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The government is considering leglislation to enable it to nationalise Northern Rock, so...

[Poll #1122072]

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There are 29 comments on this entry. (Reply.)

As far as I can see, the only options are:

i) private buy-out
ii) let it go bust
iii) nationalise it
iv) do nothing

(i) doesn't look like it's going to happen, (ii) is politically (and probably economically) unviable, and while (iv) is what the government is best at, it is clear that the Rock is not going to dig itself out of its £23bn hole, and things will only get worse, so the point of no return is already some way back down the track.

Therefore it's got to be (iii).

Interestingly, even the fanatically free-market Economist is in favour of a short-term nationalisation, lthough only I think because they can't think of a better plan...

Could be that the government just subsidises (i). I think that could be more likely than (iii).

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I think that is doubtful, they are likely to cop a lot of flack if they do that.

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mm, but it'll be one-off, rather than having their prowess as bank-managers under scrutiny from now until they sell the thing off for a fraction of what it's worth, at which point they get it all over again.

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That's true, but it would be more likely to be sold off under a Tory government, than a Labour one, so I can't see this government being that bothered.

Also I would expect the Treasury to appoint some notable money managers to run it and step back. After all they seporated themselves from the decisions on interest rates that the Bank of England now makes.

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Indeed - the process has been dragged out so long that the public is now aware that any 'private sector' option involves a heavy degree of subsidy by the taxpayer, both in the cases of Virgin and Olivant.

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They can't do iv because that would come under European rules about propping up banks, so they have to either get somebody else to take on the government loans or nationalise the whole thing.

Whether they nationalise it depends a lot on how the Office for National Statistics regard the existing loans. If they are going to get bollocked for not obeying their rules about fiscal responsibility anyway then they will be much more inclined to just nationalise the whole thing.

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Is it possible there's a (i)(b) option: slow fire-sale of assets? The value of their loan-book is considerably more than their £23bn debt.

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The Northern Rock shareholders have already failed to impose their collective will on the directors, so the last real objection to short-term nationalisation has faltered. Though the shareholders seem to have caused sufficient problems for any realistic private buy-out (whether that be from Virgin or someone else) for a buy-out not to happen. Gun, foot, bang, ouch!

Just doing nothing and letting the whole thing go into free-fall seems so unlikely as to be impossible. HM Government will be wanting their money back, doing nothing won't achieve that. If nothing else the opposition will be asking questions, if not jumping up and down, and the press would love the opportunity of a feeding frenzy.

That basically leaves nationalisation.

I would be quite interested to know what would happen to the mortgage customers if Norther Rock did go bust. Would they be pressured into paying back their loans early?

In that case, their mortgages would be sold off to the highest bidder; I wouldn't expect anyone to suddenly have to pay back their loan...

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And if nobody bids?

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Pass. Ask an economist :)

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Presumably the creditors end up owning a bunch of mortgages and deriving an income from the interest on them.

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Why wouldn't they? Assuming there is some reasonable prospect of recovering the loan, there's always someone going to be willing to buy the debt. If all else fails, sell the loan back to the homeowner on really favourable terms (they can remortgate to pay for it).

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Agreed. A mortgage is (from this perspective) a promise by the bank's customer to pay a specified amount of money every month for a specified number of years, offering property as collateral.

Unless it's certain the customer cannot possibly ever be persuaded, cajoled or prosecuted into handing over any more money and the collateral property is uttery worthless, the mortgage has at least some value.

And the world is full of people with money they want to spend on making more money.

If nobody else wants it, I'll gladly pay my bank 1p for my mortgage. (-8

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The mortgages would vest in the Crown as bona vacantia. Although as has already been said, the mortgages are plainly valuable assets, so there's no prospect that they wouldn't be sold.

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Actually it's more that a majority of active Northern Rock shareholders turned out to be more sympathetic to the directors on most of the proposals than to the two hedge funds. I didn't exercise my vote, but I'd have agreed with the result as it turned out, restricting the issue of more shares but not the other measures.

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AIUI a majority of shareholders voted in favour of all the resolutions, but three of them were special resolutions requiring 75% support which they did not achieve.

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Thanks for correcting me. Still, I'm not surprised by the size of the majorities. I didn't notice that my shares had lost most of their value until it was too late; and given that I'd never paid for them beyond having had a Northern Rock account since childhood, I could be philosophical about it.

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So far as I can see, the shareholders have these options in decreasing order of preference:

Organise a rescue package on their own terms, fully supported by Government underwriting of the company's liabilities.
Organise a rescue package urgently, facing the fact it will get them less money because the Government won't keep underwriting their liabilities forever.
Let the company be nationalised and take what they're given.

We, the people of the United Kingdom, who are currently exposed by £1,000 each through the Government's (borderline-illegal) underwriting of Northern Rock want the exposure to end soon and to end with us getting all of our tax money back. This is a higher priority to us than the bank's shareholders getting their money back: they chose to gamble; they knew the risks; they've lost.

But the shareholders have a false sense of entitlement to having their value in the bank supported by the taxpayer. The support is for the benefit of depositors and institutional lenders, not them, and they have to accept this.

Making it abundantly clear that (3) is an option is the government's way of forcing the shareholders to accept option (2) rather than holding out for option (1). There may well be all sorts of rancour about how much money they've lost, but ultimately they will take the second option not the third.

Richard Branson's keeping quite quiet. He's set out his stall; now he just has to wait until the investors come to him.

Disclaimer, I'm not good at using technical language when it comes to finance so please bear with me.

But...I agree with the comment I am replying to. (Although as per the BBC news last night, it's arguably £2000 per head of population, and £55 bn in support not £23 bn).

Completely agree on the point re the shareholders, harsh as it might seem: "shares may go up or down, sometimes dramatically" is something even *I* know, and I think I did when I was about 15. Saw some shareholder on the tellybox lamenting losing his savings (when he meant shares). Sorry, but they're not the same thing, and it's the safety of actual savings (deposits) (and the mortgage issue) that prompted all this in the first place. I think either nationalising it or doing a deal with private investors who seem most likely to the treasury to take the least risk, and in such a way as to minimise the risk incurred by the treasury, are viable ways to go. My personal inclination as a taxpayer is probably that they should nationalise it. I wouldn't object too strongly if RB's lot were involved however, his track record isn't too bad.

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The Wolfie Smith in me asks "Is this an unforseen opportunity for ad hoc land redistribution"? :)

What I find astonishing about recent developments is that HMG seem to have decided that administration isn't an option. This seems to show that the government has no confidence in the UK's insolvency practice. Why should HMG be entitled to a remedy which is unavailable to private creditors?

The government has bailed out Northern Rock by offering loans and guarantees. It did that to help depositors and institutional lenders rather than employees and shareholders, claiming that allowing the bank to collapse wasn't in the public interest.

This means the government is now exposed to Northern Rock: it has underwritten the bank for a colossal sum without in return getting any control over the business in order to protect the money.

It therefore seems arguable that the government is entitled to an abnormal remedy against Northern Rock in exchange for the abnormal assistance it has provided.

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I'm not sure if it's helpful to think of nationalisation/administration as a remedy "against Northern Rock". The Rock is plainly a basket case: the question is therefore how to balance the rights of the various interested parties: HMG, the bond-holders, general creditors, depositors, employees etc. Administration provides various safeguards to ensure the right balance is struck. The Government has taken the actions it has for no doubt good politic reasons, but I don't see why that should entitle it to override the rights of other interested parties.

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Personally, I'm not certain the Government was right to intervene. If it hadn't, the Northern Rock would likely have folded already and the shareholders would have even less value left than they currently do.

The Government did intervene, though, and the cited reason was that Northern Rock's mess was threatening to destabilise the entire UK banking industry. If that's true then I think it's reasonable for the UK, its Government and taxpayers to hold it against Northern Rock, its management and its shareholders, who ought to suffer some penalty. While exacting a suitable penalty might entail overriding rights they thought they had, I don't think it's actually unfair.

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If Northern Rock went into administration, depositors wouldn’t be able to get their money back? Yes yes, they’d get government compensation eventually, but they wouldn’t be able to walk into a branch of Northern Rock and collect it over the counter, would they?

Or do I have that wrong?

There was a special sort of administration for RailTrack, so I don’t see why there shouldn’t be a special sort of insolvency for regulated banks, if it meant depositors wouldn’t have to wait for their money back.

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It's true that the deposits would be frozen in the ordinary course of things, but if this is unacceptable it's clearly possible for the Government to put alternative arrangements in place.

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I answer no because the Tories are, I believe, currently saying they'll be voting against it if a Bill comes before Parliament, and I'm quite willing to believe they'll hold off nationalisation for a while. I'd say mid-range future rather than near, myself.

October