18 February 2008


Having put shareholders out of their of misery by nationalising Northern Rock the Chancellor of the Exchequer, Alistair Darling, can now concentrate recovering the tax payer’s billions.

In his statement accompanying his decision to take the Northern Rock into public ownership Alistair Darling said:

“At every stage the stability of the economy and the interests of depositors and taxpayers have been - and remain - our first concern.”

While Alistair Darling has been faced with criticism from the Conservative Party, commentators and shareholders alike, it is hard, to see what alternative the Chancellor had?

Sir Richard Branson believed that his proposals were capable of rescuing the interests of all stakeholders, but, even for Sir Richard, to save everyone involved is a very tall order. The difficulty bidders faced was that, because of the huge debt to the Northern Rock has to the public, we are all stakeholders.

Individual interests, in this case, are simply incompatible. Shareholders would like to sell their shares at their peak, while tax payers want their money back as soon as possible. The crucial difference between these two particular stakeholders is that shareholders were free to choose whether, or not to invest in Northern Rock and tax-payers had no choice.

So how will the collapse of 150 year old Northern Rock affect stakeholders more generally?

The only clear winner from the collapse of Northern Rock will be their savers. Savers not only have a government pledge that their money is safe they are likely to be offered relatively high interest from a government desperate to attract fresh funds to re-balance the Northern rock’s books.

The news for Northern Rock’s mortgage customers, however, is not so good. Mortgagees are likely to see the cost of buying their home rise as the bank is forced to reduce loans to free up money locked up in property.

Put simply, the easiest way to recoup tax payers money lent to their customers is to put up interest rates relative to other banks and wait for them to switch lenders.

Northern Rock’s shareholders, angered by the destruction of their company’s value from over 5.3bn to less than 379m on Friday have threatened legal action against the Government to try to salvage something from the wreckage.

There may be a chance that shareholders will retain a stake in the nationalised bank, but the plight of Northern Rocks’ shareholders is unlikely to be high on the list of the Chancellor’s priorities. At the close of business on Friday Northern Rock shares were trading at just 89p, this morning the shares were suspended.

As the newly nationalised bank downsizes taxpayer’s cash will be steadily released, but creating uncertainty for Northern Rock’s 6000 employees already worried about the future of a banking sector badly hit by the liquidity crisis both here and in the United States.

In future we are likely to see a dramatically smaller Northern Rock focusing on savings rather than loans as it steadily reduces its mortgage book to repay UK tax payer.

In effect the Northern Rock is likely to look more like a National Savings Bank than a Mortgage Bank, but how long it will take for the newly nationalised bank to repay tax payers money is anybody’s guess.

This article can also be read on the on-line magazine about your money.

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