The Last Northern Rock Accounts

I have to admit that at the time I invested, I didn't realise that NRK had a flawed business model, indeed I believed then, most of their funds came from savers - the usual model for a Building Society. That they were largely NE-based meant that they would be lending to "locals" and that these would be considered risks - unlike the US_style "Sub-primes". In fact 50% of Mortgages appear to be based in the SE.

After the NRK-slide I obtained a copy of the latest Accounts, about the time of several postal strikes, so it did not arrive that quickly.
These observations are my reading of the accounts dated 2006. p57 is dated 27 Feb2007 so one can surmise it is their last version.

The first 10pp are the usual guff, but writ large are the following:-
(1+page) New uniforms for 2007 roll-out, on page1
(1+page) Sponsorship of Newcaselt United FC, on page 3
(1+page) Sponsorship of All-Star Golf seen on ITV by 4.5m, page5
(1+page) " Durham CCC - helped raise ( NRK's) international status, on p7
(half-page) Newcastle falcons get a nice mention on page 9
Pages 10,11 list the directors with a nice photo of the corner of the boardroom.
...up to p23 is Corporate responsibility, Governance and the sp relative to FTSE since 2002.
26-29 lists the Directors' remuneration.
30/32 Community and Environmental
33 = NRK foundation - 5% of pre-tax profits go to good causes, it seems.
34-54 Operating Business Review - colour graphics, pie-charts and so on...there is scant mention of Risk, yet each is dismissed. Under one Para, Market Risks "...changes in the level of interest-rates, the rates of exchange between currancies......The principle financial instruments that expose us to such risks are loans, deposits, securities and derivatives, none of which are used for trading purposes." ( my Italics!) Looks like the only reference to reality.
(1-page graphic:-) Rock Golf junior pro-am Tournament - page 55.
56 Directors report mentions substantial share-holdings and the contribution staff make ( usual guff), brief mention of risks is referred to the Review section.
57 - Auditors' Report - this contains the usual disclaimers and generally agees that the report conforms to IFRS Euro-gobble.
58/67 Company accounts balance-sheet, followed by Notes 67-103
The last page lists dates in 2007 and 2008 (24Oct2008=interim dividend)

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Not being a real expert, NRK all looks reasonable to me; the pictures and explanations appear to give an air of solidarity that will continue well beyond 2008
just like the earlier years, one might expect everything to continue.

Indeed I suspect this type of Annual Report is really giving the Directors Blinkers!
If it has that effect on me, an outsider, how much more is this effect year-on-year "internally"?. Indeed would anyone dare voice an "alternative-view" - or risk being fired?

Perhaps investors are not well served by such Annual Accounts - and the Auditors appear to be complicit in this, being dependent upon the Directors say-so for their fees. This state of affairs is not conducive to good practice. It allows Directors to take the "Steady as she goes" attitude. . . . no-where do we see the effect of rising interest-rates - yet this is key to the survival of the business.
Seven full pages of photos showing a happy-face and not a mantion of the narrow margin ( knife-edge it turned out) between profit and no-profit ( I suspect this occured between 5% and 5.5% although it might be time-related as well since they will have loan-contracts that are spread throughout the year. Nevertheless it would seem sensible to show the information with notes as to how they will accomodate these situations. When interest is at 4% it might seem unlikely that 6% will ever happen - yet such levels are not unheard-of. They could occur within a few months by which time their contracts would be in need for renewing.

It seems to me that this is fundamental to any loan-company - -and it might be said that NRK is more like a "Mortgage Broker" than a Bank - - having insufficient funds to satisfy the Mortgages.....OR, have I got this wrong? By the time the Annual Report was signed, there must have been some recognition of the effects o0f Sub-prime woes in America...although the incidious nature of the "passed-on loan risk" will not be understood probably until 2009 ends.


Furthermore I am troubled by the reward for failure that pervades the UK marketplace. . . it seems to only folk that suffer are shareholders ( although families and employees do often enough). . . .yet shareholders have indsufficient information and are unable to exercise any power, since the Institutional Holders have already agreed the Resolutions that are "notionally agreed" at the AGM.

I suspect it shows that Institutional Holders are not capable of being sufficiently strong witht FTSE companies, maybe because of a "scratch-my-back" unspoken rule, or maybe it's vested interests that don't want anything to become Public.
Whereas, I suspect small-shareholders would have a far better grasp of the issues, since it is their money - whereas everyone else present is just in it for a job, they have no vested interest and the very nature of Options and other "contractural" rewards means that Directors are not really employed by shareholders ( Although they are technically).
We need MORE shareholder power...... and if it is slightly inconvenient for Directors, - so what?

Nothing I'd like to change, other than the sp is moving between about 80p and 95p - represent the "hope" that some stupid Bank will be given the Keys, by the UK Government ( along with an almost unlimited pile of cash).

But, if there had been clear Accounts - showing the huge Risk looming - would Directors have been able to continue along this route....say 3 years ago, when Sub-prime first caught the (minor) finance-headlines. Indeed I'd be surprised that those in Mortgage Industry would not have been monitoring the underlying trends - so why wasn't anything done about it?

I suspect this fiasco just goes to show how badly our Regulators do their job. It may be that they are concerned about misleading comments, or minor infringements may loom large . . . .
. . . but if the Company is able to go belly-up - - - - THAT - - - is something I really want nailed yesterday . . . . .
-Yet it seems that the various Regulators were not involved in this Bank, nor were there any concerns reported in the Annual Report . . . . so it seems to me this whole episode shows that another "Marconi" can happen, because it has no downside - if their whole lifestyle was connected, then they'd make sure they didn't take risks with the shareholders' company.

I wonder if all Accounts should be reviewed by an independent Auditor. A list of local Auditors should be published and selected at random by shareholders at the agm - any that are "connected" to the company would be ruled out.