Time to get a grip on loans to Northern Rock

<p> The idea that Northern Rock loans will be packaged and sold to the private sector is not a solution to the crisis, especially as there will be a government guarantee on them. Instead, this represents a decision by the government to lengthen the period over which it is prepared to lend to Northern Rock.</p>
<p> It means that all interested bidders wanting to buy a share of the action in Northern should; be invited to rebid, as the terms on which they are bidding are now so much better than they were. It appears that a bidder now has the government as its bank manager, guaranteeing substantial lending, for a long time period. This is a much better proposition than the one they sought bids for before Christmas.</p>
<p> No-one writing up the story seems to grasp the importance of adopting the recommendations that readers of this blog know well, recommendations to the government and Bank of England to get a grip as Northerns most important bank managers.</p>
<p> Whether Northern is to be nationalised, sold to a private bidder or remain independent, the need is the same. It is high time the authorities toughened up the terms of their lending to Northern Rock, and set out a timetable for repayment that is demanding but realistic. It should be up to the management to decide if they can repay from trading profits and cash, or if they need to sell assets to meet the demands for money back by the taxpayers.</p>
<p> I find it almost unbelievable that Mr Darling and the Bank should make maybe £55 billion of loans and guarantees available to Northern Rock with no public statement of how long they can have the money for, how the asset cover has been secured, and when the money has to be repaid. All these things should be public because they have such a big impact on public spending, and so bidders can form a proper view of the value and the liquidity of the business. More worrying is the likelihood that there is no private agreement about how and when the loans will be repaid. What private sector banker would ever lend large sums to a distressed company without first asking and answering the questions How and When do I get my money back?</p>
<p> The governments decision to back the “solution” of selling bonds to the private sector to release cash to the government that it has lent to Northern would work well if there were no government guarantee, but the existence of the guarantee keeps the taxpayer on risk. At the very least if they wish to go this route they should look at time limiting the guarantee, or phasing it out.</p>
<p> This could prove to a dear way of avoiding the ruin of nationalisation. Maybe one day the Treasury will wake up and understand that they have a banking problem. The way out is by applying proper banking disciplines to this business, and making the shareholders and directors of Northern Rock confront the simple truth either they trade their way out of the borrowings, or they sell assets to repay the borrowings. Nationalisation, or lengthening the terms of the loans and guaranteeing them take the pressure off the management. A sensible bank manager with that much money at risk with a single client would want to hold their feet to the fire, not let them off in the way the latest proposal does.</p>

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8 Comments

  1. mikestallard
    Posted January 20, 2008 at 5:50 pm | Permalink

    I don't think you get the problem, John.
    Mr Brown, financial wizard, "who provided the best economy the world has ever seen for the longest period of time ever", runs the government.
    His ministers are kept in the dark and they are deliberately chosen because they are his minions. They do what they are told when they are told.
    The Chancellor is a lawyer who knows nothing about either the economy or the Bank. He is there to please his master.
    The whole problem is that his infallible master is a ditherer who, as a mere politician, really knows very little about finance.

    Given that this is true, please expect nothing from this government except more and more chaos in every single department.

    Watch the ministers on Newsnight or on Question Time, or listen to them on the radio and see if I am not right.

    It must be really frustrating for you, as an ex minister, to see how badly your country is being ruled. But – fear not! – "Europe" is coming up and also Northern Rock, which is going to cause huge tax rises at a difficult time. Both of these could easily cause a back bench revolt of unimaginable proportions.
    Even the Lib Dems might attack the government!

    I give them until Easter. then the Conservatives will storm in.

  2. Steve
    Posted January 20, 2008 at 6:48 pm | Permalink

    I hope that someone will accurately calculate the present value of the guarantee. To provide a gtee worth 50-100bps on such an enormous sum will show the true scale of the "loss" to the taxpayer.

    Brown is simply using public money to subsidise a private sector sale to save political embarrassment. Shocking.

  3. Tears for Tier 1
    Posted January 20, 2008 at 7:00 pm | Permalink

    Surely in the short term the problem is this:
    Northern Rock is worthless in every respect except one, its ownership represents a call option on the upside (probably inflation bailing out all its debtors as Brown devalues our currency and allows negative real interest rates).

    Brown seems to be suggesting a transfer of ownership of this option from existing shareholders to his mate Brown.

    The rescue is being made possible by the tax payer who will certainly be left holding the baby on the downside. The tax payer should therefore keep the call option, not Branson or any other private sector hedge fund.

  4. griswold
    Posted January 20, 2008 at 7:15 pm | Permalink

    Because NuLab ministers of the past decade have very little experience of the commercial world, they have effectively subcontracted major policy implementation decisions to consultants whose primary interest is the generation of profit for partners and shareholders.

    Consultants and PFI principals have rung rings around the Govt whose ministers do not have the nous to analyse proposals and solutions put forward. Ministers are babes in the wood.

    Consultants have cost us dear. Not the

  5. Eddie
    Posted January 20, 2008 at 7:28 pm | Permalink

    It si suggested that the Bonds will be repaid as people redeem their mortgages… but banks normally relend this money. If the money is not to be available to re-lend (and it shouldn't be, the taxpayer should be repaid first, how will the Northern Rock be able to grant new mortgages?

    The alternative is that they borrow from the wholesale markets, but in doing so they should use the proceeds of any borrowing that becomes available to them to repay the taxpayer backed bonds.

    If the money is used to generate profits through further lending, it allows shareholders to profit at the taxpayers expense.

    This is a solution to the problem only if the taxpayer is allowed to be treated as the doormat.

  6. Bob
    Posted January 20, 2008 at 8:21 pm | Permalink

    I notice that the Rock's Audit and Risk Committee Chairperson (Sir Derek Wanless) has been very quiet. He's the same bloke who sorted out the NHS isn't he? How did he miss the huge risk of funding a multi billion pound mortgage book on short term borrowing?
    On Radio 4 last evening they declared that the debt will be converted into bonds and then sold off. The host (Jenny something or other) interviewed Phil Hammond and he explained that the Goldman Sachs plan would leave taxpayer's money at risk for many years. He said the taxpayers interests (as creditors) must be protected, to which she replied "what about the shareholders". However, when I listened again on the iPlayer her remark about shareholders had been deleted. BBC censorship at work – what are they affraid of?.

  7. Big Andy
    Posted January 21, 2008 at 12:52 am | Permalink

    Whilst your comments sound very persausive: i.e. the government should treat Northern Rock like a private entity and not prolong its assistance longer than necessary, however, i think you are oversimplifying things.

    If Northern Rock were subject to the market and the government acted as an ordinary creditor, it would go under.

    You could argue that this is fair enough, but the consensus appears, that the potential domino effects are too great or unknown.

    Therefore, if the government is having to back Northern Rock, it should look at how it can do this in a cost effective way; selling the loans whilst providing a guarantee appears one such way.

    As to placing limits on the timescale of government support, this would not really work as – due to the very reasons for intervention – if Northern Rock was not able to stand on its own two feet at the due date, the government would presumably have to renege on its tough stance and would appear even weaker than present.

    Big Andy

    reply: I am talking about putting some proper banking discipline into the situation. Of course the loans can be repaid over a sensible time scale – if necessary by selling off the assets, whilst giving the bank the chance to trade itself back to health.

  8. Ian
    Posted January 21, 2008 at 6:38 pm | Permalink

    What is being proposed is what the US Federal Deposit Insurance Company has been doing for years. It is called a Purchase and Assumption where the FDIC takes over the risky loan portfolio (Assumption) and then liquidates it in an orderly fashion. In all the hysteria there has been little discussion of how sound the underlying mortgages are. They are certainly not all going to go into default, although some the commentators seem under this illusion since they keep on equating the loan of 55 billion with a subsidy of that amount, even though with the present terms the Bank of England is actually making a (notional) profit.

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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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