Sir Richard Branson's Virgin consortium is putting a bid together for Northern Rock. This was inevitable given the drop in the share price.
What is puzzling is why a profitable, well-run bank had such a precipitous fall in its share price. Sub-prime debt was not a serious issue, and all banks lend long and borrow short to some degree.
When something dramatic happens in finance, there is usually a hidden story. Behind the smoke screen provided inadvertently by pundits and other outsiders, someone has made a killing. The pension funds and other holders of NR stock lent stock to the hedge funds knowing they would drive down the share price by short-selling.
Short-selling involves borrowing stock, paying a commission for the priviledge and selling it in the market hoping it will depress the price. The stock is then bought at the lower price. The stock is returned to the original lender, and the borrower pockets the difference. The hedge funds have made billions doing just this in the last 12 months.
No doubt the pension funds charged hefty commissions but why would they deliberately cause the value of their holdings to be devalued?
As Warren Buffet says "if you don't know who the sucker is.... it's YOU!"
Regards
Morty Sill
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