Uncharted Territory

February 27, 2008

Blast-off from Planet Hector

Filed under: Economics, Media, Northern Rock, Rights issues — Tim Joslin @ 3:06 pm

This is positively my last post on Northern Rock.

I’ve recently taken to listening to Radio 4 in the mornings. As a communication medium TV has much greater bandwidth than radio (visual awa aural), so why do they fill it with garbage?

Anyway, yesterday we had the former Treasurer of the Rock, who noted passim that “a £5bn problem” was turned into a £25bn one by the bungling authorities. Would have been nice if he’d broken cover before nationalisation. Still, it’s more than his successor has done – he’s quietly left the bank. Not surprisingly, since basically liquidity is a Treasury issue and I presume it’s the Treasurer’s job to stand up to a Chief Exec who gets carried away.

Today we had Hector Sants of the FSA, who explained how it would all not have happened had they paid a little more attention to NR. What self-serving twaddle! Any system that relies on a single group of experts (a) seeing something that’s going on that no-one else (auditors, the markets) can, and (b) being able to quietly solve the problem behind closed doors, will always fail. No, the Tripartite Authorities need to concentrate on setting objective liquidity (and other) measures for the banks, that can be policed not just be the FSA, but by the market and the banks’ own internal and external auditors. Because liquidity is a collective property, the behaviour of the BoE also needs to be predictable – i.e. to inject liquidity into the markets if particular thresholds are crossed. The 19th century approach Sants and King would like (I wonder why) is no longer appropriate. We need “water” – transparent liquidity – management. Planet Hector must resemble Mars.

After the Guardian rejected my exceedingly witty letter, I thought of writing a piece for their “Reply” column. Trouble is, the issue will now have to be resolved in court, so bashing my head against a Rock trying to change a few minds can no longer have any real world effect, so I left it unfinished. Here’s my draft, anyway:

“Public support for the nationalisation of Northern Rock is based on a misunderstanding. The false impression has been given that nationalisation is the least risky option for the taxpayer. In fact, two private sector proposals were rejected last weekend because the Government judged the potential to be too low for profit to accrue to the public purse.

The shareholders’ preferred option was that of the in‑house management team, led by Paul Thompson. This proposal included a rights issue of £700m. The shareholders would have invested another £700m in the bank. This will not now happen. By nationalising the bank, the taxpayer is therefore taking more risk than necessary. As a Northern Rock shareholder, I am baffled that the Government has spurned my offer to take on this risk, and distressed to be vilified in the Guardian and other media.

Northern Rock would have been managed similarly whether nationalised or not. Bryan Sanderson has said that he will operate “at arm’s length” from the Treasury. Even if it had not nationalised the bank, the Government could have imposed constraints on the payment of dividends and the extent to which Northern Rock could take on new business.

It’s perhaps worth remembering that among the people who will suffer most as a result of this fiasco are financially stretched Northern Rock mortgage-holders. The essence of the situation is that Northern Rock is simply an institution established to intermediate between those prepared to lend money and those who wish to borrow it. Following the run on the bank, Northern Rock now has a lot less money to lend. Something has to give. It seems that the nationalised bank intends to try to drive mortgage business away at the end of existing fixed-rate periods. But some mortgage-holders will be unable to find another lender, because every bank has reduced the maximum loan-to-value ratio it is prepared to offer, and, in any case, house prices are starting to fall. The most vulnerable homeowners will be forced to remain on expensive variable rate mortgages with Northern Rock. As a shareholder right up until nationalisation, it’s difficult to reconcile the moral opprobrium heaped on myself with the fact of the matter that borrowers were let down by depositors. Hadn’t they seen “It’s a Wonderful Life?”.

Under the Thompson proposal shareholders would have put another £700m in Northern Rock. It is completely untrue that the taxpayer would have been “retaining all the risks”, as claimed by, among others, Vince Cable, on this week’s BBC Question Time. Let’s imagine that there is indeed a serious house-price crash in the UK, and, in a couple of years it becomes clear that Northern Rock is insolvent. If the bank had remained private, the shareholders would have lost everything, including the £700m of fresh capital. In the same scenario under nationalisation, the taxpayer will have to cover all the costs. The taxpayer will be at least £700m worse off under nationalisation than with the private sector solution. It’s a shame that so much energy has gone into pouring vitriol onto shareholders, and so little time spent understanding their role. I’m no happier with the state of Northern Rock than any other taxpayer, but, unlike most, I would have been prepared to invest more money in the bank with the risk of losing it all. Now, every taxpayer is having to take on that risk.

Two typical comments have caught my eye this week. Will Hutton referred (in a Comment piece in the FT) to the “Northern Rock shareholders’ extraordinary sense of entitlement”. And someone left a message instead of their name on a petition on the Downing Street website: “ffs shareholders should know the risks – u deserve nothing”. But during the run on the bank, the government guarantee to depositors was dramatically improved, at great risk to the taxpayer. No‑one said: “ffs depositors should know the risks”. Perhaps that’s why shareholders expect to be treated a little more fairly than they have been.

The nationalisation route has been taken for purely political reasons, and is certainly not the least risky option for the taxpayer. From a shareholder point of view it is laughable for the Government to tell shareholders such as myself that we’ll be treated as if the bank is being wound up, when in fact it is being run as a going concern. Naturally, if the Government does find an “independent” arbiter willing to accept the terms of reference it is proposing, I’ll join with other Northern Rock shareholders in taking legal action, as long as I consider it likely that a judge will see the situation my way. Otherwise, I’ll have to shrug and walk away. The Northern Rock shareholder could have had such a beautiful relationship with the taxpayer. Now I guess we both feel as if we’ve just been screwed.”

That’s it, there are other fish to fry. See you in court, Darling.

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3 Comments »

  1. […] Filed under: Economics, Media, Northern Rock — Tim Joslin @ 5:30 pm OK, I know I said I wasn’t going to write any more about the […]

    Pingback by Northern Rock nonsense: deconstructing demonisation « Uncharted Territory — March 24, 2008 @ 5:30 pm

  2. […] and individuals who saw the companies as recovery prospects. As I noted before, (more than once, or even twice, it seems) at least some of these investors were prepared to put more capital in to these […]

    Pingback by More on the immorality and hazard of policy based on moral hazard « Uncharted Territory — March 26, 2008 @ 3:47 pm

  3. […] There are a lot of positive feedbacks in the housing market, so clear thinking is called for.  The critical consideration is who carries the risk.  Effectively concentrating the risk and assuming the state can bear the burden seems to me to be one of the worst options.  At least the UK is trying to run down its Northern Rock mortgage book, though it would have been far preferable to allow this risk to remain private, as I pointed out at the time. […]

    Pingback by Fannie and Freddie Get Naked « Uncharted Territory — July 16, 2008 @ 4:52 pm


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