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Northern Rock crumbling before our eyes

The nationalisation of Northern Rock was inevitable after the Governments interference in the original crises. Interfering in the problems of Northern Rock at such an early stage, in the glare of publicity, with the market aware of the deteriorating situation, was always going to end at this inevitable conclusion. The Government maintains it had to support Northern Rock to stabilise the banking system, its customers and the economy, but in truth it did the opposite! In fact it looks like their actions have actually not achieved any of these objectives but confused the position and put the tax payer's money a risk.

Let's look at the facts. The Governments actions did not stop the flow of Northern Rock customers moving their assets away into what they think are safe havens. It did not stop Northern Rock continually needing to draw on loans to support its tenuous hold on its mortgage book. It did not stop its share price from plummeting. It did not bring a quick resolution to the problem. It will not stop redundancies and branch closures. This is as total a defeat for the Governments strategy as could be imagined! The future looks very bleak for Northern Rock's shareholders and employees. As there is no chance that shareholders will get much return on their investment.

However, the Government did draw out a couple of business entrepreneurs looking to turn the Northern Rock business around, but each proposal was not to the liking of either the investors or the Government, leaving the Government locked into a business situation where there was no key. Virtually any solution was going to be unattractive with our money being spent to support a bank that was rapidly losing value. That's not say that Northern Rock has no assets; they are just not worth what the Government paid for them! Any solution now is likely to be long term, having no end date when the tax payer can expect to see a return on their investment. If the Government was your Broker you would have sacked him by now!

One can feel a little sorry for Alistair Darling, as this appeared as he took over the watch and I suspect the previous watcher has had a direct hand in the decisions before and since, which led Northern Rock to its current disastrous position.

The conclusion to this episode now appears to be the extinction of Northern Rock in any case, as the Government winds up the business and sells off the remaining assets, for whatever price they can get. This still may not be enough to recover the Government loans. The probability is that the Government has been dealt a mortal wound by its handling of this situation, which will be terminal at the ballot box.

My previous blog was entitled "Northern Rock a Government blunder" and sadly we are not yet able to measure the true scale of this appalling mismanagement of an industry problem. I still maintain that if the Government had not interfered, Northern Rock would have been managed towards extinction, as has historically been the case, by the banking industry taking over the assets but also very importantly without using the tax payer's money and it would not have put the Government into a position it could not win from. History has shown that Governments interfering in business does not work and it is something that in the halls of the Treasury and No 10 they just might realise now. 

 

 

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Comments: (6)

Paul Penrose
Paul Penrose - Finextra - London 20 February, 2008, 14:32Be the first to give this comment the thumbs up 0 likes

Will Hutton in the FT today suggests that there are few companies in the FTSE 100 that have not in some way had their franchise today shaped, supported and helped by government action. As Hutton observes: "Claims that the public's embrace is an automatic palsy on enterprise are just ideological. Both sectors are indispensable and interdependent."

Hutton lists a whole bunch of top companies that have relied on public sector support to grow their power base, including BP which was nationalised by Winston Churchill in 1913 in part for the pragmatic rationale of securing oil supplies.

You can read the full text here.

A Finextra member
A Finextra member 20 February, 2008, 15:28Be the first to give this comment the thumbs up 0 likes

I can't really agree with much of that analysis. Politics and business work together best when they keep within their own boundaries. Politics and business never mixes well.

The privatisation program in the eighties Thatcher Government was successful because it released companies from state control. This policy was adopted worldwide.

I am not sure that any Government nationalisations have ever proved profitable over the long term. The survival of the fittest should prevail and if a business gets into trouble, market forces will normally take on the asset.

It is pointless to look at either Tory or Labour statements on nationalisation as both look similar in conclusion although coming from different starting points. However, the use of tax payer's money to buy an ailing business has to be questionable and in EU terms may be even illegal.

In the past the Bank of England would have managed the Northern Rock situation, one could argue that is nationalisation by another name. The difference is when Governments take over control using our money.

A simple question for everyone: Would you have used your family's money to buy a house that was losing its value by the hour? If the answer is no then why would you support the Government? If the answer is yes, I doubt your sanity! 

A Finextra member
A Finextra member 20 February, 2008, 16:39Be the first to give this comment the thumbs up 0 likes

Not entirely convinced that privatisation was a raging success. Our railways are a complete mess - lots of money being made by the companies leasing the trains - but a mess. And as for our energy supplies...
 

A Finextra member
A Finextra member 20 February, 2008, 16:43Be the first to give this comment the thumbs up 0 likes The railways are not a good example! If it was organised like on the continant it would have worked well and actually had nothing to do with privatisation just how it was designed!
A Finextra member
A Finextra member 21 February, 2008, 10:38Be the first to give this comment the thumbs up 0 likes  

I can't agree with the basic premise of your analysis. The group that have really been rescued with tax payers money are the depositors, the rest have gained collateral benefit. If this had been let go to the wall then depositors would have lost out, as well as shareholders and employees. Theoretically, mortgages could be recalled in due course. The fallout would be catastrophic. The fact is that even though the 'rule' has been only £18,000 deposit is guaranteed, plus 90% of the next £2000 (or whatever the numbers are these days), most people don't know that - and now no-one believes it. Not only would it be harsh to let large numbers of people lose their life savings, it's impossible to imagine a peace-time government letting it happen. So that's the dilemma, arising from poor macro-risk management. The £18000 rule should be enforced and depositors made to spread their counter party risk, then banks could be let go to the wall like any other business.

 

A Finextra member
A Finextra member 21 February, 2008, 10:50Be the first to give this comment the thumbs up 0 likes

Nope! Disagree again

Despositors would have been picked up by other banks, as would the mortgage book and all other assets of value, leaving the rump for disposal at the best price available. No Government intervention needed, as the Banking industry would have absorbed the business.

Losses would have been mainly with shareholders (but that is the risk for all shareholders) and employees and that is sad, but a fact of life!

The Government will try and justify their decisions of course and will present facts that suit their version, however distorted. So people should use their brains and work out where fault lies and what would have been a better resolution. Rather than follow Government spin.