Yesterday was a dispiriting sight in the Commons. We saw Lib Dems and Labour arguing over the future of a bank when none of them seemed to understand the first thing about how banking operates. Nor did they seem to understand the complicated banking regulations and company law they have put in place over the last decade.
Cable for the Lib Dems set the terms of the debate in an entirely false way, which unfortunately some in the media have copied. He offered two “solutions” as the only possible options – put NR into administration (i.e. bankrupt it) or nationalise it.
Neither of these courses of action make any sense and should be rejected at this stage.
Of course the government could bankrupt the Rock, if it withdrew its funding and the promise of more cash and if no private sector party stepped in with the offer of the money. That would renege on government promises and might break its loan agreement (we still have not seen what form that takes or what period it covers). It would still require the government to bail out the depositors, unless they reneged on that promise as well. It might prove to be dearer than other options, and would probably lead to law suits against the government by shareholder and other interests who could legitimately complain about the inconsistency of government actions.
The government could push a nationalisaiton bill through the Commons with Lib dem support. Presumably that would offer no compensation to the shareholders. Then the taxpayer would be on risk not just for ??24-25billion of loans and the estimated ??16 billion of remaining deposit guarantees, but for the whole ??100 billion of liabilities on the 2006 balance sheet and any additional ones added since the last year end. The government would then have to make the announcements about sacking the staff that were superfluous to the slimmed down business they would be running, would have to pay all the bills whether the company werre profitable or not, and stand behind all the obligaitons of the company. The government would need to repay the debts outstanding to other city institutions as they fell due. Why would that be good for the taxpayer? What does Alastair Darling know about running a mortgage bank that he cannot share with the external management already in place?
The only sensible course of action from here is to ignore siren pleas for liquidation or nationalisation, and to manage the debt and the deposits rationally like a proper bank manager. The government has not “nationalised” the bank by lending it money. What it needs to do, if it hasn’t already is:
1. Secure sufficient asset cover to guraantee repayment of all its lending to NR whatever happens. If it does not have enough asset cover – and in current conditions you need to take much more than100% cover given the possibiltiy that the value of mortgages will fall – it should do so as a condition for future lending.
2. Set out the repayment schedule it expects, preferably in agreement with NR but if necessary it has to impose one.
3. The shareholders and Directors of NR then have a choice – a) trade their way out of it b) find a bidder for the whole who will meet the repayment schedule or c) start selling the assets off piecemeal to meet the repayment schedule. They and the Regulators tell us they are solvent. That means that the assets cover the liabilities, so selling the assets will enable them to repay the liabilities. The government only wants one quarter of the assets of the business to repay it loans so far, so it should be achievable.
4. The deposit guarantee should continue but the governemnt should replace it as soon as possible by the beefed up general deposit insurance scheme they are working on with the City. If the deposit guarantees trigger the need for more funding the Bank of England should allow for that within its schedule of repayments.
The Directors and shareholders should be given a chance to rescue it by methods a) or b). The timetable should ensure that if they do not do so in reasonable time then method c), an orderly run off, kicks in automatically. That way taxpayers can get our money back without legal actions against the government for precipitating a crisis.
Mr Darling failed to tell us what markets and Parliament needed to know yesterday – how much money has been lent on what terms. The absence of this information runs the danger of creating a false market in the shares. It also means the task of evaluating bids for NR is difficult if not impossible . If bidders do not know how much money is available on what terms, how can they ascribe a sensible value to the company? And how can you compare bids, if bidders have made different assumptions about government generosity?