Although Northern Rock Bank appeared to have grown rapidly over the past two years, becoming a major bank by 2007, with branches located in shopping malls across the UK...
However, at its peak in February of this year, its market capitalization was only £5.2 billion, and its scale wasn't considered large—roughly one-twentieth the size of Barclays.
So, acquiring the bank now, even though its market capitalization has shrunk to less than $360 million—and its stock price is still falling—
wouldn't it be more costly than the benefits?
If that were the case, there wouldn't be so many institutions and consortiums actively competing to acquire Northern Rock Bank.
As previously mentioned, Northern Rock Bank's losses during the subprime mortgage crisis weren't that significant. Their main problem was that they had issued too many mortgages under loose terms, similar to the subprime mortgage crisis in the United States. Rising interest rates in the UK, coupled with the impact of the subprime mortgage crisis, could have resulted in many loans going uncollected, leading to loan defaults.
This situation caused Northern Rock's cash flow to dry up—they already funded 75% of their loans with funds borrowed or loaned from other sources. Coupled with the depositor run, the cash flow that normally circulated during boom times was disrupted, leading to Northern Rock's current predicament. The funds
injected into Northern Rock by the British government through the Bank of England didn't simply disappear; they filled the gaps between depositor withdrawals and the urgent repayment of funds previously received through other channels.
For example, Northern Rock's assets originally reached £100 billion, but these assets included liabilities and depositor funds. After deducting these, the stock price reflected a market capitalization of over £5 billion.
Now, Northern Rock's market capitalization is only £360 million, due to losses, a decrease in depositors, increased debt and interest payments, and, more importantly, a lack of market confidence.
To put it bluntly, a stock price doesn't fully reflect a company's true value. It's more closely tied to market confidence. When the market believes you can achieve significant growth or revenue growth in the future, even if your current assets are only $100,000, the stock price can rise, pushing your market value to $1 million or even $10 million. Investors are investing in the future.
Conversely, when the market loses confidence and becomes pessimistic about your company, even if you have $1 million in real assets, the stock price may ultimately reflect a market value of only $100,000 due to a sell-off.
While the acquisition of Northern Rock Bank will undoubtedly incur £25 billion in debt and interest, and many previously issued mortgages may be difficult to collect, this doesn't mean the funds have vanished.
Those who bought their homes with loans have already mortgaged their properties to banks. With the suspension of mortgage payments, the banks can repossess these properties. The only concern is that given the current global economic situation, these properties may not be able to be sold for the value they were originally mortgaged for.
After all, in order to expand its lending, Northern Rock Bank was even offering loans at rates as high as 100% of the then-current housing price, and even as high as 125% for some properties. Therefore, if the loans were not collected, even if the borrower had already made several payments, the current prices of the properties would still result in some losses.
However, Barron also knew that after the subprime mortgage crisis, British real estate prices would quickly recover, even experiencing significant price increases.
Therefore, these "bad debts" would at most tie up a significant amount of their capital, and with the recovery of the housing market, they would eventually be unwound and even generate profits; they would not simply disappear out of thin air.
This was precisely the reason why more than a dozen institutions and consortiums initially competed for Northern Rock Bank.
However, the British government's condition that the £250 loan, plus interest, be repaid within three years discouraged many of these institutions and consortiums. After all, given the current situation, who knows when the UK's real estate market will recover? Not only is Northern Rock Bank experiencing a liquidity crunch, but the subprime mortgage crisis has also caused many banks to become cautious. Taking on debt is no problem, but repaying it within three years is proving extremely difficult.
"I understand your concerns very well, sir..."
Barron said to the Chancellor of the Exchequer in front of him:
"I can guarantee to pay off the 25 billion pounds and interest within three years, but it needs to be done in a different way..."
Darling frowned slightly when he heard what Barron said to him, and shook his head and said:
"To do it this way... I'm afraid it will be very difficult. At least within the government and the central bank, there will be a lot of opposition."
"But I hope you understand, sir, this is already the best solution. Apart from this, under the current circumstances, no one will be able to accept the condition of paying off 25 billion pounds of debt and interest within three years. As for those opposing voices... things are often like this. It is easy to oppose, but it is difficult to do things. If anyone expresses a different opinion, just let him go and solve the problem, and then he will shut up immediately."
So far, among other competitors except Standard Chartered Bank, the acquisition plan closest to the British government's requirements is the Virgin Group.
Virgin Group pledged to immediately pay £11 billion of the £25 billion owed by Northern Rock to the Bank of England (BoE) upon the completion of the acquisition, and to repay the entire outstanding loan over the next five years.
It also pledged to pay interest accrued on various financing arrangements, including the Bank of England loan, in cash.
Following the acquisition, Virgin Group will inject its currency business assets into Northern Rock, renaming it Virgin Bank, and issue new shares, valuing Virgin Group's current currency business at £250 million.
Half of the £11 billion repayment to the BoE will be provided by the consortium partnering with Virgin Group, while the remaining half will be raised through the issuance of new shares to existing shareholders, priced at 25 pence per share and underwritten by the consortium.
However, Baron also pointed out to Darling the shortcomings of Virgin Group's acquisition proposal compared to their own.
Besides Virgin Group delaying repayment of its debt to the Bank of England until five years later, the government's bailout of Northern Rock Bank naturally necessitates the hope that the bank will avoid further trouble. Virgin Group previously had no banking operations, and its currency operations were at best considered "intermediary." Therefore, it remains uncertain whether it can effectively manage Northern Rock and keep it out of trouble.
Standard Chartered Bank, however, is a different story. It is a well-established bank with extensive history and experience, and well-established systems across all its banking sectors. Following the acquisition, Standard Chartered will establish Northern Rock as a branch, expanding its presence in the UK. With Standard Chartered's reputation, it will naturally regain the trust of depositors and the market, helping Northern Rock weather the recent turmoil.
Furthermore, Virgin Group plans to raise funds through a new share issuance, and Barron has reason to suspect that this process will not go as smoothly as anticipated, given the deepening subprime mortgage crisis.
Don't look at the stock market, it seems to be still booming, but choosing to issue new shares at this time is definitely not a good idea. I'm afraid they will regret it later...