Return to the 'N' word
Imagine, just for a second if you had suggested to Gordon Brown, before he became prime minister, that he would nationalise a bank in his first year in No 10. He would have laughed, then snorted but, if you'd persisted, you might have seen the colour drain from his face.
The N word - nationalisation - is so toxic to Brown's generation that they never wanted it to be heard in the same sentence as the Labour Party again. That is, no doubt, one reason he has delayed so long before taking this decision.
Before Christmas, when the Lib Dems were alone in advocating nationalisation, this was how it was discussed in the House of Commons:
"Jim Cousins (Labour MP for Newcastle upon Tyne, Central):
'Does my right hon. friend accept that the policy of nationalisation would lead to a slow lingering death for the jobs of the Northern Rock workers, its assets and Britain's reputation as a major financial services centre, with my right hon. friend the chancellor cast in the role of undertaker - and that only by finding a successor business to grow on those jobs, assets and reputations can we offer any real prospect of the taxpayers getting their money back?'
The chancellor: 'I agree with my hon. friend.'"
(Source : Hansard, 19 November 2007)
Now, to be fair, the chancellor did not rule out nationalisation then and now argues - with independent advice - that it is the best option for the taxpayer.
So, what will be the price to be paid - political, reputational and financial for today's decision?
Political damage will be:
• very serious for the chancellor who, whether he is to blame or not, is now associated with the first nationalisation in decades and the first run on a bank in over a century
• serious for the prime minister who has been forced to adopt a policy it's clear he was desperate to avoid and took months before taking
• the damage to the Labour Party is unpredictable since it may turn out that the N word is not half as toxic as was assumed.
So the key will be...
Reputational damage:
• the, as yet, unmeasurable damage to the reputation of London as the world's premier financial sector which, if serious, would lead to...
Financial damage:
• a potential loss of business from the City with knock-ons for tax revenues and jobs elsewhere
• a loss of tens of millions in consultant fees for the sale of the Rock which ministers attempted but could not pull off
• the much talked of, though so far purely speculative, loss of billions of pounds in taxpayer guarantees if the Rock cannot pay them back. It may be years before the true scale of any loss is clear
In short, this is a day Gordon Brown would have done anything he could to have avoided but we do not know how well founded his fears were.
I'm 
Comments
Given the astuteness of your article Mr Robinson, perhaps the 'N' word Mr Brown should fear more is 'Nick'!
Does this mean a growing general political consenus that the pursuit of profit isn't necessarily the best way forwawrd? Hardly. I'm sure some hacks will start calling him comrade Brown now. How original!
Nick, again is following the crowd,
Railtrack was a very recent "Nationalisation" from the Blair/Brown era. It may not have been spun as such, therefore Nick does not recognise it politically, but nevertheless it was...
I can't help feeling that this will also inflict damage on the Conservatives. The sight of Osbourne bleating 'I told you so' is sickening. We know they'd have done no better: they offered no realistic alternatives.
Generally, I can't help feeling that this is (yet another!) issue that's far too important to be left to politicians: people whose only decision making criterion is 'How will I look?'.
To paraphrase Douglas Adams, the last people who should be put in positions of power are those who ask to be there.
I posted a comment in the Telegraph forums the very first day Northern Rock was lended money stating that for me the best solution, in a liberal, capitalist economy, was simply, as any other businesses whose business plan failed, to let the bank sink, analyze the consequences and then, and only then, take measures IF (IF) necessary.
In other countries, such France, nationalizing a bank would have mean to bring a healthy financial institution to the State to bring money to the coffers, not to bring a corpse that will cost a fortune to tax payers.
What will be our tax bill each of us in the next budget?
As a business owner (a tiny one) i know that if I fail, Mr Darling will only come along to be sure I paid my tax in time, and eventually send the bailiffs as flowers for my business funeral.
Now a bank fails miserable, by offering loans they could not afford to offer basically, as their business model was simply WRONG, and her comes Brown and Darling, with 100+ billions (sure is not their money so...)
The real issue is not Northern bank, you see.
The real issue is that Gordon Brown , a proud man, can not even think to be see as the Prime Minister who saw a mainstream bank sink under his eyes ,a nd could do nothing about it.
But this is exactly what happened today: worldwide, nobody has come along thinking this business has any real value anymore, apart Virgin (that s usual wants to make money out of collapsed business, buying it at a fraction of is value, which obviously is plain unacceptable, then (oh dear) their own board at Northern Rock, who at the end of the day are the true responsible for these situations.
Morality?
Don't drink bottle water, tap water, panorama special tonight. Thats the real moral issue apparently, nothing about lending money to people who cna't afford to pay it back, or lending moeny thta you don't have in your coffers...
Usual smoke screen
:-) !!!
An if you need a loan to buy a house, ask Mr Darling. Northern will ow change their artes up and down as they pleased (they been Brown and Darling), of course under advice of "impartial (??) advisors"
The whole banking system is now flawed, as Northern Rock can't (CAN@T) be impartial, our 100 billion must be protected.
We are officially a socialist country.
The true cost of today's announcement will always be hidden. The loss of business confidence both at home and abroad is immeasurable, and the political damage will drag on for years.
The Conservatives have been dogged by Black Wednesday for 15 years, and Labour will be lucky to escape from the shadow of the Northern Rock crisis in a shorter period of time.
Railtrack was nationalisation as well Nick. Clause IV was repealed then!
This is a tricky situation. What probably should have been allowed to happen at the start is a controlled failure of the bank. If the shareholders do not get a fair deal from the nationalisation, we might see a reduction of London's strength as a financial centre, as people look to other markets where the government doesn't intervene. Remember that we make a huge amount of tax from financial services, both in direct taxation of the business, direct taxation of the employees, and also indirectly through taxation of business listing in the UK. Already this government is bringing in laws to try to drive financial services away - like the tax on non-doms - and this will further affect the position. Financial services firms can and do move regularly - the loss of taxation from driving any out of London would be unbelievably damaging.
How could you have allowed Northern Rock to fail without causing irrepairable damage to the banking sector. Simple, you break up its book and sell it off in bits. If necessary, hold a big auction for sections of the mortgage book. Everyone has been saying that the mortgage book in Northern Rock is sound, so prove it by selling the thing. You could have even just put it in administration, and started telling mortgage holders that they would have to start looking elsewhere for their mortgage. Give them a reasonable period to get another deal from another provider, and things are sorted. Maybe the Northern Rock customers don't have such a good deal anymore, but it has been shown over the past few months that the deal was too good to be true anyway.
The reason the government didn't go down this root, and instead started damaging the financial reputation of the UK instead, whilst putting 100s of Billions of tax payers money at risk? Simple, most Northern Rock savers and borrowers come from Labour strongholds, the electoral damage to the Labour party from allowing it to fail would have been extreme. Instead, the Government have damaged the finance industry, which in the short term primarily affects Tory voters. Of course, the fact that the loss of tax income from damaging this industry destroys the whole country in the long term is beside the point.
Can someone explain why our liability now could be as high as £100 billion? I understood that at the start of the Northern Rock crisis in September the amount of savings in the bank were about £28 billion.
I was under the impression that the government's actions had been designed to protect the savers from any financial loss. I am not a financial guru but if that was the case, I can't understand our liability could be nearly fours times the value of the savings we are trying to protect.
Any answers in simple language would be much appreciated!!
The only thing that surprises me about this is that anyone is surprised. This government have a track record of "u-turns" and dithering.
Mr Darling is paying the price for being the Primeminister's toy poodle.
As for "temporary" nationalisation, isn't that what was said in the 1970's about British Leyland etc?
Nick Robinson says he 'likes numbers', but I would suggest his analysis of the numbers is somewhat less reliable than his political analysis.
Surely, the £100Bn loan book which NR has does not represent a liability, but an asset - they all represent loans which are due to be re-paid in up to 25 years and are backed by the properties of customers.
Worst case, the Government may end up loaning the bank up to £100bn as it gradually pays back the short term loans it borrowed from the money market, but it does so knowing the loans are mostly safe and it is doing so at an attractive rate of interest (potentially £6bn per year).
I believe the main liabilities therefore are three-fold. First, the loss of some depositors' money if the bank folded and owed more than all its borrowings (which won't now happen).
Second, any losses incurred if the bank's costs (i.e. loan repayments + interest paid to depositors + operational costs + redundancies), exceeds the stream of mortgage repayments from the £100bn of outstanding loans. This liability is likely to be millions - not billions - of pounds, and may be less than the social costs to the Government if the business were to fold - particularly if a collapse in the economy of the northeast led to falling houseprices and negative equity.
The other liability is the amount it has to pay existing shareholders who invested in a bank which was liable to this massive cash-flow problem.
As the private sector offers have clearly valued the bank at relatively little, ethically all they should get is the value of the fixed assets (at fire-sale value), minus any liabilities, costs of the sell-off and any legal action they take.
Nationalisation? Great! Start with a few banks then move on to the Rail system (please, oh please), then all the companies who are currently ripping off the NHS (PFI organisations, catering and cleaning firms etc).
If capitalism cannot manage itself with out damaging the wealth and welfare of thousands of our citizens then it ought to have the reins taken out of its hands. The dogma that only competition can improve services is surely, by now, discredited. "The Free Market" will tend to one of three outcomes: bigger and bigger multinationals, which can ignore sovereign government; cartels of very comfortably-off companies artificially setting the price of living for an increasingly mortgaged population; or financial institutions collapsing and taking a great deal of the public's money with them (and Public money too in the case of NR).
Is no-one brave enough to argue that there is a real, workable alternative? Give nationalisation a chance; the free market doesn't seem to be serving us too well just now, especially when you factor in environmental issues.
(And the first responder to mention British Leyland and Red Robbo is straight off my Christmas card list!)
It is not surprising that so many right wing economists are having apopletic fits at even the thought of nationalisation. Why? The demonisers are out again talking about "the bad old days" of nationalised industries. But is that true? were they so bad? The railways were certainly better run, far cheaper and more frequent. Water, electricity, gas and coal were cheap and run as a public service and not for profit. The iron and steel industries employed thousands and Britain had a great manufacturing base. Privatisation has been a disaster, Gas, electricity and water bills have shot through the roof, the railways are the worse run in Europe, our manufacturing base has been decimated, we rely on imported gas, (exported to Germany from the UK and reimported at higher prices!)City speculators who produce nothing gamble on the stock markets to make obscene profits, our economy is sensitive to every tweak in the foreign markets. Bring on more nationalisation I say and let Britain build its industries again for the benefit of all and not a minority of rich parasites.
Actually, the deposits in the bank weren't the subject of the original loans. What we (the taxpayer) guaranteed was the money that Northern Rock was lending out to mortgage holders. The Rock had been lending money it didn't have, and covering the debts on the money markets using short term commercial paper (3 month loans). When these dried up, they had a liquidity crisis and needed a new person to borrow from. That new person became the treasury. As more commercial paper became due that the Rock couldn't roll over for another 3 months, the treasury had to increase the loans to the Rock. Finally, the government also guaranteed deposits at the bank as well, the meant that if the bank went bankrupt, depositors wouldn't lose there money. The combination of guaranteed deposits and borrowed money to cover the loans has meant the government exposure is currently about £55bn.
Now, once the Rock is privatised, the Government becomes responsible for all the Rock assets. This consists of £30bn in deposits, £25bn in loans and about £55bn in mortgages. Now, in theory, this means that the government takes £30bn in assets in return for underwriting £70bn in loans. However, in the worst case, if the Rock was incompetently managed and they managed to speculate away the £30bn deposit book. Then the Government would have to pay out £30bn to the depositors as a result of that guarantee. If at the same time, the housing market collapsed and all the people with mortgages and loans defaulted, the Government could be liable for £70bn for that. At the same time they will have to pay compensation to shareholders. The reality of it is, is that it is unlikely for the Government to have to pay out anywhere near that much, but a £5bn hit on the treasury if the housing market falls wouldn't be surprising.
Mark Bently,
That is in compensation to Shareholders who seem to think that, despite the company basically going belly up, they are entitled to Compensation.
However, I am not sure Nick will post this, I posted the same thing on the HYS and they have failed to publish it. Here let me post it and see if Nick's blog is more open minded then the draconian Have Your Say
moderation team.
"I don't think the Government should compensate shareholders. It should compensate Creditors that would have gained some money back through the break up of Northern Rock and its assets.
However, shareholders rarely recieve anything back for the value of their shares when a company goes under, I don't see why we should treat this situation any different."
Of course we will, because business is what Government is here to support. You think that is in doubt?
Find something in this country that the Government runs, that isn't turning a profit for someone.
Found one?
Now check what they plan to do in the future.....I bet it involves private companies.
Disablility Benefit - Private Companies
GP Surgeries - Private Companies.
Everything involves private companies these days, cause it isn't enough to just provide a service anymore, you have to generate profit for the Square Mile.
Northern Rock is no different, no matter what happens, people who GAMBLED on the Stock Market by buying shares in Northern Rock (Some of which were bought AFTER it was failing) will have to have a profit generated for them.
If that means Taxpayers fork out, then that is what we will do. It is why NHS trusts are going into debt while the PFI trust running them are racking up profits.
I think the last bastion of profit-less Government services are pensions...and how long will that last now they are under review? And who will be surprised when that review comes back...inject privatisation, or as I like to call it..profiteering.
Why did Labour nationalize Northern Rock but not Rover weeks before the last General Election? Both were walking corpses.
Would Northern Rock's demise really have seen the UK's banking system crashing to the ground - is it really that fragile? Where have the Bank Boardrooms stashed the obscene profits they've been earning for the last ten years? Surely they've been saved for just such a rainy day?
When a private business gets it wrong, no matter the root cause, the shareholders lose their money. Northern Rock would have gone into administration last September without the huge injection of taxpayer's money. How can the shareholder's who gambled on a rescue package now complain because they will get nothing? They gambled twice and lost twice.
Nick, nationalisation was a bogey-word to scare the children with back in about 1961. I doubt if most voters even know what it means, let alone why they are supposed to find it catastrophic for the government. As many people have pointed out, the Blair government nationalised railtrack, and this was generally welcomed. Before that, Heath rescued Rolls Royce, which I believe worked out rather well. I've been listening to the radio this morning, and I very much regret the ³ÉÈËÂÛ̳ editorial line, presented without any real analysis of the situation or the alternatives, that this is some kind of disaster for Brown and Darling. Reading your blog, I feel you really really want this to be the case, and are doing your level best to make sure it is, but you can't actually point to anything the government has done wrong. Nick, your political ideas were formed in the Thatcher era, an age of ideological dogma. (No doubt she would have let this 'lame duck' go broke: is that what you think Brown and Darling should have done? Now, that really would have been a political catastrophe.) Those days of dogma and fanaticism are gone, and they aren't coming back - get over it, Nick. Nowadays, people expect governments to act pragmatically in the general interest of all, which is what Brown/Darling are doing. I think this will play well with the voters, despite your efforts to the contrary.