Are the two remaining Northern Rock bids enough to stave off nationalisation?
- 4 Feb 08, 06:41 PM
I don't think so. The Treasury said today that any private sector solution to Northern Rock has to offer the taxpayer a "demonstrably better" outcome than any nationalisation. Let's be clear, (as I always say to finance geeks "as if for an idot") what the economic stakes are:
- Northern Rock owes the government 24bn pounds it can't pay back...
- the collateral for that loan is mortgages which will provide a steady stream of repayments
- Gordon Brown & Alistair Darling decided take Northern Rock's IOU, tear it up into little pieces and sell them to people in the markets. And when those people ask "who guarantees the debt?" The government answered "we do!". Thus removing the need for any takeover bid to raise 24bn itself; b) shoulder the risk.
On the basis of that what has been offered:
Virgin is going to put in 1.28 billion, up to half a billion of it raised from existing shareholders, and take in return, ownership of half the business, said to be (but not confirmed at) 55%
The existing management offered to put in half a billion.
So are these enough to get the government off the hook?
IF we were only looking at the question of an IOU for 25 billion, the answer is maybe. But we're not. Remember there are other people who've also been given guarantees by the government:
- savers - they have an unlimited guarantee an there's still maybe 10-13bn in there
- unsecured creditors
This deal does not solve that, and the government is still exposed to the tune of maybe 30bn to them, and has been since its announcement on 18 December.
So is Nationalisation still an option?
The City is reading the current emphasis of Treasury briefings that way. Gordon Brown has a philosophy about the public vs private debate that can be summarised like this: private's better, but if the cost of doing something through the private sector outweighs the benefits, then public is an option (and that cost can be regulatory, risk, actual money etc). By trying this solution - designed by Goldman Sachs - the government can argue it has tested the market solution to the limit.
Each remaining bid has a technical attraction:
Virgin pumps more money in now, so Northern Rock can withstand the downturn in the housing market.
The management bid involves getting rid of some of the mortgages to other lenders, slimming down the operation.
BUT: Both involve Northern Rock slimming down its lending and its workforce.
Northern Rock is responsible for a hige chunk of mortgage lending. (Declaration of interest here, I have a mortgage with Northern Rock). Does the government want mass sackings on Tyneside and a hole in mortgage provision in this country? Does Richard Branson's 1.28 billion make the vital difference? I think we'll find out fairly soon.
PS I have just asked Downing Street whether they are going to nationalise Northern Rock. "Matter for the Treasury," came the reply. Yeah, right.
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Hi Paul,
You mention that NR owe the government 24 billion pounds, don't you mean the taxpayer?.
In fact you could argue that the government owes us 24 billion pounds, does this mean that we will all receive additional interest payments on top of this figure from our government?.
Hang on I spy pigs flying.
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Gordon and Alistair are caught between a Northern Rock and a hard place.
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The one option that everyone seems afraid to consider is simply to let NR collapse. Commercial options for takeover have been put on the table from a number of sources and, so far, rejected by the board as inadequate.
I do not recall that the big American banks looked to be bailed out by government. They managed to refinance, for the most part, by attracting sovereign fund investment in the Middle East and Asia.
Is it not possible that NR was badly run and that, while account holders deserve some help, the company failed conspicuously and should live with the consequences.
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Dear Newsnight
surely instead of voodoo economics, Northern Rock's recovery depends on tackling the underlying weakness that lead to this situation?
a lack of receipts from customers and over reliance on the money markets for income?
imaginative ways need to be found to increase receipts from ordinary people and perhaps the right fit for it may lie in an organisation with a strong day to day interface with customers?
what about a Supermarket or even the Post Office? or an consortium with both?
a swipe card could help people save with NR?
Northern Rock still has a strong brand in the North East which could be brought into play?
just a thought
best wishes
Bob
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Am I dreaming? Can it be true that the same board who created a national liability commiting every person in the country to a personal obligation around Β£800, in order to rescue their failed bank are still able to make a bid to buy it, presumably while being driven round in gorgeous cars? Are we in the Third World By The North Sea?
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The rationaslisation of Northern Rock is a necessary but not sufficient condition for its survival. It will undoubtedly need to have a smaller market share of a reduced market for mortgages. Because of a lack of action over the past 6 months, the turnround will be more difficult than if measures had been taken earlier. The skill sets required for such a turnround are different to those of an entrepreneur. Paul Thompson as CEO of a new management has the experience and capability to give this a good shot. Any chance Olivant may fall in behind him?
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Hi
its just the way we are looking at it ?
can't a bit of slick accounting erase any losses
isnt this the way these days-
after all the UK remains afloat although the liabilities exceed the assets-
ie re is no such thing as reality in the world of accounting ?
best wishes
Bob
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'Matter for the treasury, yeh right' hahahahahaha
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This whole thing is grotesque - a private company pursues a risky business strategy, goes bust as a result and then the taxpayer is landed with enormous liabilities by a stupid government terrified of the effect the collapse of NR might have on the City's reputation.
The only people who should be compensated by us, the taxpayers, are the depositors. So what if NR went bankrupt? It just shows so much of our so-called economic succes under NL is based on dodgy tricks with borrowed money.
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If Branson is involved, Heaven help us.
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