The sale of Northern Rock

The Northern Rock crisis was something that is seen as the first event that kicked off the financial crisis that seems to have gone on for far longer than previous ones. I’m not going to pretend to be a banking expert, so am not going to go into the detail of what happened when and why. I’ll leave that to the Treasury Select Committee’s investigation and report.

Strangely enough it led to one of the highlights of my civil service career – having to deliver a ministerial speech with three hours notice because the minister that I was working for at the time was called into the Commons (as with all the other Labour MPs) on a three-line-whip in order to pass the Banking (Special Provisions) Act 2008 that evening. I knew this was serious stuff because the entire bill needed to be passed in that single evening – with all of the parliamentary votes such a move entails. It is extremely rare for such a move to happen, which is why the minister could not get out of it.

I had already been aware of what was kicking off on the Rock – not just because of the queues outside the bank but also because of the compelling footage from the Treasury Select Committee where parliamentary heavyweights (messrs McFall, Fallon and Thurso amongst them) tore into the non-executive chairman of Northern Rock, zoologist Matt Ridley. (Why a major UK bank would employ a zoologist as a non-executive chairman is beyond me – George Monbiot goes further).

John McFall – the then Chair of the Treasury Select Committee tore into Northern Rock’s former board over what happened – in this case the chair of the risk committee.

I blogged previously on the issue of non-executive directors not doing their job. The Northern Rock crisis was a classic case. Is the cosy club of non-executive directors an opportunity for well-connected rich people to get paid lots of money for doing not much? What penalties are there on non-executive directors that fail spectacularly in their jobs? The sack? Well…they’ve already pocketed a nice amount of money so it’s not as if that’s going to be a huge deterrent.

As far as the status of the bank is concerned, we are where we are in terms of it having been nationalised…until today’s announcement.

“BBC business editor Robert Peston said taxpayers had injected £1.4bn into Northern Rock plc.

He added that, in addition to the immediate £747m the government would get back following the completion of the sale, there was the potential for the Treasury to receive a further £280m over the next few years.

“So on paper, taxpayers end up with a loss of somewhere between £400m and £650m,” said our business editor.

The size of the potential losses contained in the bad bank part of Northern Rock is still uncertain and it still owes the Treasury £21bn.”

As Robert Peston asks: Why now? Why choose to confirm those losses at a point when the market is at rock bottom, rather than wait for the value to rise? Or does this indicate that markets have further to fall? I don’t know. What I do know is that Parliament now has a duty to scrutinise this move in detail – both the Treasury Select Committee and the Public Accounts Committee. The sad thing today is that the chairs of neither select committees were interviewed by journalists or the mainstream news – or if they were’ I’ve not spotted it (despite being in all day and having BBCNews24 running for much of the afternoon). But then, given that Parliament is in a mini-recess, there are few backbenchers around within easy reach of Parliament – perhaps why the only backbencher I’ve seen interviewed is the Conservative MP for the Cities of London and Westminster.

Because I and many other taxpayers don’t know the intricate details, it’s all the more important that those within Parliament who do can properly hold the government to account for such decisions. Because the headline losses don’t sound too clever to the person on the street.


8 thoughts on “The sale of Northern Rock

  1. You are right that the select committee can hold the government to account in the strict sense of accountability but I certainly will not be looking at talking shops of politicians, civil servants or quangos to judge the question of whether it was a financially sound decision. I’d be more likely to listen to people like Allister Heath of City AM.

    Of course the government was completely wrong nationalise Northern Rock, egged on by Vince Cable, they should have let it go bust. Simple as that.

    On your comments about the NR directors, the government is equally culpable for believing that it had abolished boom and bust, deliberately cultivating the house price boom, and the population at large was exclusively responsible for over-stretching itself to buy property at ridiculous prices – no one was forcing them to.

  2. As John Redwood “writes:”

    There is no point people tut tutting about losses on these holdings. The last government was wrong to buy these stakes at the prices they paid. We were bound to lose money on them. Recognising the loss is a necessary part of sorting them out and passing them on to owners who may be able to make them useful to our economy and turn a profit. Those profits can then be taxed. That was why I at the time recommended controlled administration.

  3. Nice counterfactual by Mr. Redwood…. The problem with counterfactuals is that can never be disproved because we can never relive the alternative history.

    Just a few questions about Mr. Redwood counterfactual that I don’t fully understand: –
    – Is there any evidence that simply catching the North Rock problem early would have prevented the global meltdown of the financial system due to the weakness of American subprime loans (which seems to be what Mr. Redwood is inferring)
    – If the BoE had pumped money into the money markets is there not a risk that they would have just ended up swapping distressed assets for sterling, effectively filling there balance sheets with financially toxic rubbish!
    – Had we just “let Northern Rock fail” is there not a risk that there would have been contagion across the entire retail banking system as people become aware that banks actually don’t have your deposits in their safes (and don’t want to be the last to withdrawal their cash).

    Like both of you I hope this deal is scrutinised by parliament. i think Robert Peston sums it up pefectly. Either we are selling early in what is a financially reckless decision by George Osborne…. or (and I suspect this is more likely) this decision is been driven by a realisation that we are about to double dip!

    1. Paul, I don’t for a moment think JR is suggesting averting nationalising Northern Rock would have prevented the wider crisis – how on earth do you read that into anything he’s said? I suggest you try putting that (and your other questions) to him on his website – he does tend to respond.

      Lehman was allowed to fail (and I hope will now be generating some juicy profits for Barclays shareholders) and unlike Northern Rock they did hold positions that could have been problematic for counterparties but which were unwound successfully.

      Anyway, regardless of the could have/should haves, the important point, which that very debate in itself proves, is that the loss is there whether you like it or not: you have to value thie asset at its present or future value, not past.

      1. “In the summer of 2007 I argued that the Bank of England and the government should have put more money into the wholesale markets. Had they done so I do not think Northern Rock would have gone bust . They put more than I suggested into the markets, but only after the troubles at the Rock. Timing is everything. Northern Rock started with a liquidity problem which the authorities refused to help sort out.”

        Casting my mind back the problem was that the banks were not leading to one another fearful of who was setting on toxic assets. Northern Rock was in the unfortunately position of requiring access to these wholesale markets. Had the BoE stepped in they would (presumably) have increased their exposure to assets the market was considering risky! But that aside….

        The question of history are really irrelevant. The real question is “why now”… indeed as John Redwood says “Timing is everything” (the one sentence that I do agree with). Either: –
        1. George Osborne thinks the future is rosy and therefore the price of the assets his setting on will go above where the market is valuing them and logically he should set on them until the animal forces in the market are a bit more bullish (in which case he’s just given a nice asset to Richard Branson at a low point in the market)…. or
        2, He has decided that things are going to get worse and the market is as bullish as it is likely to get for banking stocks and therefore best dispose of some now. (In which case that rather suggests that he doesn’t have much faith in his recovery).

  4. Not really. Re.1: It’s not necessarily the case that in government ownership the bank is capable of becoming more valuable as it could under private ownership and there are benefits to the wider economy and to tax revenues in there being another bank out there. Re. 2: Banking stocks are not going to be as valuable in the future as they were in the past for the same value of overall economic health.

    1. I don’t dispute that a marketing man who poses a strong brand might be able “to add move value” to a bank than civil servants, but that is semi irrelevant to the discussion. The question is purely one of timing. Assuming the civil servants don’t make the bank worse then arguably he would have been better holding onto it and selling it on later when the market recovers and valuations even allowing for the time value of money are higher.

      I think you might be right that on your second point about bank stocks never being as valuable again….. and related to that the recovery and rebalancing of the economy might take longer than the government are claiming…. in which case the sale makes sense although some of George’s other pronouncements on the economy look a bit more dubious

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