Jeremy Warner's Outlook: Ministers may have to consider radical action as mortgage famine intensifies

Morgan Stanley way to rights issue riches; Rock pays £1.1m for its man, but why the largesse?
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News from the housing market just gets worse and worse. The number of new mortgage approvals fell a further 23 per cent in June to a level which is now nearly 70 per cent lower than a year ago. If the drop rate continues at the present pace, there will be no new mortgage finance at all by the end of the year.

The resulting mortgage famine is already more extreme than anything seen even in the early 1990s, and therefore threatens a more damaging and lasting housing market crash.

How far should the Government go in trying to reverse this phenomenon? Economic purists such as Mervyn King, Governor of the Bank of England, might argue that the taxpayer should do nothing, other than perhaps providing housing associations with a bit more money for buying up vacant properties for social housing purposes. To do more, by for instance providing the mortgage market with some kind of government guarantee, which is in effect what they do in the United States, would risk restarting the housing market boom of a year ago, thereby creating the backdrop for an even worse crisis at a later stage. The market must be left to correct as it sees fit.

Yet if you fall out of a window, it is surely much better that your descent be slowed by a safety line than you end up splattered all over the pavement. As it is, the housing market crash threatens substantial collateral damage in the wider economy, and a possibly devastating downward spiral in asset prices and employment. If the process is allowed to go unchecked, it won't be the bankers who fed the mortgage boom who will be the main victims, but ordinary householders forced to pay more for their mortgages, if they can get one at all. Where's the issue of moral hazard in that?

Britain has the second-largest mortgage market in the world after the US. This has driven one of the highest levels of home ownership on the planet, which must on the whole be thought of as a plus. What's enabled this growth is wholesale funding of the mortgage markets.

In Britain, retail deposits account for little more than 50 per cent of outstanding mortgages. The rest has been funded either through securitisation of mortgages, or directly through wholesale money markets. For the time being, securitisation has gone, and even short-term funding in the money markets is problematic. In very rough terms, the amount of available mortgage finance has been halved.

If the other half is not persuaded to return, Britain faces reversion to an age of mortgage austerity and queuing where only the bankable middle classes will find it easy to obtain the money to buy a house. Some might regard this as a more sensible, low-risk approach to mortgage lending, but is that what we really want?

In a report handed to ministers this week but not yet published, James Crosby, the former HBOS chairman charged by the Government with addressing the crisis in the housing market, examines a number of possible solutions. The most radical of these would involve the Government in guaranteeing mortgage-backed securities, either explicitly, or implicitly in the same way as the US.

Yet for the Government to subsidise the housing market directly in this way would be unpalatable to many and in any case is a system that has been found wanting by the present crisis in the US in the affairs of Fannie Mae and Freddie Mac.

A possible halfway house would be to extend the scope of the Bank of England's "special liquidity scheme" to new mortgages, so that for a price lenders would be able to swap new mortgages for more liquid government bonds. Yet Mr King would be vigorously opposed to any such extension and, in a falling-out that would make the present strained relationship between the Bank and the Treasury look like a vicar's tea party by comparison, would fight any such notion tooth and nail. What is clear beyond doubt is that something has to be done. The debate as to what is about to get very heated indeed.

Morgan Stanley way to rights issue riches

Sorry to keep going on about the Morgan Stanley shorting of HBOS, but boy have those investment bankers cleaned up on this one, leaving luckless long-only HBOS investors again badly short-changed.

Forget the rumours of a takeover bid from the Spanish bank BBVA. Though not entirely implausible, it is not clear why BBVA would want to take on one of the world's largest mortgage lenders right now, and one, moreover, which is nearly double its own size in terms of balance sheet assets.

Still, the possibility shouldn't altogether be discounted. BBVA's bigger Spanish rival, Santander, is already bulking up in UK mortgages through the acquisition of Alliance & Leicester. To prove it's got cojones, BBVA might be tempted to try and go one better. In any case, the story reinforced a rare day of positive sentiment for banking stocks, with HBOS shares soaring a spectacular 17 per cent. Goldman Sachs added HBOS to its "conviction buy" list while the well-regarded Wall Street banking analyst Thomas Brown said that in his view the banking sector had already passed its moment of capitulation and was set for a giant rebound.

The upshot is that the rump "overhang" in HBOS stock has now been largely removed. In the past few days, the two lead underwriters, Morgan Stanley and Dresdner, have been able to reduce their exposure to the rump to less than a disclosable stake. Even combined, they are thought now to own less than 5 per cent of the stock. No wonder so many punters out there sense a conspiracy. One correspondent on The Independent's website (see yesterday's "Outlook: "Morgan Stanley in hot water over HBOS short") calls the HBOS share price one of the most manipulated he has seen in years.

The effect of the Morgan Stanley short position, taken out after subscription to the rights issue had closed, but before any attempt to place the rump had been made, may have been to depress the share price to a point which guaranteed that the rump was left with the underwriters. This has enabled Morgan Stanley to make a substantial profit not just on the original short position but now on the unsold rump too. Ordinary shareholders have meanwhile been deprived of anything that might have been made from the sale of the rights on their behalf. Never mind the principle of pre-emption rights. All in all, the HBOS rights issue seems to have succeeded only in lining the pockets of the underwriters. Thanks for that rumour of the Spanish bid, which has further helped the underwriters' cause.

If the debacle of banking rights issues hadn't already assigned the rights method of fund-raising to the dustbin of history, the sight of underwriters coining it on such a scale surely will. Credit crunch, what credit crunch? Bonuses all round, please.

Rock pays £1.1m for its man, but why the largesse?

Another outstanding hire by Northern Crock in Gary Hoffman, allowing Ron Sandler, the chairman, to ease back on his executive duties so as to concentrate on, er, strategy and pursuit of a gong? Yet I'm not entirely sure why Northern Rock (ie the taxpayer) finds it necessary to pay £1.1m in golden hellos.

By some accounts, Barclays, Mr Hoffman's present berth, would have paid Northern Rock to get him off its hands, though that wasn't the official line being peddled yesterday by Barclays' chief executive, John Varley, who said the bank was releasing him "only reluctantly".

Others tell a different story. Since giving up responsibility for Barclaycard two years ago, Mr Hoffman has been in pretty much a non job at Barclays. He's still a main board director, but insiders struggle to figure out what exactly he does other than produce corporate social responsibility reports.

Nor was his management of Barclaycard thought to be an unambiguous success. Mr Hoffman's main contribution there was to buy Monument, a sub-prime credit card lender, and embark on a period of hell-for-leather growth. The consequent uplift in impairment charges so shocked the Barclays old guard that they undid the acquisition and kicked Mr Hoffman upstairs. Still, I'm sure the Government has made the right choice in paying through the nose for such a talent.