Northern Rock – the Chancellor cannot even run an auction

We learn today that the Chancellor favours a bidding war for Northern Rock, and that other bidders are preparing to challenge the Virgin bid.

What a shambles!

We recently learned that Virgin was the preferred bidder. That implied there had been a first round of bids under proper conditions, the bids had been evaluated, and Virgin’s was the best. Normally in such a position there is either a declared second round of bids to seek a better answer or the best bidder is given a period of exclusivity to reach contracts. Instead they invented this half way house of “preferred bidder” status, leading the press to believe Virgin was likely to end up the buyer quite quickly. It encouraged the other bidders to come back with new ideas, as if there is a proper second round.

I have been saying for a long time that as this is an unusual bidding process because the taxpayer has a different interest from the shareholders. The government and the company needed to be careful and to set out the rules in advance. Clearly the taxpayer wants to get as much of the Bank of England loan back as possible on sale of Northern Rock, with as short a time scale as possible for repayment of the rest. Shareholders want the maximum price for their shares, and their shares are worth more, the more money there is available from taxpayers for longer.

There were two ways of handling this. I proposed that the government set out in advance how much money was available for how long so all bidders bid on the same basis. The company could then compare how much each bidder offered to shareholders and make the appropriate decision. Alternatively the government could have said it wanted bidders to bid for how much money they could repay how quickly as well as bidding for shareholder value, and the government as bank manager could have insisted on the bidder offering to repay most most quickly winning. That way always left it more likely shareholder and taxpayer interests would end up warring with each other.

From the leaks and briefings we do hear it appears the governemnt made it no clearer to bidders than they have to Parliament how much money is available for how long, so they allowed the bid process to be complicated by the twin bid issues. Now apparently the Chancellor is having second thoughts about the preferred bidder and likes the idea of other bidders coming back in with revised bids.

If they are not careful they will lose the Virgin bid without finding a better one they can get to completion quickly. In the context of more depositors taking their money out, and the Bank of England having to lend more and more money to Northern Rock, time is of the essence. If Mr Darling helps delay an outcome to the bidding process by complicating or changing it he is doing damage to taxpayers, as it means more public money going into the mortgage bank.

It is difficult to rescue the auction because they did not set out in public in advance what people could expect from the government when buying Northern Rock. This obvious error has made this auction a mess, and has delayed a result. They may now have reached the point where however they handle it from here there will be aggrieved losers.

Mr Darling is not up to the job, and taxpayers will all end up paying more as a result.

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3 Comments

  1. Sally C
    Posted December 3, 2007 at 1:17 pm | Permalink

    They’d need an overdraft to run a booze up in a pub, when the brewery donate the beer

  2. cherie79
    Posted December 4, 2007 at 12:50 am | Permalink

    I wonder just how much more damage this awful government can do before we finally get rid of them. I think you will inherit an even worse mess than you did in 1979 and look how long that took to sort out. Seems people have to learn exactly what Labour do to the economy every generation. Even worse is the damage to the civil service and destruction of our own legal service and freedoms, these will be very hard to reverse. For myself, I have just bought a nice new house and intend to make it as comfortable as I can, I have enough money to live on and know I am one of the lucky ones. There I will nest until we get a change of Government! just hope it is not too late.

  3. Bazman
    Posted December 7, 2007 at 10:22 pm | Permalink

    Read it again Cherie….with bunt..
    For myself, I have just bought a nice new house and intend to make it as comfortable as I can, I have enough money to live on and know I am one of the lucky ones. There I will nest until we get a change of Government! just hope it is not too late.

  • About John Redwood


    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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