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Posts Tagged ‘Nationalisation’

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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A staggering amount of money for Northern Rock.

Posted by markharrison on January 21, 2008

Dear Mr. Chancellor,

The Northern Rock employs 6,500 people, most of them in marginal constituencies.

You have just promised £25,000,000,000 of public money to keep them employed, as a loan that you only get back if the business ends up doing well.

That works out at almost FOUR MILLION POUND PER JOB SAVED.

If the business tanks, you will end up with the assets of a failing company – mostly some nice office blocks in marginals, where maybe you could create some public sector jobs?

I also live in a marginal constituency.  Our (labour) MP got back with a majority of 19… not 19,000, just 19 (on the third recount.)

My company employs two people.

Would it be possible to arrange for a cheap loan on the same basis. Clearly we wouldn’t require the full £3.8million per head – we’d be happy with just £2.5 million each.

And we promise to pay ourselves no more than the Directors of the Northern Rock.

Obviously, if the business does well, we’ll repay you.

If the business tanks, then for only £5,000,000 of taxpayer’s pounds, you have have control of all the revenues of my book, and my laptop (the two core business assets).

Is no-one else shocked at what’s happened here? The SAVERS money was already protected – the NR had, for years, been paying a levy into the Financial Services Compensation Scheme to guarantee that.

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Northern Rock Nationalisation? My off-the-wall solution :-)

Posted by markharrison on January 8, 2008

Of all the reports about Northern Rock over the last six months, the one that has consistently impressed me most is Robert Peston, of the BBC.

In the latest twist, Robert reports that SRM, a Hedge Fund who currently own about 10% of Northern Rock have written to the Government, making it clear that if the Government try to Nationalise NR at less than a “fair price”, they will sue for damages.

The story then goes on to report how SRM have arrived at a “fair price”, and how difficult it is to value failing businesses.

I have a solution. I’ve no idea whether it would hold water legally, but it has a certain “business logic” and “natural justice to it.”

I wonder whether it could apply to all “companies on the verge of nationalisation”, not just NR…

Run an auction with a twist

  • Buyers would have to demonstrate (before entering the auction) that they had the funds in place
  • The government would have the RIGHT, but not the OBLIGATION (ie an option), for 24 hours after the auction closed, to buy, at a 10% premium over the “hammer price”
  • Of this 10%, half (5% of the highest bid) would be an uplift to the price the sellers of the business received
  • The other half (5% of the highest bid) would go to the highest bidder

Why have I suggested this?

  • The purpose of the first 5% is to demonstrate, clearly, that the government is paying “fair price”.
  • The purpose of the second 5% is to make sure that potential bidders are encouraged to bid up to their highest price – because for just making the offer, and putting down no cash, they MIGHT end up with a 5% profit straight away.
  • The purpose of making it an OPTION is to  make sure that no-one over-bids in the hope of that 5% profit – there would be a good chance that the Government would leave them swinging with their over-priced asset 🙂 And, of course, to make sure that the Government only bought if they REALLY felt it was in the national interest.

Would bidders play? Asia is awash with rich financial institutions at the moment!

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