Northern Rock – and the Lib Dems

The BBC today offered two visions of the future for Northern Rock. The first is nationalisation, with the Lib Dems recommending compulsory purchase of the Rock, apparently for nothing, wiping out all the shareholders. The second was another Treasury guarantee, this time to small long term shareholders so they do not lose out if things get worse from here.

Both of these ideas are absurb. The taxpayer already has too large a commitment to Northern Rock, and should not be asked to take on a bigger one. It is not the taxpayers job to own and run a mortgage bank. Nor can the taxpayer decide to subsidise one group of shareholders amongst the wider list of shareholders. The compulsory nationalisation of the bank with no compensation to sharteholders would probably trigger law suits from them claiming their shares still had value. The subsidy to some shareholders might trigger law suits from the others claiming the division was arbitrary and unfair.

The Lib Dem acting Leader has pursued a persistent campaign against the outgoing management of Northern Rock in a way which makes offering impartial advice difficult, and has displayed a lack of knowledge of legal obligations and how banking works. That presumably is why the BBC have him on so often on this subject. His advice would put the taxpayer at risk of legal actions by shareholders and leave the taxpayer with larger problems of how to manage the whole mortgage bank.

People ask what could be done? What should the Conservative position be? I think that is obvious, bearing in mind I would not have started from here, as I recommended pre-emptive action long before the bank experienced the run.

What the Chancellor should do with the Bank of England is treat this lending to Northern Rock as if it were a commercial loan. They must agree with Northern Rock the duration and interest payments, with a schedule of repayments. They must take sufficient security to guraantee that in no forseeable circumstance can the taxpayer lose money, and then force the mortgage bank to manage its way out of the debt to the agreed timetable. If they cannot agree a sensible timetable then they have to impose one which they think the bank should be able to meet. Above all they must have enough security to ensure no taxpayer loss. Then they need to agree all that with Brussels, which may be the most difficult part of the obvious remedy. I assume they got Brussels agreement in the first place to temporary assistance – they now need to define how long is temporary.

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3 Comments

  1. Tony Makara
    Posted November 19, 2007 at 12:34 pm | Permalink

    The more, we the ordinary public, learn about Northern Rock, the more we become aware of the incompetence of the Labour government and the amateurish response of the Liberals. As ever both are going for the quick fix/quick fail approach. Vince Cable certainly has no idea how banking works in the real world, what might look plausible on paper just would not work in practice. John, I suggest you forward your sensible proposals to Alistair Darling and guide him through the process with a few bullet points, just in case he finds the concepts outlined hard to grasp.

    Reply: Thanks! I have just written a short piece for the Standard along those lines.

  2. C P Smith
    Posted November 19, 2007 at 10:23 pm | Permalink

    Am I missing something or this there a very important issue about which some MP should be querying the Chancellor? Currently, the taxpayer is exposed to c

  3. Man in a Shed
    Posted November 20, 2007 at 12:13 am | Permalink

    Do you think if it had been The Chelsea building society than the government would have placed so much of the tax payers money at risk ?

    Reply: No!

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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