Some better news on Northern Rock?

I was pleased to learn today that Goldman Sachs are looking at the possibility of selling on the taxpayers loans to Northern Rock. It would be excellent news if taxpayers can get their money back. Then idea apparently is to turn the loans into bonds and seek some other institution or intermediary to grant a guarantee of repayment, then selling them on to the private sector.

There is also at last some movement away from the lunatic idea of nationalising the bank which would mean taxpayers moving from a position where we have ?57 billion at risk to a position where we would be responsible for all ?100 billion plus of Northerns liabilities. (see previous blog entries on why that would be bad news for taxpayers and shareholders alike). We learn this morning they are looking at the government acquiring a minority stake in the company, so taxpayers will get some upside from their shareholding if the rescue works well.

I would suggest there is no need for taxpayers to buy any shares at the moment in Northern Rock. Taxpayers should continue as bankers of last resort. What Ministers could demand to continue in this role is the grant of options to buy shares in the company at a future date. The taxpayers long term interest would be best protected by having the right to buy a substantial minority stake in the Northern Rock at around the current share price at any time over say the next five years. If all goes well and the companys share go up substantially, and taxpayer can then buy its shareholding, the company will get extra share capital, and taxpayer can sell on the shares in the market to make a profit. If the companys shares do not prosper the taxpayer has no share capital at risk and does not have to buy the shares. That would be less risky than buying a stake in the company today and would reward taxpayers if our lending to the company enables it to recover well..

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  1. Tony Makara
    Posted January 10, 2008 at 5:13 pm | Permalink

    John, on a slightly different matter, but I'm very interested to hear you opinion on the latest BOE decision not to cut rates. Do you now think we have reached a stage where the BOE is so afraid of the Sterling falling against the Euro that the MPC has now, in effect, pegged the BOE lending policy to that of the ECB, so that whatever step the ECB takes on rates the BOE will shadow it? With so many EU foodstuffs in our shops these days any severe differential between the Pound and the Euro could sends prices rocketing. Is our economic policy now being determined by what the ECB decides to do?

    Reply: The decision to leave rates as they are was I suspect a close call, but not one I am unhappy about. We are witnessing a welcome decline in market interest rates at the moment, as some of the tightness in money markets unwinds. Market rates are coming back down to be closer to the Bank rate. There will be further uncomfortable price figures this winter from energy and food prices. The fall in the pound against the Euro also represents a further loosening of conditions. I suspect they will resume cutting next month following more evidence of the slow down.

  2. Norfolk Observer
    Posted January 10, 2008 at 11:57 pm | Permalink

    I find it fascinating. The News at Ten gave the impression that the government was introducing new policy on decommissioned guns. Harriet Harman said in the House of Commons that it was an intention and that there would be a consultation before coming before parliament. Jacqui Smith did say in passing that it would be consulted, but unless you understood the nuances you would assume that it was new government policy. I find it amazing that the government are covered by the subtleties of words, the BBC perhaps sloppy in their coverage, but the public believe that this is now government policy when it is not the case….yet

  3. Abdul Rahim
    Posted January 11, 2008 at 2:53 am | Permalink

    I was surprised to see that nationalisation was even on the table in this day and age. I can't imagine taking such a huge risk with consumers money, although the situation itself is pretty outrageous.

  4. Letters From A Tory
    Posted January 11, 2008 at 10:47 am | Permalink

    Alistair Darling is starting to talk tough about the possibility of nationalising the bank and told the shareholders that they would not be able to stop such a move, which makes me suspicious about how seriously he is considering alternatives like this.

  • 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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