Investment Markets » Banking and Finance
What Should Happen To Northern Rock?
All the options for disposing of the corpse of Northern Rock are messy and expensive. It's time we cut our losses.
The putative buyers of Northern Rock have put their offers on the table. But if the Chancellor nurtured hopes of a true white knight appearing, he was in for a shock. Precise details of the bids have been kept secret, but all valued the stricken bank well below its already-hammered share price, causing a further bloodbath.
As Jeff Randall summed up in The Daily Telegraph: "Northern Rock, in its current form, is as dead as Monty Python's parrot. Its metabolic processes are history. If Alastair Darling hadn't nailed it to the perch, the bank would be pushing up daisies in an administrator's allotment."
And what an eye-wateringly expensive nail it has proved to be. By agreeing to guarantee Northern Rock's deposits, while pouring some £24bn of public money into its coffers, the Treasury has clocked up a £40bn exposure in just two months – more than its annual defence budget.
It the bank's directors can organise a genuine rescue, all power to them but, judging from the leaked prospectus circulated to potential investors, the Rock's rescuers will continue extracting billions in Government subsidies for years. It's blatant blackmail. High-profile bidders know that the alternatives – forcing the Rock into administration, or nationalising it – are too unpalatable to contemplate.
Administration is arguably the correct course, and would at least have the immediate benefit of staunching the losses, but it would mean 6,000 job cuts: political suicide for Labour. Nationalisation, the course championed by the Lib Dems, would give the Government control (and valuable time) to rebuild Northern Rock, but would smack of a socialist past that Labour would rather forget. Moreover, when did the taxpayer ever gain from nationalised assets?
All the options are horrible – and all mean probable curtains for shareholders. Few would willingly place themselves in Darling's shoes; but he's hardly helping himself. As each week passes, the state's exposure gets bigger, but Darling keeps prolonging the agony in the hope that something will turn up. He should grab the least bad solution (which currently looks to be the offer from J. C. Flowers, who at least promises to repay £15bn immediately), even if it means recognising losses.
If this drags on, the damage to the credibility of Britain's financial system could easily eclipse the losses. Darling may not have the guts to bite the bullet, but the Prime Minister should realise that if this isn't dealt with soon, he may end up as a casualty.
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