Half-baked Rock

February 20, 2008 10:36 AM

Bake before serving


The thing about rock cakes is that they need to be properly baked before serving. Mssrs Brown and Darling clearly haven't grasped that.


Unsuprisingly, the Crock's rivals are now highly agitated about its unfair competitive advantage as a state bank. Unsurprising when Northern Rock can offer a market leading 6.49% instant access acoount, fully guaranteed by HMG.


The Crock's management has a strong incentive to rinse the guarantee for all it's worth. They are chasing retail deposits to replace their notorious dependence on wholesale funding and to repay the Bank of England loans. But 6.49% and the guarantee really is taking the mickey (National Savings instant access account currently pays 2.35% - 4.90%). No wonder competitors are angry.


So obviously Darling has a plan for managing this, right? Obviously he will have spelled out precisely how the guarantee may and may not be used, perhaps even capping the rates NR is allowed to offer. Right?


Er... wrong. All he says is:


“While we will not be involved in the day-to-day management of Northern Rock we do need to approve its business plan. We want to make sure that it is prudent, that it is sensible and it protects the interests of the taxpayer but also we want to make sure that it avoids distortions. The business plan, if it was built on taking advantage of the present temporary Government support, would not be consistent with our general aim of so running the bank to reduce and then remove that level of support.”


Translation: oh... er... yes... I see what you mean: well, we never thought of that... let's hope they can come up with something... we're certainly paying them enough.


As we've said before, it's impossible to imagine the Crock surviving without its deposit guarantees. Quite how Darling expects the new management to achieve that is beyond us, and certainly beyond him.


Meanwhile, Goldman Sachs may be regretting getting involved in this sorry saga. There was never a serious chance they could find a magic solution, and the real reason they were appointed is fingered by the FT:


"It is a sure sign of how far the credibility of Britain’s “tripartite authorities” – the Treasury, the Bank of England and the Financial Services Authority – has fallen that the government’s public statements on the nationalisation of Northern Rock give a prominent mention to the plan’s endorsement by Goldman Sachs."


They were there simply to give Brown some cover. Unfortunately, for them, the real trouble is only just starting:


"The bank is in the line of fire in the short term for the fee it is charging (never mind that it is likely to be lower than for similar advice to private-sector clients), and could yet be dragged into a long and messy process of litigation about who said what to whom and when. The opposition Conservatives are already asking the government to publish the advice it received from Goldman.


A bank as careful with its reputation as Goldman will have weighed those risks before taking the mandate. But the truth is that when a G7 government asks for help, it is hard for a bulge-bracket bank to turn it down – almost irrespective of the consequences."


For regular readers of BOM, this will have a familiar ring. Many private sector firms have done extraordinarily well out of the business ladled out by this government, often on terms which have delivered very poor value to taxpayers. But more and more of them have come to realise it's a double-edged sword. They are often asked to deliver the half-baked or even the impossible, and when things go wrong- as they usually do with politicos in charge- they are right up that creek with no paddle in sight.


Reputable companies would be wise to remember that the next time some juicy government contract gets dangled before them. Or even a half-baked rock cake.

Bake before serving


The thing about rock cakes is that they need to be properly baked before serving. Mssrs Brown and Darling clearly haven't grasped that.


Unsuprisingly, the Crock's rivals are now highly agitated about its unfair competitive advantage as a state bank. Unsurprising when Northern Rock can offer a market leading 6.49% instant access acoount, fully guaranteed by HMG.


The Crock's management has a strong incentive to rinse the guarantee for all it's worth. They are chasing retail deposits to replace their notorious dependence on wholesale funding and to repay the Bank of England loans. But 6.49% and the guarantee really is taking the mickey (National Savings instant access account currently pays 2.35% - 4.90%). No wonder competitors are angry.


So obviously Darling has a plan for managing this, right? Obviously he will have spelled out precisely how the guarantee may and may not be used, perhaps even capping the rates NR is allowed to offer. Right?


Er... wrong. All he says is:


“While we will not be involved in the day-to-day management of Northern Rock we do need to approve its business plan. We want to make sure that it is prudent, that it is sensible and it protects the interests of the taxpayer but also we want to make sure that it avoids distortions. The business plan, if it was built on taking advantage of the present temporary Government support, would not be consistent with our general aim of so running the bank to reduce and then remove that level of support.”


Translation: oh... er... yes... I see what you mean: well, we never thought of that... let's hope they can come up with something... we're certainly paying them enough.


As we've said before, it's impossible to imagine the Crock surviving without its deposit guarantees. Quite how Darling expects the new management to achieve that is beyond us, and certainly beyond him.


Meanwhile, Goldman Sachs may be regretting getting involved in this sorry saga. There was never a serious chance they could find a magic solution, and the real reason they were appointed is fingered by the FT:


"It is a sure sign of how far the credibility of Britain’s “tripartite authorities” – the Treasury, the Bank of England and the Financial Services Authority – has fallen that the government’s public statements on the nationalisation of Northern Rock give a prominent mention to the plan’s endorsement by Goldman Sachs."


They were there simply to give Brown some cover. Unfortunately, for them, the real trouble is only just starting:


"The bank is in the line of fire in the short term for the fee it is charging (never mind that it is likely to be lower than for similar advice to private-sector clients), and could yet be dragged into a long and messy process of litigation about who said what to whom and when. The opposition Conservatives are already asking the government to publish the advice it received from Goldman.


A bank as careful with its reputation as Goldman will have weighed those risks before taking the mandate. But the truth is that when a G7 government asks for help, it is hard for a bulge-bracket bank to turn it down – almost irrespective of the consequences."


For regular readers of BOM, this will have a familiar ring. Many private sector firms have done extraordinarily well out of the business ladled out by this government, often on terms which have delivered very poor value to taxpayers. But more and more of them have come to realise it's a double-edged sword. They are often asked to deliver the half-baked or even the impossible, and when things go wrong- as they usually do with politicos in charge- they are right up that creek with no paddle in sight.


Reputable companies would be wise to remember that the next time some juicy government contract gets dangled before them. Or even a half-baked rock cake.

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