Northern Crock - do investors really understand companies?

There's a great bit on the FT website recalling some of the rather positive analyst comment in recent months on Northern Rock. It turns out that our highly-paid betters in the City were still churning out good news stories about the bank even as it became clear that the bank was in trouble.

One e-mail, purportedly sent by a trader at Lehman Brothers on Friday morning, urged, “load up on Northern Rock for your children, your mum, your goldfish” – just as the bank was suffering the first of two days of heavy losses.

Not that he was the only one. John-Paul Crutchley of Merrill Lynch issued a bullish note to clients, with a price target of 913p on the stock. It ended the day at 438p, having fallen 201p.

Cazenove said in July that there were “two main issues confronting Northern Rock in the short term: an increased cost of funding due to a spike in three-month Libor, and the possibility of wider spreads being demanded by investors given current market conditions”. But its otherwise commendable prescience was marred by its conclusion: “In the short term we believe the group has sufficient flexibility to meet its funding needs.”

Meanwhile fund manager Baillie Gifford seems to have been the most exposed to the Northern Rock collapse. According to the report from Thomsons below they have now sold out, racking up a £200m loss.

Baillie Gifford sells entire holding in Northern Rock - source

By selling its entire stake the fund manager has suffered a loss of up to 200 mln stg.

LONDON (Thomson IM) - UK fund manager Baillie Gifford has sold its entire stake in troubled UK mortgage lender Northern Rock, sources close to the situation said.

Although the fund manager said it had reduced its 5.98 pct stake to 'under' the 5 pct threshold, a source confirmed earlier press reports that it in fact had sold its entire share capital in the lender, realising its loss of up 200 mln stg.

At 11.19 am Northern Rock shares were down over 8 pct, or 24 pence at 280.

While it is very tempting to have a laugh at the City for their inability to do any better than a day trader, I agree with Mr Gray that the problem is that it isn't "the capitalists" who suffer when they get it wrong. You won't have to look very far to find pension funds that had money in Northern Rock, and as such are looking at big losses on their investment. Another reminder why the workers capital agenda is so important.