Northern Rock – the government’s biggest mistake so far

Yesterday evening I heard Gary Hoffman give a lecture on “Leadership and Reputation” at the Henley Management School. After 26 years at Barclays, Mr Hoffman leaves to become Chief Executive of Northern Rock at the end of this month.

He gave us an impressive talk about the importance of reputation and brand in banking. During the course of the lecture and questions it emerged there would likely be a need for more write offs and provisions at Northern Rock, as readers of this blog will be expecting. The £600 million of losses so far reported since becoming nationalised and the £3,000 million of new equity capital will not be the end of the taxpayers’ misery.

The more I see and hear of Northern Rock, the more I find it impossible to understand why Vince Cable is lauded for pressing for nationalisation, or why the government was foolish enough to do it.

As a result we have

The former biggest new lender in the market unable to make new loans at a time of mortgage famine
The need for other banks to refinance some of Northern’s mortgages, further reducing the flow of new mortgages
Redundancies to scale back the business
Large losses to be paid for by the taxpayer
The taxpayer effectively paying £15 million a year on top as a contribution to the local community
Taxpayers underwriting sponsorship of Newcastle football club

If instead the government had acted as intelligent bank manager to the Rock, it could have continued to write new loans and offer more attractive rates. It would not have lost as much or sacked as many.

The sooner what remains is sold to the private sector the better. It could either be sold as a going concern, or the assets sold to new managers and companies. Either would be a cheaper answer for the taxpayer, and would probably save more jobs in the long run.

The interesting question is what value does the Northern Rock brand now have? Mr Hoffman thinks there is strong brand loyalty to the Rock in the North East. I was pleased to hear his belief in the brand and the support he thinks it still enjoys. I would be interested in comments on how many North eastern savers would put their money with it if it did not have a government guarantee.

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5 Comments

  1. no one
    Posted September 3, 2008 at 10:28 am | Permalink

    it does have some misguided loyalty in the north east

    but then thats what brands are essentially about, a way of manipulating loyalty from the consumer

    its the same in halifax and surrounds, mass loyalty to hbos even when the accounts are not competitive

    you are right northern rock needs giving to private sector as soon as possible

    however seen as a partial subsidy to the north east as a region i doubt that the northern rock thing for the north east brings it anywhere near the amounts of money from the south east pumped into scotland or n ireland for instance, the way money is siphoned from workers and used for social manipulation is crazy and very unfair

    ah well, if only we had more people prepared to be honest about this stuff

  2. Neil Craig
    Posted September 3, 2008 at 12:53 pm | Permalink

    Cable & the LibDems seem to have been fairly silent lately on them being the first ones to call for nationalistion of the sinking Rock. For that reason I think it would be wise for the Conservatives to keep mentioning it.

  3. ex-Northern Crock sa
    Posted September 3, 2008 at 1:24 pm | Permalink

    It is not as if Northern Rock is the only housing related disaster that the Government is presiding over. Have you ever considered what happens to a Government owned trading fund when its income fails to match its liabilities?

    It would be interesting to know how for example the Land Registry, which is I believe solely funded from the fees it charges for its services will fare with the collapsing housing market. In the good times it is a cash cow for the HM Treasury providing regular receipts as its income exceeds its operating costs. So what happens when the reverse occurs – what is the taxpayers' liability and how does it continue to provide a statutory service when/if its income no longer matches its operating costs?

    According to their website (http://www1.landregistry.gov.uk/about_us/framedoc/default.asp#planning%20control): "Land Registry will agree a temporary borrowing limit with the Treasury. Such loans from the National Loans Fund are repayable in-year."

    This may work as a short-term in-year measure, but what happens in a prolonged housing market down-turn!

  4. Adrian Peirson
    Posted September 7, 2008 at 8:20 pm | Permalink

    Only Govt should be able to coin money, and it should be Backed.
    Currently what happens is, they lower interest rates, you go to the Bank for a loan, the minute they say yes, this debt is conjured up out of thin air that you then agree to repay.
    Then they raise rates so people cannot repay, then the Banks seize the assets.
    All that wealth, conjured up out of thin air. http://www.youtube.com/watch?v=v0th92jAm_E&fe

  5. BRYAN SWEENEY
    Posted September 14, 2008 at 7:04 pm | Permalink

    Have you read what a fellow MP has said.
    Although from the opposite side you seem to have a lot in common.
    As far as I can see only the two of you speak with any sense on the issueand that includes your own front bench team.

    Newcastle Central MP Jim Cousins said the bank was being forced to repay a multi-billion Government loan at a “frantic” rate despite that risking the business and sucking cash out of the struggling mortgage market.
    Mr Cousins, who sits on the influential Commons Treasury committee, accused bosses of the country’s financial services sector of making Northern Rock a “scapegoat” for wider industry failings.
    He claimed someone in the Bank of England, Treasury or Financial Services Authority leaked news Northern Rock was seeking emergency Bank of England support last year in an attempt to be tough – but ended up sparking the “disastrous” run on the bank.

    In an interview with The Journal, the Labour MP said Gordon Brown’s recent £1bn housing market support package was dwarfed by the estimated £10bn repaid by Northern Rock.

    “The negative consequence of this frantic attempt to repay the Government is not just damaging Northern Rock but Britain’s whole mortgage providing system,” said Mr Cousins.

    He added the bank is being forced to end fixed rate mortgage deals and go after people failing to keep up payments because of the “extraordinary” rate of return of the loan.

    Mr Cousins said the Government now had to take a “patient and careful” view of repayment to get its money back, with nationalised Northern Rock likely to remain in the public sector for several years.

    He added the arrival of a new Northern Rock chief executive next month could be a “new start” with the bank boosting the housing market, providing mortgages to people unable to get them and being an example of successful public intervention.

    “If we are patient and careful and try to build it up rather than knock it down fast, it could turn out to be one of the best investments by the public for some years,” said Mr Cousins.

    He said the crisis could and should have been avoided, but added: “People at the top of Britain’s financial services decided to make Northern Rock an example to deal with others.

    “We were all led to believe that there was something uniquely wrong with Northern Rock, we can now see that is wrong,” said Mr Cousins.

  • 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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