So, was Northern Rock technically insolvent or not, back in August?
In asset and liability terms, no: in terms of being unable to pay its debts as and when due, yes.
Migeru:
If it was, what are the shareholders complaining about?
Possibly they take the view that one of a Central Bank's key roles is to act a "lender of last resort"?
And if it wasn't, why are the shareholders suing the government instead of the management of Northern Rock?
Because the government:
(a) is due to pay them compensation, and they believe -rightly or wrongly - that the terms of reference of the assessors will be stacked against them, which is why they seek a judicial review;
(b) is, unlike the management - as Willie Sutton had it - "where the money is".
Of course, the Bank of England used to quietly sort out problem Banks such as Northern Rock in their sleep with no one the wiser. Had this approach been taken, it would long since have been an arm of LloydsTSB.
Migeru: So, was Northern Rock technically insolvent or not, back in August? In asset and liability terms, no: in terms of being unable to pay its debts as and when due, yes.
Which probably means that accounting methods are sorely lacking because they don't take into account the timing of liabilities and that's what made NR insolvent.
In other words, "discounted present value" is not enough. More generally, reducing a complex situation to single numbers is not enough. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
If they can't meet their liabilities when due that means they don't have the necessary assets to meet their liabilities.
They would say they had the assets, but could not access them.
The two tests are of "solvency" and "liquidity".
I can own a house worth £1m and owe £100.00 secured on it. My net assets are £999,900, so I am "solvent" using the assets vs liabilities test.
But if I have zero income, and hence cannot repay either the £100.00 or even the interest on it, then I fail the second (liquidity) test, and the house will be "repossessed" or "foreclosed"
what are the shareholders complaining about? Possibly they take the view that one of a Central Bank's key roles is to act a "lender of last resort"?
what are the shareholders complaining about?
I have never understood why piling on punitive rates and charges makes distressed borrowers more likely to repay.....
