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Northern Rock; a government blunder

Now that the Northern Rock crises is moving into its next stage, although by no means final stages, its worth reflecting on how the whole thing could have been handled better. I make no apologies during this piece from stating that I am firmly in the politics and business not mixing camp. History has told us that when governments interfere in markets the result is nearly always catastrophic. The old maxim of not bucking the market should have been uppermost in the minds of those involved and I suspect the Bank of England was one of the few, if not the only participant, in this debacle that were trying to practice it. Whatever the announcements from politicians at the time, followed by the Bank of England (I suspect under government pressure) the decision to intrude into the crises, by financially supporting Northern Rock was to ultimately create a bigger problem than the one they were trying to solve.  

Once this massive financial support had been granted and published, the fate of Northern Rock, its shareholders and customers was effectively sealed. Investors comfortable in the knowledge that the Government was underwriting the growing critical and fast deteriorating position of Northern Rock could manage their own risks out of the situation. Customers had already fled in droves, quickly recognising their particular risk, bailing out as fast as they could. Oh how the Government should have acted as wisely!

By chasing a loss (every punter knows you don't chase a loss) the government only put off the inevitable and has cost the tax payer a huge sum, which realistically will never be returned. The future of Northern Rock lies with new investors and hopefully they will be able to maintain the business. However, I doubt that any salvage will replenish what has been lost and will still come as yet, as an unknown cost. Most probably jobs losses! Only time will tell.

What should have happened?

First the Government should have stayed out and let the market take the necessary business decisions it needed too. This might have meant a fire sale and could have meant job losses (although probably not as many as we might get now) but the banks would have rallied round to absorb the risk against whatever assets they could amortise. Certainly the customers of Northern Rock would have got a good home fast and probably with less hassle. The shareholders would have been losers but that's the risk of being a shareholder and one all shareholders must come to terms with. Remember shares can go down as well as up and usually without a government funded safety net!

Britain would have saved billions of pounds and the City would have been able to take the crises and managed its own affairs in a very short time. Certainly by now the situation would have been resolved and concentration would be on understanding how the regulatory systems broke down to such a disastrous result. I might be a cynic but I suspect this particular crises came too soon in the new PM's reign and while his seat at the treasury was still warm. As the banking industry licks its wounds, we can only hope that the Government allows the Bank of England to do its job and the banking industry to manage its own affairs. This must surely be the first lesson we learn from Northern Rock!

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Comments: (1)

Andrew Muir
Andrew Muir - SWIFT - 05 February, 2008, 14:42Be the first to give this comment the thumbs up 0 likes

Interesting - I add this up differently.

I think the UK taxpayer is about to acquire a good national retailer of personal financial services very cheaply indeed. I believe that the Rock mortgage holders (who represent the only significant risk of losses of billions of pounds) will not default in large numbers, and that the government guarantees will secure the Rock's balance sheet until such time as the bonds have been floated off in bits and pieces until the deposit/loan ratio is managed down to "slightly-below-industry-average" levels - several years from now.

As someone who failed to make money out of the Rock's stock price gains earlier this decade, I am greatly relieved to find myself a beneficiary of Mr Brown's venture into the Private Equity market on my behalf, and thus being given a second bite at the Rock cake.

The losers here are the Rock's shareholders and staff, who genuinely deserve our sympathy. They were probably the most blameless of all Rock stakeholders.

Now - what should I do with my Bradford&Bingley shares? Talk about collateral damage...