What to do instead of nationalising Northern Rock

It appears that the government is flirting with nationalisation because it is having trouble persuading the shareholders of Northern Rock to see things its way. It is a very cumbersome and potentially very expensive device to try to get shareholders to do as the government wishes, when the government has a much easier way of doing it.

The government still does seem to have grasped how powerful its position is as Northern Rocks bank manager. It stepped into this role, and is now committed massively to it. As of today it is clearly the only bank manager Northern Rock has that is prepared to extend the huge sums needed for the bank to be able to carry on trading.

As bank manager the government needs to assert itself in the following ways:

1. Set out how much asset cover it wants for any additional lending ?? and make sure it has taken enough asset cover for the loans so far.
2. Set out how much money it expects Northern Rock to repay on specified repayment days.
3. Establish targets for cash generation and profit in the underlying business with management, and make them report variances with explanations of action to be taken to get back on target.
4. Establish the usual banking covenants that Northern Rock has to hit to keep its facility

I read that the shareholders are not happy about selling assets. There should be no argument about this. The government/Bank of England should tell them what repayments they expect. Northern Rock then has four ways of making those repayments:

1. Sale of whole business to an owner that can meet the repayments
2. Refinancing of Northern Rock in the private market to repay the state borrowings
3. Cash generation from the business
4. Sale of assets

The government should just insist on the repayments. It is up to the shareholders and management of Northern Rock to do the hard work and decide how they can meet the need for such repayments. If selling assets is the only option ?? as it appears to be at the moment ?? then they must do that. The government does not need to dictate how Northern Rock refinances itself ?? just has to insist on the taxpayers getting their money back in sensible tranches over a realistic time scale.

As I stated on this blog before, the taxpayer should also be rewarded for making these huge loans that no commercial business would make in the event of Northern Rock recovering well. That can be done by the government taking options to buy shares at the current price at any time over, say, the next five years. This should also be a condition of continuing the lending to the company. Should it then do well the government can buy the taxpayer shares at a favourable price and sell them on to make a profit as a reward for carrying so much risk for so long. I read that this idea is now being taken seriously by the advisers.

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5 Comments

  1. mikestallard
    Posted January 13, 2008 at 8:26 am | Permalink

    Gordon Brown has made it totally clear that he knows very little about banking. The Chancellor is, I understand, a lawyer, isn't he?
    A lot of this is being driven by the EU from Brussels through the FSA. then, aren't there a lot of ancient Labour types (like the Beast of Bolsover) who need to be kept on side in this matter which affects their voters?
    This group of people does not bode well for the future of Northern Rock and, I imagine, aren't going to listen to common sense, which you are (as ever!) providing by the day.

  2. Ian Evans
    Posted January 13, 2008 at 12:47 pm | Permalink

    I think a significant problem for the government here is the shameful failure of its regulatory framework!

    Under normal circumstances a failing business should obviously take its shareholders with it into oblivion, but in this case (though not myself a shareholder, thank heavens – never trusted their business model!) the shareholders can justifiably complain about the government's regulatory failures if the company does go belly-up!

  3. Neil Craig
    Posted January 14, 2008 at 2:04 pm | Permalink

    When you start subsidising somebody you create a lobby that demands ever more subsidy. The shareholders (a fair proportion of whom were not the original shareholders but entrepreneurs who bought up cheap shares in the expectation they would be able to extract extra cash from government) are now practicing the same welfarism as the windmill industry & the "caring professions".

  4. mikestallard
    Posted January 14, 2008 at 5:43 pm | Permalink

    Interesting point today in the Telegraph leader:
    When Northern Rock is nationalised, for the first time in British history, it will be the government, not a commercial firm, who repossesses houses when the mortgage defaults.
    That ought to make them really popular.
    I can just see it now: the Victorian young girl, still clutching her child in her arms, being driven out into the snow by a black coated politician.

  5. Bazman
    Posted January 15, 2008 at 9:57 am | Permalink

    The other beggars will be the Northern rock bosses pocketing their performance bonuses paid for continuing excellent performance. Performance so good that without the state support would collapse. The punchline though is that they need to be paid this to ensure the continuing stability of the bank. A bit like employing the same cowboy builders who made your house start to fall over. Trebles all round.
    Now you may say renumeration is a matter for the company. Firstly renumeration? What is that? Yes. Pay! Are people in factories renumerated? Pay is not a matter for Northern Rock when it could not even pay it's electricity bill. The management of this bank took a high risk strategy in the suspicion that whatever happened, the state would bail them out while no doubt screaming against any regulation. What do they have to do to fail? Rob the vault? Probably get some incurable disease and be released early from prison with the money, then recover in a medical first. That's just stupid though…
    It's interesting that the Conservatives and Labour are involved in a competition see who can be the most harsh on unemployed 'beggars' when there are so many rich people avoiding tax and receiving money for little work, risk, and in this case for failure. Maybe the public just doesn't understand? The problem is they understand only to well. Hence the attempt at secrecy surrounding these payments.
    Beggars belief.

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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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