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Northern Rock nationalised: A nation now in hock to a housing bubble

Headless chicken: Northern Rock nationalised

After five months of tough talk, roundabout action and general chicken-sans-headery, the Government has ‘decided’ to nationalise Northern Rock. (Yes, in the same way that I ‘decided’ to start losing my hair).

The authorities responsible for dealing with the Northern Rock’s collapse have been making poor precedent-setting decisions since day one of this pantomime. None are so significant as nationalisation, however.

As Robert Peston says on his BBC blog, nationalisation is supposed to be the preserve of the doomed industrial dinosaur industries of yesteryear, not our go-go financial services. It’d be scarcely more shocking if Wall Street’s bankers stopped illicitly smoking Cuban cigars and started getting behind Fidel Castro’s ideas on redistribution. Harry Enfield’s Loadsamoney of the 1980s is morphing into 2008’s Tonnesadebt before our very eyes.

Unsettling consequences for UK tax-payers of Northern Rock’s nationalisation:

  • We’ve each got between £2,000 and £3,500* of exposure to Northern Rock’s mortgage book (depending on who you believe and how the final count is tallied)
  • We’ve also got about £100 billion in assets (the same loans will keep churning out cash, provided mortgages don’t default)
  • We’ve thus now all got a vested interest in the housing market not collapsing

Yes, even bears on UK housing like myself have now become mortgage lenders at the peak of the UK’s biggest ever housing bubble. Some days you wish you hadn’t gotten out of bed.

What about the shareholders?

Well, the hedge funds played chicken with the Goverment and they lost. More sympathy might be extended to smaller investors, especially employees who thought they were doing the sensible thing in buying a piece of their company. Presumably (as I write the full details are yet to emerge) investors will get next to nothing. Let’s hope at least that rank-and-file employee pensions are secure.

Who is to blame? In order of culpability:

  • Northern Rock’s management for pursuing a business model that was always going to break, sooner or later.
  • The Financial Service’s Authority for not clamping down on the company’s actions.
  • UK ministers for back-peddling and prevaricating once the collapse was underway.
  • The Bank of England’s Mervyn King for talking tough, but not letting Northern Rock fail.
  • Hedge fund managers for playing silly buggers.
  • Gordon Brown for insisting that he’s banished the credit cycle to the history books with his endless cry of “No more boom and bust!”

I don’t want to get political: this was a difficult situation from day one, and Government’s of all hues would probably have bungled it to some degree. (The tough decisions should have been made in 2006, not 2007 when it was too late). And rather than loan £25 billion to smooth a rescue bid by the likes of Virgin, at least this way the Goverment gets some appreciable upside should the business be turned around, rather than a few measly per cent on a loan.

Let’s be clear – the collapse of Northern Rock has not come out of a clear blue sky.

Equally, if the best thing is for the bank to be run down and the mortgage book sold off, it’d probably be better to do so when everyone has quietly forgotten about the whole affair, rather than in the middle stages of a still-unfolding credit crisis.

But let’s be clear – the collapse of Northern Rock has not come out of a clear blue sky. It’s occurred after a decade of astronomical UK house price growth, which has produced losers as well as winners, and made UK Plc dangerously complacent about its financial standing in the world. If the house price doomsters are right and an early 1990s style crash does unfold, Northern Rock’s nationalisation will not be the last throwback we see to Britain’s grim years in the economic wilderness.

(* Updated (and reduced) the upper exposure limit: 18/2/08. I’m now quoting Robert Peston’s latest estimate.)

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{ 2 comments… add one }
  • 1 Tom February 17, 2008, 11:33 pm

    The original reason for giving the emergency funding to NRK was that the govt was worried that if NRK was allowed to fail, investors would stop buying mortgage backed securities from all the other UK banks as well. Given this has already happened (meaning that the UK housing market crash is assuredly on the way) and is still the case, it all seems like a bit of a pointless exercise now.

  • 2 The Investor February 18, 2008, 5:28 pm

    @ Tom, agree, the whole thing has turned out to be a pointless wander in a woods they can’t see for the trees. Indeed, from listening to Alastair Darling today they still don’t seem to know what they’re aiming to do.

    Nationalisation makes sense if they’re going to sell off the loan book piecemeal (though as I’ve said here before in my view they could have achieved the same end with administration, without disrupting market forces) but I don’t believe they have any business running a UK bank in the medium-term. Yet they’re sort of implying they might, albeit if for an eventual sale.

    Such a sale would no doubt make profits, provided there’s no housing crash, but they could achieve the same end by flogging it off in bits — and anyway it’s not the UK governments job to make profits out of private enterprise. Let’s leave that to the private sector and bongo tinpot developing world regimes. Muddying the water here benefits nobody long-term. e.g. Even National Savings produces frequent commercial conflicts (e.g. compare its tax-free savings rates with what the commercial banks can muster).

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