9/26/07

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.