Northern Rock is nationalised

[CoteDAzur]

Government announces the nationalisation of Northern Rock this Sunday afternoon.

Shareholders are not happy campers. Neither are taxpayers, I imagine, who are footing the bill of Northern Rock management's incompetence.

Let's be fair here.

Firstly, the reason Northern Rock ended up in the situation it did was the result of management failings and insufficient oversight by the FSA.

Secondly, nobody (including other banks, advisors etc.) really saw the flaws in the NR business model until it was too late as everyone was so used to high levels of short term capital liquidity.

There is no reason why the government would have seen its collapse coming any sooner than anyone else (certainly not the FSA or Bank of England). When it happened, the government had to react quickly. For those of you saying they should have left it, that was not an option. Not only would the run on NR have resulted in a quick catastrophic collapse of the bank putting tens of thousands of people into default but the run on other banks that would almost have certainly occurred could have dragged other institutions under.

Where we have got to ultimately is probably the right choice. It protects all the existing borrowers and maintains certainty in the financial markets. The shareholders deserve nothing, least of all the funds managed by RSM and RAB Capital who are whinging the most (and only went in recently on the hope of making a quick buck). We, as tax payers are not paying £100 billion, or even £50 billion, or anything like that. That is merely the (potential) value of loans and guarantees out there. Only in the event of every single borrower of NR going bust would we be liable for a portion of that (the value minus the resale of homes, assets etc). If anyone should be complaining it should be other financial institutions like Bradford & Bingley. NR is open, taking in new business on attractive rates and guaranteed by the government - who can compete with that!

The government have, however, screwed up royally in their mismanagement of the process and especially the failure to accept the Lloyds offer at the outset, or failing to select a preferred bidder quickly to resolve the situation.

Is it? Is that just conjecture?

I cannot profess to understanding the complexities of why they had to step in at all but I am somewhat bemused as to why they step in to help a bank but when thousands of us had half our pension pot taken away in the Equitable Life fiasco the government did nothing.

C'est la vie's post is a first class explanation of why they did it

The issue is really about regulation in banking and capital markets IMO

They all cry "No-one could possibly have foreseen ...." but you know I think they could and should have thought about this issue

That is so true, Idlingabout.

Did you get shafted by Equitable too Suedonim? I used to get so furious about it and to this day feel there should be recompense - it has to have been someone's fault but these financial board directors just make sure they look after themselves.

There's an interesting Dispatches tonight which will give some more detailed insight into the credit squeeze.

I suspect that Quattrocentro is right, but it is/was a very difficult situation. The last five years had seen an unprecedented availability of credit on favourable terms to everyone from sub-prime borrowers in the US to major European corporates. Partly this was due to favourable economic conditions but partly this was also due to new sources of credit, in particular 'non-bank' lenders, i.e. CDOs and hedge-funds. Hindsight is a wonderful thing but certainly some of this could have been better regulated and policed (e.g. structure and terms of CDOs, ready availability of sub-prime mortgages) but some of it couldn't. Unfortunately, there was very little incentive to do so. People were borrowing more on better rates and getting bigger houses and nicer holidays, banks and financial institutions were making more money and governments were getting economic growth. Who wanted to rock the boat?

In terms of answer to the two posters previously. I think that NR has been taken over as a going concern and will continue to build its mortgage book (i.e. not shut down and just run out the existing mortgages) - if you've got an offer from them it should still hold, although I guess it's possible the terms might change slightly. On Equitable Life, I don't know the details but I imagine it was simply that in this situation, a collapse of NR would not only have (potentially) wiped out the savings of 700,000 people but could have dragged down many other institutions with it which would have been catastrophic - there was a need to intervene politically and financially which didn't exist in Equitable Life case (although I could be wrong).

You are probably right CestlaVie but part of me suspects that they thought that the majority of policy holders in Equitable Life did not live in the politically sensitive North East.

i don't profess to have a full grasp of economics but i do think the government has screwed this up big time. the nationalisation/intervention is clearly driven by the fear of the political catastrophe that would have happened if all the savers lost their money on the government's watch. i am a believer in free markets and intervention of this kind poses a serious moral hazard - it sends the signal that if you take a lot of risks (in the hope of higher returns) and get big enough before the shit hits the fan, there is a safety net, called the labour government, who will not let you fail. i don't have much sympathy for shareholders - they are smart cookies who played the risk/reward game - but perhaps thwarted by the government's ill judgements.
if the downturn is going to be anything like most city people think, i can't see what the easy way out of this nationalisation debacle would be.

Stocks and shares is essentially gambling and they lost so no one should feel sorry for them.I can't believe that NR are the only bank who borrowed from these sources though and so probably more of this to come.

Schnitzel - Why would you say "what else realistically could they have done? far worse to start foreclosing on people's houses."

A bank can't repossess people's homes as long as they continue to pay their mortgages. Northern Rock's troubles have nothing to do with people having trouble with their mortgage payments. Possessing homes was not even an option here.

What they should have done was to sell Northern Rock to the highest bidder.

I think there will be repossessions though because NR have always been specialist lenders and offer 125% mortgages etc and huge multiples with very few checks and these are the people who will have difficulty obtaining credit elsewhere.

Cote d'Azur is largely right. If NR has become insolvent the only impact on mortgage holders would have been a transfer of the mortgage obligation from NR to the administrators. The people with savings accounts, on the other hand, would have been screwed.

In terms of selling NR to the highest bidder, that was unfortunately not an option (I imagine) as soon as the Treasury extended the £25 billion facility to them. At that point the sale price became pretty much irrelevant and the terms of the government repayment/ residual interest in NR became more important.

Noddyholder is also right. There is more to come. The main problem with NR's funding structure was not to do with thinly veiled charitable trusts (although that's not a particularly attractive aspect) but more that they funded their expensive long term mortgage products very cheaply in the very liquid short term money markets. When that dried up, they ran out of funding. They are not alone in having this business model.

southutsire - You are right, if they wanted you to be saving (rather than consuming), they would raise interest rates.

However, the way the economy seems to be heading, they would rather see you consuming so that the economy will not go into recession.

cestlavie - I agree with most of what you said but re "nobody (including other banks, advisors etc.) really saw the flaws in the NR business model".

My understanding is that their problem was one of strategy - liquidity crunch caused by lending long term (mortgages) and borrowing short term. When they could no longer borrow short term, they went belly up.

This was a management decision, not something other banks could see or better oversight could avert. Mismatching the duration of your assets and liabilities is not illegal, it is just utterly stupid, as any student of economy can say.

dittany, re:"The only people who would benefit from a sale are the shareholders."

Don't forget the taxpayer. If gov had sold off NR shortly after its troubles began, they wouldn't have to sink GBP 55 bn into the bank. Most probably, this amount will continue to increase.

If gov insists on recovering this amount from any future buyer, in addition to what it is actually worth, NR will never be privatized.

Sorry, I don't believe that the taxpayers have gained.

CDA: yes, that was largely their strategy and conceptually it is flawed, however, the massive historic depth of short term liquidity (especially in the commercial paper market) meant that it was not wholly unreasonable. People saw that potentially it had flaws, but just simply couldn't see the short term liquidity disappearing as quickly as actually happened. Sort of like "gosh, if the commercial paper/ inter-bank market dried up they'd be buggered, thank god it never will... oh".

As I understand it, the £55 billion is not all committed capital, but also guarantees. The majority of the committed capital is back up by NR's mortgage book so it is largely secured. They should be able to get this back in principle (i.e. on the same terms of committed plus guarantees) from another buyer when they decide to sell. I don't think this is what prevented the sale in this case but rather ancillary issues (especially the prospect of the buyer making a quick buck and making the government look stupid, like QinetiQ)

I'd agree with dittany. Shareholders have lost out (fine, half of them were only in as short term value players anyway and besides that's equity risk for you). Tax payers may not have gained financially. Indeed they may lose out slightly financially given the low quality of NR's mortgage book. However, if the alternative option was a collapse of NR and its 700,000 other savers and a run on other banks and building societies (which would absolutely have necessitated the government stepping in at some point), the tax payer has certainly gained.

C'est la vie

You are saying that the taxpayer has gained given the situation the bank was in

I am saying that had the management been more competent, and managed their liquidity better (and what do bankers do other than manage liquidity really?) then the taxpayer would not have had to stump up.

And no I do not think that NR is an asset as such. Not one that I'd have bought anyhow.