In conjunction with our current events discussion this morning in class, I chose to write a journal entry about an article which discussed Northern Rock and the company's current situation.
Title: Northern Rock opts to cancel dividend
Source: Financial Times 9/26/07
Amid growing pressure from regulators and MPs, the troubled mortage lender bank Northern Rock decided to drop its controversial £59m pay-out, which the company had announced and planned on doing before it was hit by financial crisis. While the Association of British Insurers and other investors are pleased to learn of this move, RAB Capital, Northern Rock's hedge fund manager, took the news with much dismay. Philip Richards, runner of RAB, said that they disagree with the decision about the dividend in that the decision agrees with suggestions that the Bank of England and Treasury want to see Northern Rock's shareholders wiped out; RAB became Northern Rock's biggest shareholder last week through its Special Situations fund.
Despite RAB's discomfort with Northern Rock's move to cancel its dividend pay-out, other companies such as the Treasury, Financial Services Authority and UK Shareholder's Association are all coming to Northern Rock's aid. The Treasury and Financial Services Authority has hired the Slaughter & May law firm to work with Goldman Sachs to adivse on options for Northern Rock, and the UK Shareholder's Association has formed an action group for Northern Rock investors in order to oppose any quick sale of the bank. Since the initial announcement of the bail-out, however, most large banks have kept their distance from Northern Rock due to concerns about financing the £113.5bn balance sheet the company has accumulated as well as damage to their brand. As with many other current situations in the UK's economy, only time will tell what will happen to Northern Rock, if there even is a Northern Rock in the future. Until then, we'll all just have to wait around with our ears open and eyes peeled.
I personally think it was a good idea for Northern Rock to cancel their huge dividend. As the article mentions, the dividend pay-out would have alienated the government and resulted in an outflow of cash that would make the company particularly unattractive to bidders. With this, however, it is good that Northern Rock has a law firm working with Goldman Sachs, one of the biggest names in economics, to advise them on what their options are and what they can or should do next; Northern Rock has obviously made some bad decisions in the past so it is definitely a good thing for them to have advisors. As the old adage goes, time is the best and worst medicine, and as I have mentioned previously, only time will tell the destiny of this troubled bank.
Wednesday, 26 September 2007
Tuesday, 18 September 2007
9/18/07
Today's Guardian Newspaper had a particular article that caught my attention, not only because it seemed to be an interesting article, but also because it is very pertinent to the topics we have been discussing in class. It deals with inflation rates and their relation to interest rates and the overall UK economy. It was a very insightful article and gave me a more powerful understanding of how an economy functions and how one aspect can have a waterfall effect on the many other economic facets within a country.
Title of Article: Inflation drops further
Source: Guardian (9/18/07)
Although not done intentionally, the inflation rate fell by 0.1 percentage points in August from July's 1.9% reading. This news was announced after the Bank of England made another £4.4 billion available to money markets in attempts to bring down the Libor (London interbank offered rate) interest rates closer to that of the bank rate, which is around 5.75%. With this decrease, the inflation rate is at its lowest level in more than a year, is significantly less than the spring all-time high of 3.1%, and is also below the Bank's 2% target for the second consecutive month. It also carries the potential to allow banks to lower interest rates if the ongoing chaos in financial markets continues.
The article credits the decrease in inflation rates to mortgage lenders cutting their exit administration fees as well as many gas and electric companies lowering their prices. With this, it makes sense that housing, water, electricity, gas and other fuels inflation has gone down to 2.8% from 3.5% in July, which is the lowest its been since March 2004.
Until recently, officials expected the interest rates to rise to 6% or over, but with the decrease in inflation rates, many are now expecting a cut to occur before Christmas. Howard Archer from Global Insight says the decrease is very encouraging but expects the Bank of England to be very cautious about lowering interest rates just yet given the record oil price and possible increase in food prices, as these two factors may cause the inflation rate to rise once again in the coming months. To judge whether or not interest rates should be trimmed, the Bank plans to monitor how the current credit crunch and Northern Rock crisis is affecting the economy and the outlook for growth and inflation, and says that if growth is being significantly hit and continues to dilute underlying inflationary pressures, officials will then be more likely to lower interest rates.
While it would be a welcome change to the now high interest rates, I believe the Bank of England is being very smart to be weary of lowering them just yet. I don't know very much about economics as of now, but I at least know that the field is very dynamic, and just because inflation rates are low right now it does not mean that they will be low for long. If the Bank lowers interest rates now, inflation rates may spike tomorrow and then the Bank would be in serious trouble. Therefore, the Bank should continue to do what it is doing now and just keep track of the inflation rate decrease, and not make any decisions to lower interest rates until the inflation rate decrease remains constant.
Title of Article: Inflation drops further
Source: Guardian (9/18/07)
Although not done intentionally, the inflation rate fell by 0.1 percentage points in August from July's 1.9% reading. This news was announced after the Bank of England made another £4.4 billion available to money markets in attempts to bring down the Libor (London interbank offered rate) interest rates closer to that of the bank rate, which is around 5.75%. With this decrease, the inflation rate is at its lowest level in more than a year, is significantly less than the spring all-time high of 3.1%, and is also below the Bank's 2% target for the second consecutive month. It also carries the potential to allow banks to lower interest rates if the ongoing chaos in financial markets continues.
The article credits the decrease in inflation rates to mortgage lenders cutting their exit administration fees as well as many gas and electric companies lowering their prices. With this, it makes sense that housing, water, electricity, gas and other fuels inflation has gone down to 2.8% from 3.5% in July, which is the lowest its been since March 2004.
Until recently, officials expected the interest rates to rise to 6% or over, but with the decrease in inflation rates, many are now expecting a cut to occur before Christmas. Howard Archer from Global Insight says the decrease is very encouraging but expects the Bank of England to be very cautious about lowering interest rates just yet given the record oil price and possible increase in food prices, as these two factors may cause the inflation rate to rise once again in the coming months. To judge whether or not interest rates should be trimmed, the Bank plans to monitor how the current credit crunch and Northern Rock crisis is affecting the economy and the outlook for growth and inflation, and says that if growth is being significantly hit and continues to dilute underlying inflationary pressures, officials will then be more likely to lower interest rates.
While it would be a welcome change to the now high interest rates, I believe the Bank of England is being very smart to be weary of lowering them just yet. I don't know very much about economics as of now, but I at least know that the field is very dynamic, and just because inflation rates are low right now it does not mean that they will be low for long. If the Bank lowers interest rates now, inflation rates may spike tomorrow and then the Bank would be in serious trouble. Therefore, the Bank should continue to do what it is doing now and just keep track of the inflation rate decrease, and not make any decisions to lower interest rates until the inflation rate decrease remains constant.
Tuesday, 11 September 2007
9/5/07
Despite its plethora of intriguing and prevalent articles, a particular story in today's Financial Times caught my attention. As we all know, Chinese manufacturing companies are under intense scrutiny after several occurrences of potentially fatal product recalls. This article discusses how China is slowly getting to grips with product safety standards as well as the effect of the strong price pressure from the big western groups these Chinese manufacturers supply.
Title of Article: Testing Times
Source: Financial Times (9/5/07)
Whenever 21st century consumers in one country buy products from manufacturing industries working in 19th century conditions in another, there is bound to be problems. Such is the situation between US and UK business tycoons and several Chinese manufacturing industries. These very modern and prosperous countries have moved their production to the place with the lowest level of regulation (China), which has stirred up much controversy and caused great economic turmoil for all countries involved.
Over the recent years, US and UK buyers of Chinese goods have put enormous pressure on these companies to reduce the prices of their goods. This has in turn forced Chinese manufacturers to look for cheaper alternatives as well as cut corners on quality standards in order to win contracts with US and UK companies. On account of these resolutions, everything from dog food to toys and toothpaste have been recalled, and these recalls are the source of the intense attention put on and the tarnished image of China and its manufacturing companies.
The all too common occurrence of recalls has also led to unexpected visits from US and UK safety inspectors. Previously, inspections usually focused more on social compliance, labor conditions and environmental issues within each factory, but now more than ever inspections are mainly concerned with safety issues. These unannounced inspections have caused factory managers a great amount of stress and also disrupted work within the factories.
Before all the blame is put on the Chinese factories, one has to realize the faults within the US and UK companies. Firstly, these companies are demanding lower prices regardless of the conditions the Chinese workers face, and are not realizing the problems caused by making such demands. They are also waiting until the toys are shipped to their respective destinations (either in the US or UK) to test the products' safety and not requiring continual inspection and testing by the suppliers.
In light of these recalls and faults, all companies invovled are vowing to right their wrongs. US companies such as Wal-Mart are pursuing a drive to improve the monitoring of workplace conditions and has recently stepped up the testing of products in response to safety concerns. US and UK companies are also requiring routine safety checks of all products produced. Chinese companies are paying more attention to the manufacturing processes and securing the quality of their goods. Many of them have made needle detectors mandatory to check for any fragments of broken needles in their garments or plush toys and are also testing each of their products to ensure their safety and reliability. For example, one company has developed a "drop test" in which toys are dropped from 90 cm (a child's height), and tested to see if they fracture into shards that are either dangerously small or sharp. The Chinese government is also stepping in, demanding to see safety reports for toy shipments and requiring that the reports not be more than twelve months old. Executives complain that the government is "being more Catholic than the Pope."
Even though Chinese companies are complaining of the unexpected safety inspections and strict Chinese governmental regulations, in order to rid these companies of their bad image, I believe such precautions must be taken. If not, China may lose their reputation of having the world's best toy factories and largest volume of international product exports. If the promises of improvement made by US and UK buyers and Chinese producers do not come to fruition, the economies of all three countries could suffer even more than they already have.
Title of Article: Testing Times
Source: Financial Times (9/5/07)
Whenever 21st century consumers in one country buy products from manufacturing industries working in 19th century conditions in another, there is bound to be problems. Such is the situation between US and UK business tycoons and several Chinese manufacturing industries. These very modern and prosperous countries have moved their production to the place with the lowest level of regulation (China), which has stirred up much controversy and caused great economic turmoil for all countries involved.
Over the recent years, US and UK buyers of Chinese goods have put enormous pressure on these companies to reduce the prices of their goods. This has in turn forced Chinese manufacturers to look for cheaper alternatives as well as cut corners on quality standards in order to win contracts with US and UK companies. On account of these resolutions, everything from dog food to toys and toothpaste have been recalled, and these recalls are the source of the intense attention put on and the tarnished image of China and its manufacturing companies.
The all too common occurrence of recalls has also led to unexpected visits from US and UK safety inspectors. Previously, inspections usually focused more on social compliance, labor conditions and environmental issues within each factory, but now more than ever inspections are mainly concerned with safety issues. These unannounced inspections have caused factory managers a great amount of stress and also disrupted work within the factories.
Before all the blame is put on the Chinese factories, one has to realize the faults within the US and UK companies. Firstly, these companies are demanding lower prices regardless of the conditions the Chinese workers face, and are not realizing the problems caused by making such demands. They are also waiting until the toys are shipped to their respective destinations (either in the US or UK) to test the products' safety and not requiring continual inspection and testing by the suppliers.
In light of these recalls and faults, all companies invovled are vowing to right their wrongs. US companies such as Wal-Mart are pursuing a drive to improve the monitoring of workplace conditions and has recently stepped up the testing of products in response to safety concerns. US and UK companies are also requiring routine safety checks of all products produced. Chinese companies are paying more attention to the manufacturing processes and securing the quality of their goods. Many of them have made needle detectors mandatory to check for any fragments of broken needles in their garments or plush toys and are also testing each of their products to ensure their safety and reliability. For example, one company has developed a "drop test" in which toys are dropped from 90 cm (a child's height), and tested to see if they fracture into shards that are either dangerously small or sharp. The Chinese government is also stepping in, demanding to see safety reports for toy shipments and requiring that the reports not be more than twelve months old. Executives complain that the government is "being more Catholic than the Pope."
Even though Chinese companies are complaining of the unexpected safety inspections and strict Chinese governmental regulations, in order to rid these companies of their bad image, I believe such precautions must be taken. If not, China may lose their reputation of having the world's best toy factories and largest volume of international product exports. If the promises of improvement made by US and UK buyers and Chinese producers do not come to fruition, the economies of all three countries could suffer even more than they already have.
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