Friday, September 14, 2007

Old Fashioned Bank Run - British Version

This can't be good:

Sept. 14 (Bloomberg) -- Hundreds of Northern Rock Plc customers crowded into branches in London today to pull out their savings after the mortgage-loan provider sought emergency funding from the Bank of England,

``It's scary,'' said Peter Pye, 60, a retired university lecturer standing in a line of about 30 people outside the Moorgate branch in the financial district. ``I have my life's savings in Northern Rock.'' He said he would withdraw a ``six- figure'' sum and leave 5,000 pounds in the account.

The Bank of England said it will provide emergency cash to Northern Rock, Britain's third-largest mortgage provider, in the nation's biggest bailout of a financial institution in 30 years. The rising cost of credit left the lender unable to make new loans and stoked concern among customers about their money.


Northern Rock has 76 bank branches, according to Hunter. By 11 a.m., dozens of people formed queues on the sidewalk outside the Moorgate office, the Maddox Street branch in the West End shopping district, and the Kingston Upon Thames outlet in southwest London.

``There is no risk,'' said James Hamilton, an analyst at Numis Securities in London. ``The Bank of England said Northern Rock is solvent.'' Hamilton said that ``as credit turmoil will return to normal, Northern Rock's business will as well.''

``Why leave your money in a bank that obviously has some major problems?'' said Michael Ribotham, 74. ``I'm not young and don't have a chance to make it back again.'' Ribotham had been waiting at Moorgate for about 40 minutes.

Northern Rock was formed from a merger between two building societies and the initial public offering of Northern Rock Building Society in October 1997. The stock plunged as much as 26 percent today. The lender said profit will trail analysts' forecasts, blaming a ``severe liquidity squeeze'' and rising short-term interest rates.

``I am going to take out the lot, every penny,'' said William Gough, 75, queuing with about 30 people outside the Maddox Street branch. Gough, from Belfast, in Northern Ireland, was ``horrified'' to hear about Northern Rock's request for emergency funding.

You may remember that we here in America had our own old fashioned bank run back in August at Countrywide.

Of course, Countrywide has since borrowed $11.5 billion, sold a $2 billion stake to Bank of America, obtained $12 billion more in credit, and threatened to lay off as many as 12,000 employees, so all is well with Countrywide.

Sure it is.

POSTSCRIPT: BTW, if you haven't read the Gretchen Morgenson article in the NY Times on Countrywide shoddy, fraudulent business practices, you should.

Here's a taste:

On its way to becoming the nation's largest mortgage lender, the Countrywide Financial Corporation encouraged its sales force to court customers over the telephone with a seductive pitch that seldom varied. ''I want to be sure you are getting the best loan possible,'' the sales representatives would say.

But providing ''the best loan possible'' to customers wasn't always the bank's main goal, say some former employees. Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide's smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.

Countrywide's entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of the company and internal documents they provided. One document, for instance, shows that until last September the computer system in the company's subprime unit excluded borrowers' cash reserves, which had the effect of steering them away from lower-cost loans to those that were more expensive to homeowners and more profitable to Countrywide.


''The whole commission structure in both prime and subprime was designed to reward salespeople for pushing whatever programs Countrywide made the most money on in the secondary market,'' the former sales representative said.

Consider an example provided by a former mortgage broker. Say that a borrower was persuaded to take on a $1 million adjustable-rate loan that required the person to pay only a tiny fraction of the real interest rate and no principal during the first year — a loan known in the trade as a pay option adjustable-rate mortgage. If the loan carried a three-year prepayment penalty requiring the borrower to pay six months' worth of interest at the much higher reset rate of 3 percentage points over the prevailing market rate, Countrywide would pay the broker a $30,000 commission.

When borrowers tried to reduce their mortgage debt, Countrywide cashed in: prepayment penalties generated significant revenue for the company — $268 million last year, up from $212 million in 2005. When borrowers had difficulty making payments, Countrywide cashed in again: late charges produced even more in 2006 — some $285 million.

The company's incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan's value, versus 0.20 percent on loans one step up the quality ladder, known as Alternate-A, former brokers said. For years, a software system in Countrywide's subprime unit that sales representatives used to calculate the loan type that a borrower qualified for did not allow the input of a borrower's cash reserves, a former employee said.

A borrower who has more assets poses less risk to a lender, and will typically get a better rate on a loan as a result. But, this sales representative said, Countrywide's software prevented the input of cash reserves so borrowers would have to be pitched on pricier loans. It was not until last September that the company changed this practice, as part of what was called in an internal memo the ''Do the Right Thing'' campaign.

According to the former sales representative, Countrywide's big subprime unit also avoided offering borrowers Federal Housing Administration loans, which are backed by the United States government and are less risky. But these loans, well suited to low-income or first-time home buyers, do not generate the high fees that Countrywide encouraged its sales force to pursue.

A few weeks ago, the former sales representative priced a $275,000 loan with a 30-year term and a fixed rate for a borrower putting down 10 percent, with fully documented income, and a credit score of 620. While a F.H.A. loan on the same terms would have carried a 7 percent rate and 0.125 percentage points, Countrywide's subprime loan for the same borrower carried a rate of 9.875 percent and three additional percentage points.

The monthly payment on the F.H.A. loan would have been $1,829, while Countrywide's subprime loan generated a $2,387 monthly payment. That amounts to a difference of $558 a month, or $6,696 a year — no small sum for a low-income homeowner.

''F.H.A. loans are the best source of financing for low-income borrowers,'' the former sales representative said. So Countrywide's subprime lending program ''is not living up to the promise of providing the best loan programs to its clients,'' he said.

Countrywide - bad people doing bad things.

Not enough bad stuff can happen to everybody involved with this company -from the greedy, arrogant asshole who owns them (and who dumped a lot of his own company's stock right before the bursting of the housing bubble) to the sales force who screwed as many people as they could to increase their commissions.

Read the whole article. It will make you want to put your fist through the TV every time you see the Countrywide commercial come on.

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