WHY, six weeks after Northern Rock went cap in hand to the Bank of England, are shares in Britain’s fifth-biggest mortgage lender still allowed to trade?

Buying and selling shares in the bank has become nothing more than a lottery. The bidders don’t even know how to value the bank’s equity, and neither do the Bank nor the Treasury.

If you are unable to quantify the risks, what is being created is a false market. If this is the case – and I think it is – then the shares should be suspended.

Here are five reasons why there is a false market: we don’t know the precise terms of the £20 billion loan and guarantee that the Bank has so far advanced to Northern Rock. Neither do we know at what point the Bank has to be repaid and if there will be a commercial interest. Will this loan be advanced to potential bidders and, if so, for how long and at what terms?

Second, if the Bank is saying we are still not out of the credit crunch, what does it know that we don’t?

Third, one has to assume the Bank and the Treasury have detailed knowledge of Northern Rock’s books and have shared some of this information with the bidders. Wouldn’t it be better to suspend the shares while these negotiations are taking place?

Fourth, the reputational damage to London – as I have said before – is immense. Letting Northern Rock shares yo-yo round like a penny stock is to no-one’s advantage.

Fifth, given that the Bank’s rescue talks with Northern Rock were leaked, how certain can we be that more price-sensitive information will not emanate from Treasury quarters?

There are repeated suggestions that the Treasury is not keen on the Virgin bid. Does that mean the successful bidder will not necessarily be the one with the highest offer, but the one that offers the neatest solution for the Treasury?

Mervyn King, the Bank’s governor, Sir Callum McCarthy, the head of the Financial Services Authority, and Alistair Darling, the chancellor, must get a grip of this situation. They have already moved to safeguard the deposits of Northern Rock retail investors but they appear to have no regard to the dubious morality of allowing the shares to continue trading.

Philip Richards, chief executive of RAB Capital, the quoted hedge fund, has made the biggest bet so far. He is one of the City’s smartest investors, but even he now has the wobbles and is out of the money on his £50m wager. His average buy-in price is about 250p compared with Friday’s closing price of 191p.

If King wants the City to become a glorified betting shop he is going the right way about it. The Bank is full of some very clever economists but it appears to have no-one with any market nous. In the meantime, private investors are being sucked into a Northern Rock recovery story and buying the shares. People compare Northern Rock with the secondary banking crisis in the 1970s. That is patently ridiculous – this is a premier league crisis in contrast to a collapse like Slater Walker.

What, no siren?

ON THE subject of the Bank of England, the institution said last week that commercial property investment was an asset class particularly vulnerable to new shocks in the financial system. The thousands of private investors who piled into property funds just as values in the sector hit the high-water mark earlier this year would no doubt have liked to have heard the warning siren a tad earlier.

That is not to say that property is going to hell in a handcart. What is true is that the sector is feeling the impact of the credit crunch, which has made debt more expensive and harder to source. The days when £100m acquisitions could be financed with just a few million pounds of equity are long gone.

The impact of this is that values will come down; the big question is by how much. If you measure it in terms of equities, big stocks such as British Land, Land Securities and Hammerson are seeing their shares trade on discounts of up to 30% to net asset value.

That is a big discount. Mike Prew, a property analyst at Lehman Brothers, has called it a short, sharp shock and he is predicting a bear quarter of asset write-downs when the majors start to report next month. He believes that the “point of maximum pessimism” has to pass before the sector turns positive.

That implies that just as share prices in commercial property stocks overshot on the way up – although they look cheap now – they may just get cheaper. The dividend yield on many of the shares like Land Securities and British Land is attractive, but not yet compelling.

The property industry is in a state of paralysis. Some large asset disposals have been pulled and there are genuine concerns that a handful of highly geared investors may go to the wall – but it is on a much smaller scale to the 1990s crash, which was triggered by a a huge glut of unoccupied developments.

The Bank’s warning has already been priced into the quoted sector, although it has yet to be felt in the auction houses, which for the past five years have been packed with private dealers. If the capital markets do start to ease and banks are able to provide leveraged finance, some of these large quoted property vehicles will present attractive bid targets.

The old adage that it can be cheaper to drill for oil on Wall Street than in the ground could soon be true for property as well. But we have yet to see that moment of maximum pessimism when values hit the floor.

john.waples@sunday-times.co.uk

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