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Northern Rock – the story that wouldn’t die

Posted by markharrison on November 20, 2007

Back in September, I wrote a series of articles about Northern Rock, the troubled UK bank. It would appear that the shouting is continuing.

Just to re-cap the facts to date:

  • Northern Rock stopped being a building society and turned into a bank some years back
  • Because of this, it is now owned by Shareholders, who are completely different to the “savers” who have accounts with the bank
  • It made a bunch of loans, on the assumption that it would be able to borrow the money back from other banks
  • Because of the US Problems,  it wasn’t able to, so the Bank of England stepped in (after some pressure from the Treasury), to provide it with a loan facility of tens of billions of pounds
  • The news of this got out, and there was a run on the bank, people queued in the streets to get the cash back out of their accounts (about £10,000,000,000 – that’s Ten Billion has been withdrawn in the last 8 weeks).
  • Because of THAT, the shares collapsed

Key point is that SAVERS are protected (up to about £30,000 per saver), but shareholders aren’t.

There have been a few bids to buy the bank outright, and several more to buy out part of the bank. However, because Alastair Darling, the Chancellor has refused to make any on-going promises that the Bank of England loan will be held in place much into the new year, Northern Rock is seen as a very risky proposition.

Here endeth the factual part of the post – now onto the opinionated part 🙂

At the time, some financial journalists were tipping the bank as a “hot buy”, certain that the shares would rebound. I was not convinced, and it looks like my caution was right – the shares have continued to go down.

Sadly, the whole thing has degenerated into a political circus. Some MPs, who have large NR offices in their constituencies, are making speeches about how the government  should “save jobs” – though at a loan of £25 billion for a company that has 6,500 jobs at risk, that does work out at almost £4 million per job!

Personally, I would have thought that loaning £4 million on favourable terms to a bunch of small businesses would probably create a lot more employment, and wealth, than propping up a fallen giant. Hell, lend me my £4 million on an “if it fails, that’s OK” basis, and I’ll promise to employ 10 people, not just one! I’ll even guarantee that 3 of those 10 will be former Northern Rock employees – they certainly have some polite helpful staff in my local branch, and I’m sure I could find something for them to do if the government were paying.

There’s an interesting followup to the idea of “saving jobs”, though, and whether it works. The figures below are from Tom Peters, and represent the period from 1980 to 1998.

During this period, the European Union had a policy of “protecting jobs”, wheras the US had a policy of “making it easy for businesses to get rid of people”. (The logic being that, if it was going to be easy to get rid of someone, a small business was more likely to take a punt on hiring them in the first place… and that would overall create more employment.)

In that period, the EU gained 4,000,000 jobs… (to be fair, most of these were in the public sector, but still 4 million extra people working is a good thing, surely?)

Over the same period, American companies laid off 44,000,000 people – 44 million people out of work…

… but created a new 73,000,000 jobs over the same period (at other companies, obviously.)

So, over the same period, by having a policy of “make it easy to lose jobs”, the US economy managed to add a net total of 29,000,000 new employees to the workforce. (29 = 73-44)… over 7 times as many extra people working, in a similar sized economy, as a result of a “don’t bother to save jobs – instead concentrate on ‘flexibility’ in the labour pool” policy.

Makes you think, doesn’t it?

(Oh, and for what it’s worth, I’m in favour of using public money to protect Northern Rock savers AND Northern Rock staff, by making sure that they get decent redundancy payouts… but NOT in favour of supporting Northern Rock Shareholders at the public cost, or in favour of putting up £4million per job to keep 6,500 employed.)


3 Responses to “Northern Rock – the story that wouldn’t die”

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