What was Northern Rock worth?

Shareholders of the Rock are battling it out in the courts. They say their bank was taken from them by the government, without proper compensation for their interests. The government says their bank was in a very bad way, and has to be valued without the support the government was offering it. I leave that to the well paid and well qualified lawyers to fight out. Some will say a central Bank’s duty is to lend money to banks that need it – had they carried on doing that for Northern Rock, shareholders would have retained an asset with decent future value. Others will say the Rock was in deep trouble, and that it had run out of normal commercial options.

What should be clear by now is the government did the taxpayers and future mortgage holders no favours by its nationalisation. As I feared at the time, we have been left with the worst of all possible worlds. We own a heavily loss making bank, which is not allowed to write new business and to grow its activities to try to trade itself into profit again. Taxpayers can look forward to more shrinking of their assets, as staff are sacked and the loan book is run down.

Why on earth did the government do that? Why didn’t they assist a refinancing of the Rock that would have allowed it to carry on trading, and to make a further contribution to the market for new mortgages? Do they yet regret their haste in rushing for the Vince Cable “solution” of nationalisation which is turning out to be a kind of lingering death of the business?


  1. APL
    January 13, 2009

    JR: “What was Northern Rock worth”

    We will never know, because the government went on a vote buying spree in northern constituencies.

    The Market was trying to find out, and had been revaluing Northern Rocks potential future earnings quite dramatically.

    Northern Rock should have been left to go bankrupt, the depositors would have been protected by the UK deposit protection scheme, its debts would have been liquidated from its assets. Anything left over would have been snapped up at fire sale prices. The shareholders would have got the going market price.

    Labours Northern vote purchasing scheme has cost us billions with a nearly unlimited billions more tab yet to hit the desk.

    Eighteen months ago, letting NR go through bankruptcy would would have been a worthwhile and salutary lesson to the likes of B&B HBOS, they might still have been able to raise significant capital in the markets at that point, or sold assets.

  2. Callum Wood
    January 13, 2009

    I think the nationalistaion was a classic case of “Something needs to be done. This is something, therefore it must be done.” reasoning.

    The message to banks is now clear: fail, and we’ll bail you out. If Brown et al. really wanted the banks to up their game, the whiff of Northern Rock’s demise would keep them on their toes much more than the risk of having to answer to Darling.

    The only victim in all of this is the aleady overburdened taxpayer who now has the unenviable responsibility of carrying Northern Rock’s liabilities.

  3. Brian Tomkinson
    January 13, 2009

    Brown has been scrambling around to be seen to be doing something – anything – regardless of the consequences. At the same time he and his lackeys take every opportunity to label the Conservatives as the “do nothing” party. Most of what has taken place has had more to do with politics than sound economics. Cable is still waffling on about nationalisation and is given unjustified credibility by the media. Most people think that the VAT reduction was a complete waste of money but how many know the consequences of the other actions Brown has taken? Can you produce a simple cost/ (lack of) benefit analysis for Brown’s various actions since the run on Northern Rock?

  4. Lola
    January 13, 2009

    Nationalisation is New Labour’s default option. It’s in their DNA, despite the abandonment of cl4.4. Plus they have always wanted to own the banks. Controlling capital, they consider, is fundamental to getting socialism to succeed. Or to put it another way the reason that socialism has always failed in the past is because they never controled the banks. This action was political, not economic.

    1. DBC Reed
      January 13, 2009

      Nationalisation is certainly not in the Republican Party’s DNA but they’ve used it. Letting Lehman’s go belly up did n’t do any good at all. There was a real and present danger of runs on several banks.
      Whose money is it by the way? Why should n’t the profits from the creation of credit be in public hands ? They are a function of the credit- worthiness of the whole nation not just the private banking firms.

      1. Lola
        January 13, 2009

        It’s the banks money. They are a private business. If they create wealth – in whatever currency it is measured – they get to keep it. And the credit wothiness of the county is a Hell of lot different to the credit worthiness of its banks, as we are about to find out when the Government has to default on its Sterling obligations. The banks will still trade quite happily except for not receiving their due interest from the government – that is me and you.

        Since the banks are creating credit why not dismantle the monopoly of state money? If banks offered currency they’d have to be certain that their customers were confident that they were sound and the market would make bloody certain that the credit checks were of good quality.

        1. DBC Reed
          January 14, 2009

          The banks actually create money/credit certainly,but do they have any right to do so?
          My 15th ed of Encylcopaedia Britannica puts it like this (Vol12 p357)
          ” In the course of issuing money the commercial banks actually create it by expanding their deposits,but they are not at liberty to create all they may wish,whenever they wish,for the total is limited by the volume of bank reserves and by the prevailing ratio between these reserves and bank deposits-a ratio that is set by,law,regulation and custom”
          I am not some nutter who wants to return to the Gold Standard: Iam probably some other kind of nutter who believes that if expanding deposits increases the money supply then it should be the whole community which I) controls the process 2) takes the profits ( I believe called seignorage).

      2. APL
        January 13, 2009

        DBC Reed: “Letting Lehman’s go belly up did n’t do any good at all. ”

        Did saving Bear Sterns improve the situation? Did it stop AIG running to the US government for funds? Did it stop Citi running to the government for funds?

        It is a curious item of information, but the people with their hands on the levers of power Bernanke, Paulson were all ex Wall St. now they are using US tax dollars to bail out their cronies.

        Before you suggest it, this is not Capatilism this is Fascism.

        I am not at all surprised that Gordon Brown can endorse siimilar policies in this country.

    2. Cliff.
      January 13, 2009

      I fear you are correct. The problem we have now that we have never had in the past is this;
      The left controls the media and the education system. They also control almost the entire western world and with the President elect of the USA being further to the left than any previous president, the future looks grim.

      1. APL
        January 13, 2009

        Cliff: “The left controls the media and the education system. ”

        Which in this country illustrates the utter and abject failure of the Tory party.

        1. Lola
          January 13, 2009

          …and for which the answer is simple privatise education and the BBC

        2. Cliff.
          January 13, 2009

          I couldn’t agree more!!
          Our party’s leadership has also gone too far to the left.
          The main parties use market research companies to ask the public what they want and what matters to them. In reality, the answers will be similar and so the main parties fight over the middle ground which gives little real choice to the electorate.
          I feel we need to move towards a more traditional Conservative agenda and worry less about Mr Cameron’s green hobby horse. We cannot afford to follow the new religion of climate change which in the end, will drag us kicking and screaming back into the dark ages. Don’t get me wrong….Sensible green policies to save energy and resources are a good idea but, bin police, the war on cars etc etc are not.
          With the current problems in our country and the crazy solutions promoted by the government to solve the problems by repeating what caused the problems in the first place, we should be miles ahead in the polls but we are not, this does beg questions in relation to our leadership and our communications department.

        3. adam
          January 13, 2009

          The right in general is really in crisis.
          Most of them are into war on terror psychology and their biggest concern is Islam.
          Reality moves on without them and they are being blindsided by the UN and EU, getting rid of the (PM -ed) is not going to make those institutions go away.
          All the real political activity and intelligent analysis is taking place on the left while the right continues in a naive belief that Sustainable Development and similar is of no significance to them.
          David Cameron and George Osborne are a manifestation of the failure of conservative values.
          Until the right gets out of the Islam obsession and realises what is happening closer to home regarding their liberty and democracy they will continue to be out of date.

          Reply: I do not agree. Many of the important ideas are coming from what you would call the right. My main concern is not Islam but the world economy, and the solutions we are going to need are not those currently being tried by left of centre governments with so little beneficial effect.

  5. Acorn
    January 13, 2009

    Am I imagining it, but are the nation’s politicians and pundits turning slightly “Redwood” lately. I think your message JR, may finally be settling on fertile ground. The NuOldLabour front bench is floundering. Their lack of private sector business and banking experience is becoming fairly obvious now. Voters should remember that, the next time they see a ballot box.

    Poor old Gordo will have to autograph a cheque for £17 billion as the underwriter for the Lloyds and HBOS rights issue, knowing he is already out of the money. Less than one percent of the shares were taken up; by naive little shareholders no doubt.

    I have said before that the government should be the INSURER of last resort, before it becomes LENDER of last resort. If the government is going to intervene in financial markets, then they should use the same mechanisms that the market would have used to assess and cover risk; when that risk become “no price” in the financial market but an unacceptably high price for the non-financial markets.

    Whatever happens to financial regulation, there should be a large section looking at the state of Swaps; Repo; Options and Futures trading, with a mandate to take rapid action when a speculator bubble pops up.

  6. Waramess
    January 13, 2009

    The answer to your question is obviously, stupidity.

    I had always thought that banks were only able to operate with a fractional reserve because of the implicit support of the central bank and its willingness to provide liquidity at appropriate times.

    Amongst its many failings the BofE was very picky about doing this, and as a result has brought into question the viability of the fractional reserve system as a whole.

    Brown now tells us that Northern Rock’s business model was broken (insolvency as opposed to illiquidity) but how would he know that at the time,?

    Now we are a few billions down as taxpayers as a result of the government paying more than market value for shares in Lloyds/HBOS.

    I sometimes wonder if we would be any worse off if we were governed by primary school children.

  7. A_Mullinder
    January 13, 2009

    I don’t mean to be heartless, because this will represent a personal tragedy to many who have lost fortunes through the bank’s collapse: we should have compassion for these people. However, that doesn’t mean we should all collectively hand them a wad of cash. Did they not read the part of the share investment portfolio that reads “prices may go down as well as up”? Surely, before parting with their hard earned cash, they must have realized that equities are particularly volatile investments, even in blue chip stocks listed on bellweather markets like the LSE.

    Why weren’t they investing in AAA government bonds? The yield may be lower than the average dividend on equities, but the chances of default is pretty small. Or what about a fixed interest rate cash account? If they were concerned about inflation eating away at savings, they could ahve invested in gold. But no, they liked the fat dividend payment, and are now being stung. Well, I’m sorry, but with higher rewards always come greater risks. How many of these shareholders were protesting or complaining to the NR board about its high-risk, leveraged growth business model? None, because it was sending the share price rocketing.

    Northern Rock was effectively bankrupt, and would have been but for government bailouts. But, because of its systematic importance, the government had to bail it out. Why investors should expect anything is beyond me.

  8. Neil Craig
    January 13, 2009

    At the time I suggested putting it into receivership & then financing any relaunch by the receiver, assuming that the receiver couldn’t sell it off in whole or part. At the very least this would have prevented the predictable decision of shareholders to try the legal gambit. The sharehiolders are wrong in that the compaby would certainly have gone bust without prior government support & therefore the shares were valueless. I suspect that many of the shareholders now trying this gambit bought those shares when they were valueless precisely for this reason & were not long term investors.

  9. rugfish
    January 13, 2009

    For my money they should have made it akin to a National Bank and let it be known that people were really banking with the government. What they have done amounts to exactly this but instead of building up its assets and value ready for future sale and -re-privatisation by permitting it to trade on equal terms to other banks ( which are also supported by taxpayers otherwise they’d be bust ).

    It will never make sense to me also how the government can choose to ignore EU Directives with it’s aid to banks, but won’t ignore the EU Directives which could actually save it.

    Northern Rock must not be discriminated against in this way and I blame both the government and the EU in their obstinacy.

    Incidentally, if I can put right here a possible misconception.
    I advocate a National Bank on a “temporary” basis in which “bad debt” can be gathered so as to free up the remaining private banks. There’s no march on my account away from the freedom of banks to remain independent but right now, I’d just sooner the government stopped lying to us that they still are independent when “we” own close to half their assets and without influence stand to lose substantial sums of money. They ALL need to be controlled and the issuance of credit has also got to be controlled for as long as it is necessary.

    Without that influence, the government may as well be shouting at the wind.

    1. rugfish
      January 13, 2009

      Sorry, the first paragraph should end with “But they’ve tied NR’s hands and are killing it by not allowing it to trade equally”

  10. mikestallard
    January 13, 2009

    Banks are there to deal in money. Their success is judged by their solvency. Their judgement is the way that they make money. At the top should be the Bank of England, an experienced, neutral, rich expert who can deal, in secret, with banks in difficulty. It also knows, through the experience of many centuries, when a bank is beyond help.
    In comes the bull in the china shop. FSA, EU with Basel I and II, Chancellor from nice safe Scotland, expert Prime Minister.
    But these people, despite the confusion they cause, are not at all interested, by definition, in handling money. No. They are after votes, after keeping their jobs, after popularity. This means that they are the last people to handle mortgages, evictions, (rich) shareholders (fat cats) with “their” money (ie taxes).
    We can, with confidence, look forward to a lot more financial incontinence before Northern Rock crashes and burns.

  11. Brian
    January 13, 2009

    Bit of a cop out today John:

    As a businessmen you could have explained the normal valuation methods for valuing a business.

    As a champion of fairness you could have pointed out the conflict of interests of the government acting as purchaser and setting the terms on which shares should be valued.

    As a champion of civil liberties you could have pointed out the absurdity that the valuation was based on terms that never existed.

    I hope this isn’t an attempt to join the consensus now that your views are beginning to be heard in the media.

    Come on John we need an independent thinker not afraid to think outside the box.

  12. A_Mullinder
    January 14, 2009

    I am shocked at the numbers here who would have rather seen AIG, Lehman, Northern Rock et al go out of business than nationalized/bailed out/whatever you want to call it.

    The argument seems to have been that their bailouts have not improved anything and are communist-socialist in nature and are therefore to be admonished.

    Well, sorry to offend, but that opinion isn’t worth a warm pitcher of spit. It’s all well and good sounding off about capitalist principles, but the view indicates a paucity of understanding or thought about the situation we’re facing. Whether or not one agrees with the methods, it is clear that these organizations simply had to be saved, such was their systemic importance. Their bail-outs have not made things better, but have prevented what could have been: a meltdown to make the Great Depression seem like a bull market.

    If you would wish that on the world in order to protect your precious principles, then fair enough. Good for you; I admire your efforts steadfastly refuse to countennance any government intervention in the face of overwhelming evidence that following such a course would have led to unimaginable poverty, economic contraction and a retrenchment of many of the free market advances and successes of the last 25 years.

    As Paul Krugman said, there are no atheists in foxholes and no libertarians in depressions.

  13. […] heartily recommend John Redwood’s blog. Full of sound economic sense. Read HERE his latest thoughts on Northern Rock, and the result of its […]

  14. sol
    January 21, 2009

    what the gov did was theft, their are people out there that are very happy that share holders have lost their life savings,

    well i put it to those people, why do you think that banks are suffering now? because investors are petrafied that the gov will nationalise more banks, hence they will lose their shares, and that is why banks are loosing 10 percent of their value on a weekly basis, be warned though their will not be another northern rock, the government is taking control of all the banks by playing the stockmarket, they are employing people to spread rumours and such in order to drive the price of the shares to rock botton then they are buying them all up at very low prices with money they printed from the treasury, that is why the pound is sinking because there are to many pounds available, this did not happen by chance, this was planned and implemented in 2006, dont ask me how i know this but trust me they no what they are doing, and if you dont believe me then watch the next 2 months, within two months the government will own the majority shares in rbs, loyds, barclays, e.t.c, the euro will surpase the pound and by june our new currency will be the euro

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