Private Investor: Don't get mad about Northern Rock, get even
Saturday 23 February 2008
I'm fortunate that I wasn't a shareholder in Northern Rock when it was nationalised. Were I one, I think I'd write off my investment and try to forget about the whole affair. However, should you need some ex post facto hedging on your losses, an intriguing possibility is out there whereby you could actually make some money from the thing being worthless. However, you might also lose some, so be careful.
The answer comes from the world of financial spread betting. If you go to www.cantorspreadfair.com, you'll find a sort of market in the residual value of Northern Rock shares (which may of course be nil). The spread at the moment is 25p to 35p. So my fantasy bet, if I were a Northern Rock shareholder, would be to bet £10 on every penny the Rock is worth less than 25p per share. If, as I suspect, it does turn out to be nothing, then you'll be looking at a gain of £250.
On the other hand, if the Northern Rock shares turn out to be worth £1 a share, then you'll be down for a loss of £750. That will have to set against whatever value you have in your shares at £1 a pop.
Obviously, this isn't for the faint-hearted and nor is it for people desperate to try and recover something from the Northern wreckage. It is, perhaps, a way to cover your losses a little. Better, probably, to walk away and think about your next investment.
So you may well be heartily sick of Northern Rock. Certainly if you were a small shareholder in that operation, you have a right to know what happened to the bank and why. Maybe there should be some sort of public inquiry into it, except that that would waste even more of everybody's money and, frankly, pretty much everything that Northern Rock did was in the public domain. As too few folk have noted, this was not a question of some rogue trader secretly wrecking the enterprise, as with Société Gé*érale or Barings.
Nor was it really a question of reckless lending to sub-prime punters; even now, with their big mortgage deals, there seems to be little of really bad quality on the Rock's books. It is not like, say, Countrywide in the US, which had to be rescued because it had too many of the sort of customers they call trailer trash and we call chavs.
Nor, indeed, was it the case that ministers were plotting to nationalise the thing, as was alleged in the case of Railtrack/Network Rail. There is plenty of evidence that last week's events were the last thing the Treasury wished for.
The "business model" the Rock operated was in the public domain, it was commented upon and mostly lauded. Adam Applegarth, the former chief executive, was praised in the press for his go-ahead ways. He was, after all, taking a dusty old Newcastle-based former building society into the sexy bright steel and glass gherkin-shaped world of 21st-century finance. Maybe the Financial Services Authority or the Bank of England should have paid more attention to the downsides, but too many of us thought there would be a credit crunch so severe that banks would simply stop lending to each other. Everyone is looking for someone to blame for this, and it is obvious that things went to an extreme with the Rock's borrowing in the money markets. However, it may be "just one of those things", an act of God almost.
In fact, this is the more disturbing aspect of the Northern Rock affair: that we all knew what was going on. Had shareholders been more alert to what was happening they would have been welcome to turn up at the AGM and ask some questions. Or email them in.
I wasn't a shareholder in the Rock for very long; I got out fairly soon after the trouble started, and suffered a small loss. I count myself lucky. I'm not in the mood for taking legal action against the Chancellor of the Exchequer, although, looking back, I did find his argument that Northern Rock was illiquid but not insolvent persuasive and reassuring – but ultimately misleading.
For me, the best news of the week were the profits at Centrica. Some customers are obviously right to feel aggrieved, but they have the ability to shop around. For shareholders the results were excellent. If you are a disgruntled British Gas user, you should go and buy some shares in Centrica as a sort of emotional hedge. I'll add to my holding, but maybe take another look at their business model first.
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