Nationalisation of Northern Rock - What it Means

Although, the government has tried for several months to avoid this option, Alastair Darling admitted that the government had decided to nationalise the beleaguered bank Northern Rock. It means the government is responsible for over £100m of mortgages and savings.

What Nationalisation Means

1. Shareholders are likely to get very little in compensation. They have threatened to sue the government
2. If there are more mortgage defaults and the Northern Rock lose more money the taxpayer will be responsible for the losses. If however, the Banks does well and doesn’t default, the Government can benefit from the profits of the Bank.
3. The government hope that if financial conditions improve, in a couple of years they will be able to sell it for a much better price. At the moment, they feel that the private offers from Virgin don’t offer sufficient value for taxpayers.
4. The Bank will be run at arms distance, with a commercial attitude predominant. In the past, nationalised industries often were run for political reasons and heavy intervention by the government.

Some people argue that the nationalisation of the Bank shows the economic incompetence of the government. But, I don’t think it does. The fault lies with the poor management of the Bank and the US subprime crisis. I don’t see what else the government could have done. I don’t have much sympathy for a legal challenge by shareholders. If it had not been for the government the Bank would have collapsed and they would have been left with nothing. Buying shares is risky.
See argument for Nationalisation