Investment Markets » Banking and Finance
Can Northern Rock Compete Fairly?
The bank's cash-strapped high street rivals fear that nationalisation will distort the market. Are they right?
The British Government may not be quite such a wholehearted convert to the cause of state-sponsored capitalism as Hugo Chávez, but it's entry into the cut-throat retail banking market has certainly set the cat among the pigeons.
With the financial weight of the state behind it, Britain's dodgiest bank has just become Britain's safest. And it is clear that behind the bland, business-as-usual pronouncements of the Chancellor and the Rock's new chief, Ron Sandler, lies a determination to capture as much new business as possible. Roll up, roll up for the Treasury's suite of super-savings rates.
If that's not unfair state competition, I don't know what is. It would be one thing if Northern Rock was being nationalised to be put into run-off – in effect, wound down gradually as it repays debts to the taxpayer and other creditors. But the ultimate purpose of this endeavour is to make a big fat profit for the Treasury.
No wonder shareholders, who stand to lose their entire investment, are complaining of expropriation and will, in all likelihood, sue. As things stand, Northern Rock is to be managed as if it is still in rude health, with access to wholesale funding others can only dream of.
Why is such a special treatment being meted out to a business which – far from being a company of vital national interest – is largely just a transitory creation of a ten-year credit boom, when other industries and companies, such as Rover, have been left to go to the wall?
There are certainly strong arguments in favour of a run-off, but they pale beside the risks. As well as huge redundancies, a skeleton Northern Rock would involve axing most branches, with the risk that the savings base becomes unstable again.
It would also mean encouraging mortgage holders to move on – but since not every borrower with a Northern Rock mortgage would be welcome elsewhere, the taxpayer would be left with a rump of the worst quality loans.
Operating within EU rules on state aid will never mean "business as usual", but this fudge is the most practical solution.
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