BBC misreads the Rock crisis

I am glad to have won the battle against Vince Cable to avoid nationalisation of Northern Rock. I am grateful to the Jeremy Vine programme and the Week In Westminster for giving airtime to the case against nationalisation. Their commonsense and fairness shows up the lamentable performance of the Today programme, the World at One and Pm who gave ample platforms to the pro nationalisation case but refused me the opportunity to explain why it was a bad idea, and to offer a more positive alternative.

In the arguments with editors I was told that my proposals were unlikely to be taken up, whereas nationalisation was the likely outcome. I explained that the government had to come up with something better than nationalisation because nationalisation would have wrecked the borrowing and spending figures. The BBCs flagship programmes as always remained wedded to an old fashioned state solution and to the Lib Dems, so their listeners were not made aware that there was a better way, and were in ignorance that the governments advisers were working on it.

I am pleased this morning that the government has decided to

1. Avoid nationalisation
2. Get some cash back more quickly by selling bonds to replace the loans
3. Seek a new private sector owner
4. Take an equity stake via warrants to give the taxpayer some profit if it recovers well.

What I want to see in addition is

1. Proper banking disciplines enforced to repay the borrowings. Northern Rock still needs an injection of tough banking controls to make it work.
2. A phased withdrawal of the guarantees ?? we dont just want the cash back, we also want to get the taxpayer off risk
3. A fair competition allowing in new bidders ?? as the basis for bidding is now very different from before Christmas. Otherwise there could be legal challenges.

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25 Comments

  1. Michael Taylor
    Posted January 21, 2008 at 10:06 am | Permalink

    Going only on the information gleaned via the lamentable Today programme, it seems, if anything, this government is proposing something worse than nationalization – nationalization of the liabilities coupled with selective (and therefore, in this case, ethically crippled) privatization of the assets. Now that we (the taxpayer) are obliged to support Northern Rock's debts, is there anything to stop, say, a French bank, or a Russian bank for that matter, being sold the equity?

    Who, in any case, is to decide? The Today programme implied (never quite said) that it would be the government. On what basis, since they do not own the business?

    Third point, and one which I am surprised you have not been alert to. If the taxpayer is to guarantee vast swathes of Northern Rock's liabilities, this is a massive distortion of the market. Northern Rock was, I believe, the 5th largest provider of mortgages in the UK, and it now, presumably, will be able to expand its position at the expense of its rivals, thanks to its unique and utterly unfair funding-by-the-taxpayer. Anyone who gives a damn about the integrity of the market – and certainly that should include the four big banks – should be screaming blue murder over such a proposal.

    I go back to a proposal I made earlier, and one which worked well in Japan: if the political decision to keep this bank alive has been taken, it would be more mortgage-market neutral to do so by the government issuing non-voting high-yielding preference shares, convertible at some determined point in the future (three years?) into common equity unless repaid. That keeps the bank alive, but holds a gun to the head of the management and the owners to sort their balance sheet out, which effectively means that any profits they make go towards repaying the taxpayer, not expanding their business at your and my expense.

    Final point: the utter serial incompetence of the Northern Rock saga is probably biggest disgrace to Britain's institutional competence I've ever seen. Heads far and wide should be rolling. Oh yes, the BBC's performance throughout, from its initial panic-inducing broadcast casting doubt (only almost, of course) on whether the initial funding package would be enough to pay out the depositors, to its refusal to explain the full financial horror of the government's abandonment of its fiduciary duties to the taxpayer, also needs a public enquiry.

    Sentence deleted -ed.

    Reply: the government would point out they are proposing to charge Northern Rock for the loans and guarantee, and to give the taxpayer some participation in any upside. The power they have to influence the deal comes from the power that being the main bank manager to the company gives them.

  2. Tony Makara
    Posted January 21, 2008 at 11:10 am | Permalink

    John, you have done not only Northern Rock a great service but also the country a great service. Nationalization would have been a disaster and would have set a dangerous precedent. Thank you for the time you have put into this matter. Vince Cable's quick-fix would have helped no-one in the long run.

  3. MartinW
    Posted January 21, 2008 at 12:01 pm | Permalink

    It doesn't surprise me that you were refused air-time on those news & current affairs programmes, whose editorial shortcomings are a continuing scandal. For many years the 'World at One' and 'PM' in particular have been notorious for unbalanced reporting not only on domestic politics, but also the EU and wider world affairs, Islamism, climate change and a whole slew of other topics. The 'rebalancing' of the BBC should be a high priority for our Party.

    MartinW

  4. brian kelly
    Posted January 21, 2008 at 12:08 pm | Permalink

    Thank God, in my view, for a voice of reason and common sense. The BBC is becoming an irrelevance to proper debate on serious matters. Most presenters on Today do not have the capability to seriously debate issues – never mind their political bias. However, I have no faith in anything that Brown and this woeful government does. It seems to me that a competent government would have nipped this problem in the bud right at the outset instead of which, by incompetence, indecision and political calculations, allowing it to fester into the huge problem it is now. Now the taxpayer has a huge potential liability stretching away into the future. Of course, one of Brown's biggest aims is to shove it out of the headlines until after the next election….And the thought of (description cut out – ed|) Branson being in control just makes my blood boil

  5. Posted January 21, 2008 at 1:31 pm | Permalink

    I echo the above comments on the BBC and have more or less abandoned a once esteemed news brand.

    Am I right in saying that the Lloyds TSB abortive takeover of Northern Rock would have meant the government offering guarantees of around

  6. newmania
    Posted January 21, 2008 at 2:04 pm | Permalink

    This is tremendously impressive !

  7. Ian Evans
    Posted January 21, 2008 at 2:42 pm | Permalink

    I agree with everything said here (by you and at least the first three commentators). The tragic delays and dithering have crushed Northern Rock, but at least now Northern Grit may rise again!

    I regularly watch Daily Politics and normally regard it as a (relatively speaking) bastion of political fairness for the BBC (except when Jenny Scott is in charge, of course!). However their treatment of the Northern Rock issue has been as abysmally imbalanced as that of other BBC shows: Vince Cable, Vince Cable, Vince Cable … !

    I hope the Conservatives have some sort of plan for evening out the BBC bias – which, like the pro-labour bias currently built into the elctoral boundaries, has entrenched the status quo for so long!

  8. rose
    Posted January 21, 2008 at 2:58 pm | Permalink

    The BBC is not immune from criticism. If enough sane people keep writing they do eventually hear. They should of course be swayed by the force of argument, not numbers, but we must work with what we have.

  9. Posted January 21, 2008 at 4:21 pm | Permalink

    Unfortunately the BBC is not an irrelevance in debate on any matter because they are so powerful. Most people get their news from broadcasters & the BBC makes up at least half of such broadcasts. They establish the ground rules on what views may & may not be considered eg global warming, whether the answer to almost any question is more state spending/regulation, windmillery. Anybody having this close to a monopoly control of the opinions the public are allowed to hear is a serious restriction on our freedom. This would be the case even if they didn't abuse it.

    I would like to think that John will get an apology from the editors of Today, World at One & PM, or their bosses, for saying anything other than nationalisation was unlikely, but I somehow doubt it.

  10. Robert
    Posted January 21, 2008 at 4:27 pm | Permalink

    Yes totally agree except of course I remember you and the Thatcher years, so we come back down to earth with a large bang.

  11. Glyn H
    Posted January 21, 2008 at 6:40 pm | Permalink

    It seems to me that as the government spiked the Lloyds TSB deal NR should have been put into administration – all this farago is solely in pursuit of Labour party interests at taxpayers expense. And the avoidance of 'nationalisation' is a throwback to the Byers/Shriti Varda Railtrack debacle. (plus of course the 'golden rule' rubbish;which due to the deceit of PFI's is just so much tosh). This is different – because the 'grannies' had bought their Rail Track shares in good faith, wheras in NR they were gifted at demutualisation and the hedge funds were sniffing carrion and their getting a bloody nose is fair game.

  12. mikestallard
    Posted January 21, 2008 at 6:46 pm | Permalink

    Northern Rock could add

  13. Cliff
    Posted January 21, 2008 at 8:16 pm | Permalink

    Dear John,

    Perhaps I am being a bit thick but, I cannot understand how changing a loan, guaranteed by taxpayer's money to a bond guaranteed by taxpayer's money actually alters the current situation. At the end of the day, it appears to me that all the risk is still being taken by the taxpayer.

    It seems madness to me that the NR shareholders should have any influence on the way it goes and what it is worth. They say the offer is too low. But for the guarantee, the shares are worthless. The company is but for the guarantees broke. They have affectively lost their gamble on betting on the future profitability of a business. That is what share investment comes down to; a gamble. As with any "bet" you may win or loose. When the bank was making a good profit, did these shareholders offer the taxpayer a share in their good fortune….no of course not.

    I still say that the person responsible for this fiasco has got away scott free….in my view, the person that blabbed to the press that NR were going to the BoE started the mass hysteria that we witnessed as thousands of people withdrew their savings. Why has there been no mention of this person? He or she must have had inside knowledge and one wonders about confidentiality clauses written into employment contracts, surely someone at either NR or the BoE has breached their contract by releasing this information.

    Reply: The Goldman Sachs proposal changes the situation in one important respect – taxpayers get their money back when buyers purchase the new bonds. Then taxpayers have to get off the guarantee hook, to complete the process. In addition taxpayers get a commission for offering the guarantee, and I believe there will be warrants or options to give the taxpayer a profit if it all works well. This is an improvement on where we are now.

  14. Terry
    Posted January 21, 2008 at 11:03 pm | Permalink

    John, good to see you punture the over-inflated balloon that is Vince Cable's reputation. Why the current adulation of LibDem spokesman? He has a good turn of phrase and his solution to the Northern Rock problem of nationalisation has the beauty of being simple and easy to understand. On

  15. Posted January 22, 2008 at 1:30 am | Permalink

    Agreed with the article and the comments so far.

    Brian Kelly (and I had a flash of concern for a moment, as our extremely leftie Unison rep' here in Medway Council has the same name! How could he have changed so much, I wondered…?) in particular highlights the dithering over Northern Rock when it first hit.

    What we have to remember was that, at that time, Gordon Brown was seriously considering an autumn General Election, and this was kept as low-key as possible during the lead-up period. It was far more important to the Prime Minister to preserve his and Labour's standing at that anticipated election than anything else at all.

    This is one of the dangers of allowing the PM the exclusive right to call an election at a convenient time. Now see how much it has cost all of us, on this one issue alone!

  16. Chris Cook
    Posted January 22, 2008 at 3:50 am | Permalink

    It might help if members of the government, or former members of the government, actually admitted the inconvenient truth of the Northern rock saga.

    And that is the longer it goes on, and the more money that is printed by the Bank of England and loaned to the Rock; the better off the "taxpayer" will be through the phenomenon of "seignorage".

    If you don't believe me, Tim Congdon let the cat out of the bag two months ago in the FT, here
    http://www.ft.com/cms/s/0/ddf4c35e-88e5-11dc-84c9

    The fact is that this money has never been anywhere near a taxpayer.

    The solution I advocate is that this windfall, currently running at around

  17. John R
    Posted January 22, 2008 at 9:27 am | Permalink

    I make it that this bailout is costing the taxpayer around

  18. MarkE
    Posted January 22, 2008 at 11:08 am | Permalink

    John

    Although the bailout is costing

  19. Peter Rippon
    Posted January 22, 2008 at 5:11 pm | Permalink

    Hi John,

    How far we have fallen. Only recently you were praising PM in the House for being a cracking programme.
    I do think your criticism is a little unfair. You move from World at One, PM, and Today not interviewing you to conclude, 'BBC misreads the Rock crisis'. That's a big leap given you did do other BBC outlets.
    I can't speak for Today but the only producer I can find that did speak to you for Wato does not recall saying what you say 'Editors' told you.
    Your party's position changed that morning so instead of you we did Philip Hammond, the Shadow Chief Sec, on why the Conservatives would now oppose legislation to nationalise. That seems fair enough. No-one else we did that day was pro-nationalisation. We have done Vince Cable on other days but that's because he is the Lib Dem spox on these matters.
    We are interested in your views on this blog and hopefully in future on our programmes too. Just this time we went with CCO's line instead.

    Yours

    Peter Rippon
    Editor World at One, PM

    Reply: I lost count of how many press releases and blog comments you ignored, and how you failed to provide an alternaitve to nationalisation as an option on the 3 flagship programmes. I think you should try to forecast what the outcome is likely to be and cover all bases.
    I did not offer myself for interview as a Conservative, but as a well known financial innovator who was one of the pioneers of privatisation in this country, followed by wider ownership and debt swap, and a book on PFI/PPP. Your programme needed someone who knew how public/private finance and modern banking works.

  20. Cliff
    Posted January 22, 2008 at 9:04 pm | Permalink

    John: You said:
    "The Goldman Sachs proposal changes the situation in one important respect – taxpayers get their money back when buyers purchase the new bonds. Then taxpayers have to get off the guarantee hook, to complete the process. In addition taxpayers get a commission for offering the guarantee, and I believe there will be warrants or options to give the taxpayer a profit if it all works well. This is an improvement on where we are now."

    This may well be the case, however it may well be only putting off the inevitable. Whilst it is true that, should the resuscitated NR do well we shall see some profit, but by the same token, should NR fail we still would be liable as the bonds are guaranteed by the government, having no money of their own, that means the taxpayer. The other worry is that in a few years time, we shall be the ones running the country and it could all become our problem should it follow the normal anti-Midas touch associated with Labour where everything it touches turn to pooh.

    I noticed that you did not comment on my remarks about the person that blabbed to the media about NR going to the BoE, that in my view started the panic amongst depositors, does that mean you agree with me on that?

    By the way, well done yesterday defending us against the traitorous policy of Labour in relation to the treaty(sic) and I really enjoyed William Hague's speech, pity he did not wait until a year or so ago to become our party's leader as he is now clearly ready for the role. He was too young and inexperienced when he was leader, he is now ready to try again and I for one would back him for the position, unless of course you stand again.

    Keep fighting for the UK!!

    Reply: Yes I will keep fighting for democracy and the UK.
    Yes I also agree the leaking of the news about NR needing to borrow was far from helpful and it would be good to know more about who and why.

  21. amontymouse
    Posted January 23, 2008 at 12:03 am | Permalink

    I think it's important to bear in mind exactly what kind of loan this is.

    Northern Rock need the money to pay off the relatively short term loans they had taken. They can afford to pay the interest on the loans they had taken out (and even much more), but due to the complete and utter drought of available credit as a result of market panic regarding the subprime issue, there is simply no available credit, almost regardless of price, which they would otherwise have used to "roll-over" the loan.

    You can look at it this way, lets say you took out a 30 year mortgage, with the agreement that after 10 years you would roll the mortgage over to another mortgage company. After the 10 years, all the mortgage companies deny you the right to roll over the mortgage and demand the rest of the capital back. If noone lends you the money you are screwed, and I would venture to claim that both you would agree it wasn't really your fault.

    If anything, this seems to suggest something cronically wrong with the money markets. How can the bank of England say that the interest rate is 5% or whatever when you can't actually get fairly insignificant (in terms of total money supply) amounts of money at that rate ? If the real interest rate is in fact much higher, then what about the rate of inflation ?

  22. Posted January 23, 2008 at 2:07 pm | Permalink

    Looking forward the original loan & increased depositer guarantees to NR were correctly seen as establishing a precedent for any other bank that gets in trouble.

    Since there is considerable reason to expect real house price falls in Britain the chance of some other, probaly bigger, bank going the same way must be substantial.

    This would be a time to get the government to state publicly that this has been more of an 'orrible warning than a precedent to be followed & that in future banks cannot expect to be bailed out.

  23. Graeme
    Posted January 30, 2008 at 10:10 pm | Permalink

    Mr Redwood, it was just your opinion that your ideas on Northern Rock were better than nationalisation. That said, you shouldn't have to argue with BBC programmers to agree with your point of view to be able to express it. Just another blatant example of the stranglehold the subversive Left have on political discourse in our country, and why the Conservative Party and sincere democrats on the Left (there dont seem that many!) need to be far more vocal about it and be making manifesto commitments to enforce Broadcasting media's Statutory Duty to impartiality. This means that the 'usual suspects' behind the microphone and in the sound studios who dont have the professional integrity to work for the BBC and other broadcast media wont. Not going to happen though. The opposite. These people are doing a great job in slowly throttling British democracy. 'Please stop it' wont stop them!

  24. Graeme
    Posted January 30, 2008 at 10:12 pm | Permalink

    does this work?

  25. Graeme
    Posted January 30, 2008 at 10:13 pm | Permalink

    Mr Redwood, it was just your opinion that your ideas on Northern Rock were better than nationalisation. That said, you shouldn't have to argue with BBC programmers to agree with your point of view to be able to express it. Just another blatant example of the stranglehold the subversive Left have on political discourse in our country, and why the Conservative Party and sincere democrats on the Left (there dont seem that many!) need to be far more vocal about it and be making manifesto commitments to enforce Broadcasting media's Statutory Duty to impartiality. This means that the 'usual suspects' behind the microphone and in the sound studios who dont have the professional integrity to work for the BBC and other broadcast media wont. Not going to happen though. The opposite. These people are doing a great job in slowly throttling British democracy. 'Please stop it' wont stop them!

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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