Monday, 26 November 2007

Branson in a Pickle?

So out sky-diving entrepreneur is the preferred bidder for Northern Rock. Doyen of the labour party establishment Sir Richard has organised a team to put together Virgin money with Northern Rock to create a banking operation to rival the big banks. Well maybe, but there are some big questions to be asked: first most of the mortgage assets of NR are locked up in Jersey based special investment vehicles and have been repackaged and sold on as asset backed securities. The problem is no one knows how much these assets are now worth. NR had a very clear idea of the likely default rate in each of the different issue classes but a question mark hangs over the recoverability of the debt in the event of default. It maybe that we are in for a property crash putting a substantial part of the firm's asset value at risk. Or it maybe that the US experience will not be replicated here.

The 'Red Barry' who is my mole in the property business tell me that house prices are slowing but there is no sign of a collapse. Its tougher for the unemployed with £30000 of outstanding credit card debt to get a mortgage - but anyone with a reasonable credit rating can still find a competitive loan. Red Barry's only concern is with the buy to let market which has become overblown - but he feels that relatively modest correction is all that is on the cards this year. Most people who want to work can get employment and the economy is still growing at a respectable rate. So what's the problem?

I suspect he's right and that we are all too fond of watching the news and reading the newspapers. So if there is no big correction on the horizon what's the problem? Nothing really expcept the shareholders of Northern Rock are about to be shafted by a fire sale bid promoted by a government with its financial pants down and the owner of an overstretched brand called Virgin.

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