[NYTr] Bank of England in dramatic turn on 3-month money

[All the News That Doesn't Fit]

[Read Jon Snow's silly copy after the Telegraph's below.  He seems to
think the Northern Rock Bank is "on the mend," though he acknowledges
something fundamental is "awry. -NYTr]

The Telegraph - Sep 19, 2007
http://www.telegraph.co.uk/money/main.jhtml;jsessionid=KS0IE3USQZ1D1QFIQMFSFFWAVCBQ0IV0?xml=/money/2007/09/19/bcnboe119.xml

Bank of England in dramatic turn on 3-month money

By Philip Aldrick

The Bank of England has made an embarrassing U-turn by flooding the
capital markets with L10 billion of emergency three-month money and
widening the asset classes it will accept as collateral against the
loans.

Financiers have been calling for the Bank to relieve pressure in
the three month inter-bank lending market for weeks but, earlier
this month, Governor Mervyn King expressly stated that the three
month market was not the Bank's concern.

Its position changed this morning, when it said: "This measure is
being taken to alleviate the strains in longer-maturity money
markets." The Bank will accept "mortgage collateral" in the auction
and charge interest at 6.75 percent.

Bankers claim that, had the three-month money been available,
Northern Rock may not have resorted to the emergency facility that
panicked customers, irreparably tarnished its reputation, and has
caused the share price to halve.

Matthew Sharratt, an economist at Bank of America, told Bloomberg:
"One can only say that it does represent something of a U-turn.
It's likely that the pressure on Northern Rock would have been
considerably less had this policy been undertaken a couple of weeks
ago."

Bankers said the key development was the widening of the range of
securities it accepts as collateral. The decision will allow banks
to use the mortgages they have written as assets against which to
draw down on the B#10bn facility. Previously, only gilts would be
accepted.

By widening the accepted collateral class, the Bank is finally
following the US Federal Reserve and the European Central Bank.
However, bankers said it may have been too little too late. The Fed
decision to cut rates by half a percentage point has already relieved
some pressure on the three-month inter-bank market and that prime
mortgage securities can be used to raise funds at less than the
bank's penal 6.75 percent rate.

One financier said: "You can fund good quality paper at less than
that at the moment, but this will have the effect of capping the
three month lending rate at 6.75 percent. This will only be attractive
if they accept weaker assets as collateral or if they lower the
rate."

He added that the City was looking for more detail on exactly what
quality of "mortgage collateral" will be accepted.

                              ***

Channel 4 News - Snowmail (UK) - Sep 19, 2007
http://www.channel4.com

Northern Rock on the mend

It looks like having chucked the kitchen sink at it, the government has
got Northern Rock back under control. And even the other banks seem to
be recovering on the stock exchange. 

But there's little doubt that what has happened this week indicates
something very awry somewhere deep inside the tectonic plates of the
financial world.

While we're on air tonight, some of that may well be revealed by the
interest rate decision from the Federal Reserve bank in Washington and
results from Lehman Brothers, one of the big investment banks that is
thought to have traded in some of the more - how shall I put it? -
innovative financial products.

So the question now comes down to one of judgement by the regulator. 

How was it that banks were able to shift so much debt off balance
sheets into these products? And why doesn't anybody have a clue how
much damage there is out there? 

And why were people allowed to borrow sums five or six times their
total income? When I was a boy (!), a very long time ago, I was allowed
to borrow two and a half times my salary for my mortgage. 

So we have the director of the Financial Services Authority in live
tonight so answer some of these questions.