What the opposition should say in the Northern Rock nationalisation debate

February 19, 2008 9:13 AM

The Government offered every inducement to private sector bidders for Northern Rock.  It offered a heads you win, tails we lose deal whereby the taxpayer would foot the bill if things went wrong at the bank but a new owner could walk away with big profits if things turned around for the better.  They still couldn't find a private sector bidder able to offer good value to taxpayers.


That the Government could not find a bidder despite lowering the bar so drastically suggests that the private sector didn't expect to be able to get much value out of Northern Rock.  We are now expected to believe that the Government can do a better job - can deliver taxpayer value where the private sector couldn't.  Taxpayers are understandably cynical.


There are several unanswered questions.  Just how strong is Northern Rock's loan book?  How well prepared is it to weather weaknesses in the housing market and still pay off massive loans to the taxpayer?


What will we have to pay shareholders?  Is there any chance that the outrageous demands for £4 per share being made by hedge funds, who have bought into Northern Rock since the crisis, will be sated?


Bigger questions are raised by the form that this nationalisation is beginning to take.  While this is, in theory, a debate on whether or not to nationalise Northern Rock that is less a decision than a resignation that there is little other alternative.  By contrast, the form of nationalisation is a decision firmly within the Government's grasp and one that could have vast financial consequences.


We can understand how that decision has been made by listening to Ron Sandler, the new boss at Northern Rock, who was quoted in the Financial Times as saying "the aim is to reinvent Northern Rock as a 'profitable, vibrant and sustainable business'".  The Government have chosen not to take the option of running down the mortgage book and steadily putting the bank out of its misery.  Instead, taxpayers are being asked to support an attempt to resurrect the bank.  There are many parallels to the Phoenix Consortium's promise to make Rover a world-beater again.


Such an endeavour is necessarily more risky and involves a greater exposure of taxpayers' money than running the bank down.  The Government is upping the ante on taxpayers' behalf.  While there has been an attempt to spin this 'temporary' settlement as a very short-term arrangement Ron Sandler has acknowledged that it is likely to be years before a resurrected Northern Rock is likely to be ready to return to the private sector.


Throughout that period each British taxpayer will, effectively, have £3,500 staked on the future of a mortgage bank with a busted brand.  Beyond that, they will have to hope that this bank is really run on commercial, and not political, terms.  While Ron Sandler may be impeccably qualified he will be employed by, and answerable to, politicians.  If they see some short-term political advantage in delaying, for example, important decisions on downsizing Northern Rock will the chances of taxpayer value being delivered be further imperilled?


There are other costs to a nationalisation that aims to reinvent Northern Rock.  It will mean facing other mortgage lenders with a rival able to call on a guarantee from Her Majesty's Government.  That is quite a luxury and, in a time when banks are struggling to raise finance, will make it hard for other banks to compete.  For that reason European authorities are likely to take a dim view of overly ambitious proposals to revive Northern Rock.


It is a betrayal of basic economic principle and the interests of every taxpayer for the Government to use Northern Rock as, perhaps, the most expensive job creation scheme in history.

The Government offered every inducement to private sector bidders for Northern Rock.  It offered a heads you win, tails we lose deal whereby the taxpayer would foot the bill if things went wrong at the bank but a new owner could walk away with big profits if things turned around for the better.  They still couldn't find a private sector bidder able to offer good value to taxpayers.


That the Government could not find a bidder despite lowering the bar so drastically suggests that the private sector didn't expect to be able to get much value out of Northern Rock.  We are now expected to believe that the Government can do a better job - can deliver taxpayer value where the private sector couldn't.  Taxpayers are understandably cynical.


There are several unanswered questions.  Just how strong is Northern Rock's loan book?  How well prepared is it to weather weaknesses in the housing market and still pay off massive loans to the taxpayer?


What will we have to pay shareholders?  Is there any chance that the outrageous demands for £4 per share being made by hedge funds, who have bought into Northern Rock since the crisis, will be sated?


Bigger questions are raised by the form that this nationalisation is beginning to take.  While this is, in theory, a debate on whether or not to nationalise Northern Rock that is less a decision than a resignation that there is little other alternative.  By contrast, the form of nationalisation is a decision firmly within the Government's grasp and one that could have vast financial consequences.


We can understand how that decision has been made by listening to Ron Sandler, the new boss at Northern Rock, who was quoted in the Financial Times as saying "the aim is to reinvent Northern Rock as a 'profitable, vibrant and sustainable business'".  The Government have chosen not to take the option of running down the mortgage book and steadily putting the bank out of its misery.  Instead, taxpayers are being asked to support an attempt to resurrect the bank.  There are many parallels to the Phoenix Consortium's promise to make Rover a world-beater again.


Such an endeavour is necessarily more risky and involves a greater exposure of taxpayers' money than running the bank down.  The Government is upping the ante on taxpayers' behalf.  While there has been an attempt to spin this 'temporary' settlement as a very short-term arrangement Ron Sandler has acknowledged that it is likely to be years before a resurrected Northern Rock is likely to be ready to return to the private sector.


Throughout that period each British taxpayer will, effectively, have £3,500 staked on the future of a mortgage bank with a busted brand.  Beyond that, they will have to hope that this bank is really run on commercial, and not political, terms.  While Ron Sandler may be impeccably qualified he will be employed by, and answerable to, politicians.  If they see some short-term political advantage in delaying, for example, important decisions on downsizing Northern Rock will the chances of taxpayer value being delivered be further imperilled?


There are other costs to a nationalisation that aims to reinvent Northern Rock.  It will mean facing other mortgage lenders with a rival able to call on a guarantee from Her Majesty's Government.  That is quite a luxury and, in a time when banks are struggling to raise finance, will make it hard for other banks to compete.  For that reason European authorities are likely to take a dim view of overly ambitious proposals to revive Northern Rock.


It is a betrayal of basic economic principle and the interests of every taxpayer for the Government to use Northern Rock as, perhaps, the most expensive job creation scheme in history.

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