Cleaning Up?

One of the more prolific pieces of commotion surrounding the subprime and credit crisis debacle was when one of the UK's biggest mortgage and credit provider Northern Rock had to punch the dreaded 888-bail-out as it became clear that obtaining the standard rolling financing of the bank's operations in the wholesale interbank markets had become virtually impossible. Of course, this particular crisis was not without its distinct theatricals either as scores of people began to gather outside Northern Rock's branches readying themselves to go home and hollow out their mattresses. Even more quaking for the UK financial sector and essentially what brought about the whole mess in the media was when news reached the jungle drums that the Bank of England had heeded the 888 call from Northern Rock as they received the biggest one-shot amount of emergency funding in 30 years. The extra prickly about all this was that the decision to provide emergency funding came only days after the governor of the Bank of England had issued a strong call against any form of bail-out. Macro Man pounced accordingly invoking the sticker Swervin Mervyn alluding to the indecisiveness of the the governor of the BOE.  

I shall not attempt to be normative on this one since this is not the point of this entry. However, as the mess carried through in the front lines as symptom of the worsening credit crisis life was moving on as the Treasury issued calls to various investment banks to seek aid in constructing a financing package which could see Northern Rock continue. Well, it was never about going bust or not since in the event of a private sale was not possible nationalisation would be the end result. One of the potential white knights called to the Treasury chambers was Goldman Sachs as well as two bidders apparently were already in the pipeline ...

The Treasury has stepped up efforts to avoid having to nationalise Northern Rock by asking Goldman Sachs to create a financing package for a private rescue of the ailing bank. It emerged at the weekend that the US investment bank has until mid-January to pull together backers that will provide funds to prospective Northern Rock bail-out candidates. As the government, Financial Services Authority and the Bank of England seek to end the months-long crisis at Northern Rock, fears have grown that temporary state ownership may prove the only way to prevent a final collapse. The two private-sector solutions on the table are a buyout proposed by Sir Richard Branson's Virgin Group and an approach from Olivant, the vehicle of the former Abbey National boss Luqman Arnold.

Before we move up to the present allow me to take a slight detour. Back in the middle of December just about when all this mess were hitting the apex I attended one of those events which can only be described as a modern financial version of a porn movie just without the sex. Basically it works like this ... one of the major investment banks (in this case Goldman Sachs) rounds up a slew of employees from various business units together with some eager beavers from the HR departments who by the way are almost always very nice and helpful people; (often, this is usually part of a more general recruiting campaign). The word goes out which means that all students on the Economics and Finance lines at, in my case, the Copenhagen Business School receives a mail to participate in a 'Goldman Sachs' networking event. Most of us say yes of course and off we go to one of the most trendiest bars in Copenhagen. Now, if you will indulge in a sociological/anthropological observation before we move on. There are three kind of students attending these events. Group one represent the uber achievers who suit up in their Armanis, read the ten last annual reports, as well as bring their own readymade correlation analysis between the S&P 500 and the FTSE (well, you know what I mean :)). Then there are those who go with an open mind and who come largely unprepared. Finally, we have the ruthless who handily avoid dialogue with the official bank representatives and go for a quick SWAT like clean sweep of the snacks and drink table. I am happy to inform my readers that yours truly belong to the second group with a twist of number three since they usually serve top notch food.

At this point you might be completely lost as to where all this is going. Well the point is this. As I was circulating the floor with one of my mates we huddled up around one of the Goldman representatives who, I should later learn, were positioned in a department linked to debt financing and fixed income. Now, thanks to my mate who think very strongly against bail-outs and how the Fed has lowered rates recently we quickly converged on the topic of Northern Rock. My mate was basically taking the lead with an essay about how the gold standard should be re-instated finally ridding us of all problems related to inflation (well, I am perhaps simplifying his argument but that was the way it came out). Well, our friend from Goldman was playing along informing us that he was part of the department charged with aiding the Treasury knitting together a solution for shoring up Northern Rock for a sell. And he had certainly already been practicing his pitch as he pointed out that (free quote)

The bank's balance sheet looks solid over and above everything. It is just that a large part of the rolling cash flow requirement was financed through the interbank market, but otherwise there is nothing wrong.  

Indeed :) ! I should in all fairness inform you my dear reader that our friend from Goldman also spent a lot of time telling us how serious he thought all this was. All in all, this chap seemed as a clever guy. Well, I am actually trailing current events here since it seems that him and his colleagues deserve a pad on the shoulder as we learned this Sunday from Reuters that ...

Goldman Sachs is close to completing a 15 billion pound ($29.5 billion) financing package to be used by suitors for UK lender Northern Rock, the Sunday Times reported, adding details may be unveiled this week. The paper, quoting no sources, said the deal put together by U.S. investment bank Goldman Sachs was understood to be on better terms than packages being pulled together by rivals including Citigroup and could break the bid impasse.

So apart from the obvious potential corking of champagne in our Goldman associate's department, where is this likely to end? Well, it is not exactly a walk in the park to raise money at the moment so it may all still end up in a nationalisation which quite frankly would be something of a blow to the BOE and the Treasury; for Goldman I guess they will get something for their services whichever albeit not the same amount. Yet, shareholders and potential bidders seem to be unedge ...

But financing worries have loomed over the deal, with fears of a downturn in the UK housing market making it harder to value the bank and its assets. The threat of nationalization increased last month after the withdrawal of some potential suitors. Northern Rock is also set to face its investors on January 15. The extraordinary shareholder meeting, called by hedge funds RAB Capital and SRM Global, could hand shareholders the right to vote on whether assets can be sold or new shares issued -- a move the bank says would further complicate a rescue but which the equity investors say will safeguard their rights.

Hedge fund RAB, which has 7.7 percent of Northern Rock shares and is a top investor alongside 10-percent owner SRM, has written to investors urging them to back the EGM resolutions. "We are concerned that, due to the external pressure the board ... is clearly experiencing, shareholders' views and interests appear overshadowed by political considerations," RAB said in the letter released on Sunday. "Several other shareholders have expressed a reluctance to passively allow the board to decide the future of the company irrespective of shareholders' interests."

It will be interesting to follow this one from the sidelines even if it is not my speciality.

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Full Disclosure: Contrary to what might be inferred from the entry above (although I think this would be a stretch) I actually enjoyed the Goldman event quite a lot. The thing is that the vast majority of these people are very professional and very kind not to mention patient as they must answer the same questions over and over again. As for the associate in question he was particularly interesting since he was eager to play along in me and my mate's opinion makings on current events. Essentially, only a very few of these investment bank events have been a disappointment to me (I won't divulge the name of the firms).