Where are we with Northern Rock?

It seems to me that the fundamentals of this problem have left policy makers with few sensible choices.

The Government was right to step in last autumn to save Northern Rock – protecting depositors and stopping its problems spreading to other parts of the banking system. Alastair Darling was right to properly test all options for the future of the bank. The Treasury had two detailed proposals on the table and they are now taking a hard-headed choice in the best interests of the tax payer. The Chancellor has clearly decided that under current market conditions the private equity options failed to deliver sufficient value for money for the tax-payer. So bringing forward legislation to take Northern Rock into a period of temporary public ownership is the right decision.

The fascinating thing about this affair is how it has exposed David Cameron’s uncertainty when faced with tough choices. The Tory leader’s response to Northern Rock would have won an Olympic medal for back-flipping.

He began by welcoming the loans and guarantees made to Northern Rock. David Cameron said ‘we support wholeheartedly’ this approach (Daily Telegraph, 16 September 2007), with George Osborne adding “the guarantee that he [Mervyn King] put in place on Monday night was necessary…”(20 Sept, Channel 4).

That was then. This is now. Since then, Mr Cameron and Osborne have opportunistically sought to avoid the implications of the loans and guarantees they so strongly endorsed.

They have failed time and again to come up with a credible answer to the question: what would you do? The Conservative leadership have variously advocated nationalisation, restructuring by the Bank of England, private sale and now its administration again. They’ve changed their position, sometimes several times in the same week.

In mid-January, Cameron began by saying nationalisation would be a “complete humiliation and failure” (Andrew Marr Show, Sunday January 13 2007), but by the following day, when asked about nationalisation and administration, he shifted position to say: “clearly the Government will have to look at alternatives… they have to look at both of those.” (David Cameron, press conference, Monday 14 January 2008).

The next day, George Osborne had again shifted the position back towards administration, saying: “I don’t think nationalisation of a bank is going to be the best option for the taxpayer. I think there are other options. We need to look at administration” (George Osborne, Newsnight, January 15 2008). Clearly forgetting that in November he had criticised administration, saying: “the winding up of the bank would pose a significant risk to the taxpayers money … and of course significant risk to the jobs of those people who work at Northern Rock” (George Osborne, Sky News, 19 Nov 2007).

John Redwood helpfully spelt out what the Tories preference for administration would mean: “putting Northern Rock into administration could lead to a fire sale of assets and might result in taxpayers not getting all our money back” (John Redwood blog, 15 January 2008) though to be fair to John, he also condemns nationalisation. You’d expect him to do that of course. At the end of the day, he is John Redwood.

So whatever your view of the decision today, the Tories’ current position is the worst of all worlds, though of course, it could always change again by tomorrow. Administration is the very worst option you could take – risking a fire sale of the assets at one of lowest points in market and huge loss of money to taxpayers.

11 thoughts on “Where are we with Northern Rock?”

  1. I have consistently set out a better way of handling Northern Rock by the government acting as an intelligent and firm bank manager. The government should have taken more collateral for its loans, and specified tighter timetables for repayment, with a professional term sheet and cashflow monitoring. Taking the bank over makes the taxpayer responsible for all the debts, the staff, the pension deficit and everythign else, which will result in bigger losses for taxpayers.

  2. I love Nationalisation and consider any alternative to Natoionalisation to be second best.
    I used to know a miner who agreed with me.
    My electric bill has just come in.
    Don’t ask.

  3. Northern Rock a private sector failure?
    I disagree.
    Many people have mortgages with Northern Rock and are quite happy (Alastair Darling?)
    My guess is that the pension funds of the boad of Directors are well fed and they still have a smile on their faces.
    Labour’s opportunity? Maybe so.
    Bet the workers of Rover jump up and down with glee.


  4. The govt should have guaranteed the deposits of ordinary savers but let the Rock go to the wall with the result being that shareholders take the hit – which is the risk that should be understood by all who dabble in equity “investment”.

  5. John Redwood, I thought prior to Northern Rock’s nationalisation that the state had taken on all the liabilities and had left the assets alone. If true, it doesn’t take an economist to realise that would have been quite unfair on the taxpayer.

    Second, despite the alternative plans of the esteemed Tory gentleman and the prevarication of Cameron and Osborne, I have no doubt that if they were the government they would have done the same thing as Brown and Darling did. Finance is the bedrock of the economy in this country. Letting Northern Rock collapse would have had a catastrophic effect on the banking system, hence why the government intervened.

  6. The question could well be founded on the basis took in 1997 to create the single regulator, FSA. The FSA model is too simplistic and fails to reflect the mordern market.

    The FSA is the biggest failure in this. The should have took control or intervening actions back in February 2007 when the shares began to dip.. Under BoE control a simple ‘wink’ at the Rock would have stopped its reckless market strategy.

    Whether we can link the FSA failure to government is another matter..

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