at all, not even on a short-term unfavourable rate), and not enough in its deposits to cover the payback and keep within its liquidity requirements as a bank.

Uh-oh. “Hello, is that the Bank of England? We have a little.. situation.”

Now, why was it only Northern Rock that had this problem? Why not any other UK clearing bank, since they’ve all been lending and borrowing like billy-o?

One other thing you have to add to the scenario: the European Central Bank made a huge amount of credit available in September, while the Bank of England didn’t, citing the risk of “moral hazard”. Two days later, though, it was lending to Northern Rock.

So why didn’t Northern Rock get its line of credit earlier from the ECB – which that GATA link above says was being used hugely? As in…

EU sources say Britain’s banks have been clamouring for money in Frankfurt, accounting for a substantial chunk of the €190 billion (£132 billion) lent last week in the ECB’s variable tender operation. “It is fair to say they have been borrowing from the ECB on a very large scale. It’s cheap, so why not?” said one official.

The UK banks were also major subscribers at the €50 billion issue of three-month loans on September 27 at 4.63 percent, and the earlier tender of €75 billion on September 13.

Because Northern Rock isn’t a European clearing bank. It’s only cleared for clearing (if you follow) in the UK. It couldn’t get those cheap funds from the ECB.

Quite possibly if Adam Applegarth and mates had been able to see the benefits of getting European clearing benefits and signed up there, this whole story would have been entirely different: no run on the bank, no Richard Branson trying to get his hands on it (despite Virgin not having any banking licence at all), no political embarrassment, lots of sooothing words about how the UK banking sector is insulated from the US sub-prime market. None of it true, but banking doesn’t rely on truth – it relies on trust, which is an entirely different thing.

How digital cameras made the stalkerazzi feasible – and what that tells us about print journalism’s future

Good piece by Decca Aitkenhead about the life of the paparazzi in Guardian Weekend, notable for a few particular paragraphs:

Three big changes have transformed the world of the paparazzi in the past 10 years. The first, and most radical, was digitalisation. Today you need camera kit worth little more than 500, and no photographic training, to have a crack at working as a pap – which is why their average age has plummeted. It also explains why their numbers have soared. But the second change came after a 2004 BBC documentary series, Paparazzi, which followed the biggest agency in Britain, Big Pictures. “It made it look easy,” one paparazzo complains indignantly. “We had a secret recipe, and they blew it. They told everyone the ingredients. It was so stupid. The makers of Coca-Cola don’t tell you what they put in Coke, do they?”

So digital is driving down prices of getting into the market. But…

A full-page picture of Kate, Keira, Kylie or Sienna – the most reliably bankable big four – sells to a celebrity magazine such as Heat for only 200, while a set of pictures of, say, Liz Hurley shopping, which could once have fetched 6,000 from a tabloid, sells for only 800.

So digital is also increasing the supply – which is forcing prices down. In consequence…

Mark Frith, editor of Heat, recalls how, back in the 90s, the daily delivery of paparazzi pictures to Smash Hits, where he then worked, would arrive in a single A4 envelope. Today he receives between 10,000 and 20,000 electronic images every day.

And then there’s the final piece of the puzzle:

Frith dates another major change to an issue of Now magazine in spring 2003. “It carried pictures of three celebs not looking that great. And the cover line was something like ‘ROUGH!’ I remember that issue coming into the Heat office and thinking, they have finally flipped. The first rule of magazines is you never put anyone on the cover looking awful. A week later the circulation figures came in. They’d sold something like 700,000 copies, one of their highest figures ever. And it changed everything. It changed every rule.”

So here’s what digitisation has done to professional photography: driven down the cost of entry; driven down the value you get from the product you produce; increased the number of potential outlets; and created an entirely new field, in this case of “celebrity abuse”, of essentially looking behind the curtain at what’s seen.

Now we get the same process happening with words: the price of entry is really, really low. There’s more product, though the quality.. well, it’s variable: the really good stuff is fantastic, and there’s a lot of simply good stuff. But the range is enormous. Has the median gone up or down? I’d leave others to judge.

There are more outlets. And there’s a huge amount of “looking behind how it’s done” by blogs – not really adding anything that you could call “journalism” (in the sense of finding out something that’s new), but it serves an interest of trying to “analyse” – a sort of journopapping.

What we’re seeing with celebrity photographers is surely going to find its echo with journalism. I wonder what strange niche we’re going to find flowering in the way that “rough-looking celebs” has for the photographers? Is it already here? And what is it?