Northern Rock Rescue Plan – Can You Spare us £55bn Gov?

there is a saying if one person dies it is murder, if hundreds of people die it is mass murder and if it is thousands of people it is an act of God.

If a single mother gets £20 a week benefits she is a ‘scrounger’ If you avoid paying £1000 tax, you are a tax dodger  But, if you are a wealthy banker who gains loan guarantees of £55bn you are just the Chairman of Northern Rock.

To be fair, the government does have a real dilemma about Northern Rock. Basically due to bad loans the bank had a shortage of cash. To secure the liquidity of the bank, Northern Rock had to borrow from the Bank of England and then also secure loan guarantees from the Government. What this means is that if the bank defaults, on its loans the Government will step into pay them.

The government wanted to avoid Nationalisation of the Bank and sell it off to a private sector bidder. Its motives for doing this are mainly the political stigma of ‘nationalising’ and to a lesser extent looking after Northern Rock Shareholders.

Nationalisation involves the Government taking control over its assets and assumes responsibility for running the bank. This option would have been bad for Northern Rock shareholders who would have got very little compensation. However, the route of nationalisation was also seen as the best way for the government (taxpayers) to get its money back. Personally, I don’t have a problem with Nationalisation, whilst it is bad luck for shareholders, this is the risk of investing in companies who use poor business plans.

Goldman Sachs plan for Nothern Rock

Under the Goldman Sachs plan the government loan to Northern Rock would be converted into a loan (bond). This bond would be bought by private individuals, but, to make it more attractive, the Government will underwrite any loan defaults. If bought out, Virgin or Olivant would be responsible for running the bank, with the government probably taking a 10% stake in lieu of its loan guarantees. It is not nationalisation, but, it is a public private partnership, where most of the guarantees come from the government. In theory if Northern Rock becomes profitable then the taxpayer will receive dividends, but, in practise the cost of propping up the bank may be more than the return.

Nationalisation would have meant the bank’s debt would be on the Government’s balance sheet, but the public finances would have benefited 100% from future Northern Rock dividends.


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