The debate about Northern Rock on Newsnight yesterday failed to produce a thought through alternative to nationalisation, to protect the taxpayers interest and avoid more damage to markets.
As readers of this blog will know, there is such an alternative. Maybe I have to spell it out again.
The government and the Bank should set Northern Rock targets to
1. repay debt
2. generate cash and profit
3. sell assets
These targets should be tough but achievable. The rate of asset sales should be geared to what the mortgage market can absorb, so the assets can be sold for a reasonable price, leaving the taxpayer with sufficient cover to get our money back.
Putting Northern Rock into administration could lead to a fire sale of assets, and might result in taxpayers not getting all our money back.
Nationalising Northern Rock could lead to huge losses for taxpayers, as taxpayers became responsible for all the rest of Northern Rocks assets and liabilities, including paying the staff, any redundancies, and the pensions shortfall.
Northern Rock has started to follow this managed run off strategy, selling ?2 billion of mortgages recently and using this to repay some of the taxpayer debt.
The meeting today at Northern Rock has been called to try to limit the managements scope to make decisions. This could be used to limit the Companys ability to reduce its debt to taxpayers, so it is not a helpful development from the governments or managements point of view.
The meeting is also a reminder to those who think nationalisation is an easy option, that it could be bitterly fought by existing shareholders. Taxpayers would not take kindly to existing shareholders being offered a good price for their shares, whilst existing shareholders are likely to contest nationalisation for a nominal or low price. I cant understand how anyone sensible can think this would be a good route to follow.
January 15, 2008
The Tories are right to say that the will absolutely oppose nationalisation. There is no reason whatsoever to think Sir Humphrey will run it more effectively than Sir Richard.
I still think the best option is to put in a liquidator, even though it might hurt the brand name. Bankruptcy is a very valuable part of free enterprise which leads to necesary restructuring. We ignore it at our peril. We have absolutely no duty to ensure the original shareholders make their money back & even less to the hedge funds that have been buying them out.
January 15, 2008
No one thinks that nationalisation is the easy answer, just one of many. And to be fair, the 3 points that you provided as a solution are really just the goals of a successful bank and are what any action, whether it be nationalisation or not, is aiming to provide.
February 17, 2008
[…] lead to a fire sale of assets and might result in taxpayers not getting all our money back
February 19, 2008
[…] on blogs By Ellee The government’s bungling of the Northern Rock crisis has led to John Redwood standing his ground on Tom Watson’s site. And it was most civil too, no need for the Speaker […]