Nationalised banks lose a packet

Northern Rock has weighed in with six month losses of £724 million. £122 million of that is current loss, on top of the £602 million of losses on past poor loans. No-one in government seems to think that is either bad or surprising. Forecasters think the second half should see something similar.

If you own a busienss losing money on that scale you should be changing the top management and demanding better performance. You should be cutting costs and concentrating on finding new profitable business. You should not just plough on as if it did not matter.

Now we hear there is an even sillier idea, of splitting a bad bank off from a good bank and selling the good bank. Poor old taxpayers. We end up with all the bad and doubtful debts, and let some management team take away the better assets to make more money for themselves on the back of assets they have chosen for the task. Why on earth would we want to do that?

I want Northern Rock sold back in to the private sector as soon as possible. We need to sell the bad bets along with the good bets, after suitable provisioning and assessment. How much more bad news is there to write off? Why haven’t they done it yet? Why can’t they get into profit on the rest of the business? Why aren’t they making any progress in creating some value for taxpayers?

It is the predicatable disaster you would expect from a nationalised bank run by these Ministers and their apppointees. They changed the rules for NorthernhRock from wind down to beef up. The answer will just be huge taxpayer losses.

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18 Comments

  1. Waramess
    Posted August 4, 2009 at 8:27 am | Permalink

    This mess has been caused because the Government would not let the banks go bust.

    A lot of fuss has been made about the Lehman collapse but there is absolutely no evidence of systemic collapse following.

    Had RBS been allowed to fail it would by now have been split up with the good parts having been sold and the bad parts being left with the receiver.

    This is a “grown-ups” market and the creditors should be left to look after themselves rather than be nannied by the state.

    What we have now is a pickle with nobody knowing what to do next.

    Our salvation always lies with recievership and interfering with the process simply creates a rather expensive mess.

    • StevenL
      Posted August 4, 2009 at 10:56 pm | Permalink

      “A lot of fuss has been made about the Lehman collapse but there is absolutely no evidence of systemic collapse following.”

      Didn’t the US govt bung about $80 billion dollars into AIG to prevent the next domino falling?

      • Waramess
        Posted August 5, 2009 at 9:30 am | Permalink

        AIG would have “needed” support whether or not Lehman had folded.

        Our current system of bankruptcy needs to accomodate the financial sector but liquidation should not so easily be dismissed.

        Any bankruptcy will end up with losers and that is a function of the risk a lender (either financial or trade) takes.

        Systemic risk is altogether another matter. Banks have been allowed fail in the past without such consequences, and I suspect that if RBS had been allowed to fail we would by now have increased the number of banks competing for business.

  2. alan jutson
    Posted August 4, 2009 at 8:38 am | Permalink

    Agree that we (the Taxpayer) should certainly not be left holding all of the poor investments if a Bank is split up.

    The probable reason why Northern Rock cannot quantify its losses is because it was one of the strongest lenders with the highest percentage of low/no deposit mortgages.

    People who have not saved for a deposit for a house, are by nature not likely to have any spare savings to use as a cushion when unemployment, temorary or long term strikes. It is therefore likely that a higher percentage of Northern Rock clients are more likely to default, than those Banks who lent on a more sensible scale.

    The higher unemployent rises, the more people are likely to default, the more Northern Rock is likely to lose.

  3. Brian Tomkinson
    Posted August 4, 2009 at 8:45 am | Permalink

    Brown may boast that he saved the banking system but he omits to say that taxpayers, prudent savers and borrowers are paying a huge price for the reckless behaviour of the banks and some borrowers.

  4. Brian E.
    Posted August 4, 2009 at 8:54 am | Permalink

    According to the BBC news this morning, the loss is because the government has told them to ease the supply of mortgages, which effectively means lending in those areas where other banks fear to tread. Whilst this might work in good times, its not going to work with so many people facing redundancy. Apparently the government has told them to lend £13 Billion in the next couple of years, presumably to the hard up who can’t really afford a mortgage. Hopefully all of this amount won’t need to be written off!
    I’m surprised that the BBC actually mentioned this on the news, although they did manage to have a “crack” at Barclays and HSBC in the process, presumably because they made profits and didn’t need government help.

    • Stuart Fairney
      Posted August 4, 2009 at 3:07 pm | Permalink

      Wasn’t government induced/forced lending what did for Fannie and Freddie along with the CRA?

      Oh dear. Clear evidence of what caused this mess in the first place, so lets repeat exactly that.

      Quite right about the odious BBC coverage, attack Barclays for being profitable and telling the government exactly what they could do with their “help”

  5. Simon D
    Posted August 4, 2009 at 10:56 am | Permalink

    One reason for the government’s current inaction over restructuring the banks for re-privatisation is that the media has not got its act together. Journalists love destructive stories – bash the bankers bash the politicians. However, like academics, they are not good at postulating solutions.

    The Conservatives need to raise their game by promoting a grown up debate about where the banks need to go and then holding the Government’s feet to the fire. Journalists would be delighted to criticise the government for failing to restructure the banks effectively.

  6. Richard
    Posted August 4, 2009 at 1:19 pm | Permalink

    One of the most remarkable aspects of the financial crisis is the extent to which Gordon Brown has escaped blame for the catastrophe of the banking sector. He has even been praised by erstwhile sensible commentators such as Sam Brittan and Irwin Seltzer for his handling of the crisis. The conclusion must surely be: any bank requiring government support to guarantee its depositors can have it at the price of compulsory capital raising or capital reorganisation – but at a realistic market value, not the inflated value at which taxpayers have subscribed. The economy does not ‘need’ any of: Northern Rock; Bradford & Bingley; or HBOS. All could have been wound down in an orderly fashion with the equity wiped out. RBS is more complex. But there, bond holders should have been required to take a haircut before the taxpayer shelled out £ billions. Lloyds would be fine if Brown hadn’t forced it (& Lloyd’s board & chairman hadn’t agreed) to merge with HBOS. The reality is we now have: a concentrated banking industry without competition; huge taxpayer exposure to the equity which is very unlikely to yield an economic return; sclerosis in the credit markets; subsidised funding for the banks from the Bank of England. It is an extraordinary mess & Brown is the main culprit.

  7. Ian Duncan Stanley
    Posted August 4, 2009 at 2:02 pm | Permalink

    Not surprising really …. dodgy bank loans and a lump of govenment money as equity. Same Management.

    Would you place your hard earned money there? No! risk it with some other bank and maybe you’ll get your money back.

    This bank really needs decapitating but there is nobody in the government who has the guts or feels the responsibility.

  8. Stuart Fairney
    Posted August 4, 2009 at 3:08 pm | Permalink

    No, no JR you must be mistaken, I recall Alistair Darling saying we might well make a profit from the Rock and I cannot imagine such a financial and intellectual colossus being mistaken

  9. Mike Stallard
    Posted August 4, 2009 at 4:25 pm | Permalink

    You say that Northern Rock is £724 million (not billion) down in the last six months.
    Peanuts!
    This government works in billions.
    And, remember, Northern Voters have their money in Northern Banks for a North British government.
    No wonder the BBC hasn’t reported it properly: it is under the radar!
    (It might have bought a couple of helicopters for Afghanistan, though, or paid a little compensation to war heroes).

    Reply: That was just the 6 month loss! You may remmber I said a year ago we should these days think in “rocks” or £100 billion – then we went on to just worrying about the odd trillion!

    • Waramess
      Posted August 5, 2009 at 9:31 am | Permalink

      Just print the stuff

  10. Mark
    Posted August 4, 2009 at 5:50 pm | Permalink

    The die are largely cast for Northern Rock and the other state owned banks. They are all responsible for aiding Gordon’s housing Ponzi scheme that converted borrowing into imports and holidays or to provide fund to pay for government excess, and the consequences are inevitable as the housing bubble unravels. The attempts to paper over the cracks by trying to reflate the housing market simply mean that as market forces inevitably come to assert themselves in due course the pain will be all the greater. It is the attempt to use NR as a vehicle to reflate the market that is most obnoxious and deserving of criticism, not the financial result per se. Only some rather strange accounting standards prevent a clearer view of the likely extent of writedowns that will be required eventually. The fictions in bank balance sheets are quite similar to those in government ones.

    Essentially, the choices are between paying down debt at the expense of consumption and economic activity, or allowing inflation to let rip with even more damaging consequences. Inflation may deflate the real value of debt, but only if the debtors can stay ahead of the high nominal interest rate: otherwise they simply become bankrupt. Meantime, the real value of houses falls.

  11. Andrew Gately
    Posted August 4, 2009 at 6:00 pm | Permalink

    Why is Vince Cable always on the telly and there is never a conflicting view.

    The government stole NR from shareholders so how can you make a loss when you didn’t pay for the shares in the first place.

    It’s like a thief stealing a car stereo and then complaining that it’s not a Blaupunkt and he can only get £15 for it down the pub.

    The govt. strategy for NR to repay the govt loan at breakneck speed has been a disaster. As one customer said why didn’t they just waive exit fees rather than hiking the cost of loans if they needed there money back.

    Also if you look at BOE balance sheet they have leant 100s of billions to banks but all anyone is concerned about is the 10 billion loan to Northern Rock.

  12. Adam Collyer
    Posted August 4, 2009 at 10:00 pm | Permalink

    First, Northern Rock was told to shrink its books and pay off the government loan as fast as possible. So it bribed all its good customers to go elsewhere, and was left with a much more risky mortgage book.

    Then the government did a U-turn and told it to lend more. £4 billion more so far. (It would have been £5 billion, but Northern Rock couldn’t afford that, since its losses on its remaining mortgage customers were eroding its capital too fast.)

    In other words, all along NR has been run strictly to meet political as opposed to business goals. And this will continue, and continue damaging that business further, as long as it is in State ownership.

    In fact, once the Bank has been split into a “good” bank and a “bad” bank we are already being promised that “the Treasury will provide additional funding”.

    Reminds me of British Leyland actually.

  13. Alister
    Posted August 4, 2009 at 11:10 pm | Permalink

    Northern rock loaned money out on 125% mortgages, hoping that prices would rise. They fell, now people have a house worth 80%(?) and a 120% mortgage, so it’s actually a 150 (120/80) mortgage. Then auction prices are lower still, and there are cost to add on, 75% auction and 150% owed thus the people are homeless and still owe what the house sold for!

    Why not sell all of the bad debt houses to Northern Rock housing association? That is create a housing association to house the people who would be homeless, due to loosing their houses (lower court etc costs) public own the houses, people don’t have to move etc. Taxpayers get the benefit of rising house prices, bad debt is identified, money moves from one government owned entity to another

  14. Adrian Peirson
    Posted August 6, 2009 at 4:49 pm | Permalink

    Should have let the Banks fail and written off peoples loans, mortgages, debts to those banks etc.
    Let people keep their houses, cars and businesses after all it wasn’t their fault the Banks failed.

    Take over the failed Banks infrastructure, Printed £50 Billion ( not borrowed ) to honour those with savings, investments in those Banks, waited 1 year then sold off those Banks for Real Money IE Gold, Silver, Vanadium and then placed these as Britains Reserves etc to back future issuance of non fiat British Sterling making the Pound the ONLY Real currency in the world backed by something of real value.

    It’s quite simple really all you need is to care for your country and people.

    The Renegade Economist
    http://www.youtube.com/user/RenegadeEconomist

    Ron Paul
    http://www.youtube.com/user/campaignforliberty

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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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