ROCKY NORTHERN ROCK
The catalogue of mishandling of Northern Rock must be almost without precedent.
When collapse first became apparent last August, it could have been taken quickly and cleanly into temporary public ownership, thus saving the taxpayer £25bn in loans and £30bn in depositor guarantees. Six months was spent in delaying the inevitable, which damaged the reputation both of the Government and of the City. The reason it was not promptly taken into public ownership was not, as the Government has claimed, to look first at all the other alternatives (it was clear even at the outset that there really weren’t any), but to try to avoid any cost – even £55bn – any hint of a return to Old Labour nationalisation.
Since Gordon Brown was finally forced on 17 February to accept, amid gnashing of teeth, that temporary nationalisation was unavoidable, in just 3 days a whole new series of problems and uncertainties and mistakes have surfaced:
* There is an unanswered question about how the Bank will be regulated to prevent it distorting the market and having an unfair competitive advantage because of its State-backed guarantees. The Government claimed that EU State aid rules would achieve this, but did not indicate how, and declined to say whether the OFT would have a role.
* Though repeatedly pressed, Ministers have refused to set out the Government’s strategic objectives for the Bank. Is it to run down the bank and sacrifice half the existing 6,000 jobs, or is it to build it up and consolidate further its position in the market, with an eye to the most profitable future sale?
* There several different objectives which are clearly incompatible: making the Bank a profitable concern, reducing taxpayers’ exposure, protecting jobs in the North-East, satisfying EU rules, playing fair by other banks, to mention just some. Since it can’t achieve all, to which will the Government give priority?
* It is suggested the bank will be run at arm’s length from the Government. In that case, why did Gordon Brown appoint his former chief of staff, Tom Scholar, to the board?
* It is proposed that the bank should be exempt from the Freedom of Information Act. Why? This does not encourage confidence.
* It now appears that Granite, the offshore component of Northern Rock, is being excluded from the nationalisation, on the grounds that whilst it is on the bank’s balance sheet, it is a separate trust. However, it now appears that if Northern Rock fails to supply new continuing mortgages into Granite to refresh its package as some of its mortgages are redeemed or repair, Granite will default and its entire securitised debt obligations will implode and have to be sold off on a fire sale basis. The seller’s share held by Northern Rock will also be part of the fire sale, and its value will fall well below its stated asset value in the books. Thus, by excluding Granite from this nationalisation measure, the Government is putting the taxpayer at risk of another huge bill.
* Almost worse, it is now becoming clear that the assets held by Northern Rock outside Granite, including those worthlessly pitched at 125% of value, are what the Government has acquired, whereas the high-valued assets are separately stored away in Granite. Once again, the Government has socialised the losses while allowing the smart money to privatise the gains.