Negotiation, Negotiation, Negotiation

UK Property Investment news and comments from Mark Harrison of YourPropertyExpert.com

Nothern Rock Nationalisation – and the winner is, well, no-one

Posted by markharrison on February 18, 2008

The Government is finally going to nationalise Northern Rock.

It’s “the right move at the right time for the right reasons”, according to Prime Minister Brown.

This might be a true statement, if you constrain yourself to looking at this morning’s decision in isolation.

Of course, the courts might yet decide that it was a really bad decision, and the Government have to pay a lot more than they’re assuming.

However, if you look at the overall way the crisis has been handled, it’s an object lesson in how to bungle government big-time, and back the country into a corner where  nationalisation is the only option.

Quick summary:

  • Northern Rock’s board embarked on a fast-growth strategy that used securitisation to help fuel a massive expansion.
  • The strategy misfired, and the bank had to run to first the Bank of England, and then the treasury for help.
  • The treasury came up with a clever plan where they promised to help the bank in a way that meant that you and I (the taxpayers) would carry the losses if the rescue failed, but that the shareholders would take the bulk of the gain if it worked.

In today’s announcement, the Government are basically saying that they’ve worked out the flaw in the plan :-)

However, it may be too late. A general principle of UK law (and for that matter, European law) is that you can’t enter into a contract and then change your mind without penalty.

The current shareholders of NR (trading has been suspended) now have to wait for a public sector panel to “value” the shares… and the panel is going to value them as if the guarantees never existed.

The legal challenge that will, inevitably, be made is that the guarantees DID exist.

Very few people seem, to me, to have covered themselves in glory on this.

  • The Chancellor appears out of his depth [see below.]
  • The Prime Minister, who seems to refuse to accept that his government has done anything wrong, and consistently tries to spin the discussion into how a few jobs (in marginal constituencies) have been saved at the expense of enough money to employ 100 times as many people elsewhere.
  • The Conservatives appear to be trying to get the Chancellor out, rather than concentrating on anything that might benefit the country as a whole.
  •  The original board of NR who have, at least, in the main resigned.

So who has earned my respect:

  •  Ron Sandler, the man brought in as the new exec chairman to try to sort out the problem. He seems to be telling the truth, and refusing to make glowing spin, but instead concentrating on making things work again as quickly as possible.
  • The Liberal Democrats. Vince Cable, their treasury spokesman has been recommending nationalisation for a while, and signs are he might have done so immediately it was sensible, rather than creating the murky legal waters that Darling has done so.

I do admit, however, to feeling sorry for Mr. Darling – he is caught in a government that believes in managerialism – the idea that all problems can be solved if you work hard enough at them. Sadly, the right answer for a few labour MPs with low majorities isn’t the right answer for the good governance of the country.

Sadly, there’s enough evidence around to suggest that creating a level playing field, where sadly some companies DO fail, overall provides a better result for everyone – because new companies feel that the big incumbents aren’t given an unfair advantage, they are more likely to enter a market, creating more customer choice and more jobs!

Economies can cope with companies going under. They can’t cope so well with governments that tinker and U-turn, and put politics first.

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