By nationalising Northern Rock, the Government hopes to achieve closure on one of the most embarrassing and traumatic episodes of its eleven-year rule, yet I fear its problems with the Rock are only just beginning.
At a stroke, the Government has blown its rules for governing the public finances to smithereens, driven a coach and horses through any remaining pretence of fair competition in the mortgage and savings market, subjected its rules and systems for dealing with troubled banks to international ridicule, and profoundly damaged the City's reputation for "can-do" financial innovation.
In the end, the combined brainpower of the City's finest failed to find a private-sector solution to the travails of this relatively unimportant regional mortgage bank, or at least that's the message that the Government has sent to the rest of the world by rejecting two perfectly viable private bids and nationalising the Rock instead.
Financial services is meant to be one of the few industries in which Britain excels. That's not the way it looks after the Northern Rock debacle, with the Government incapable of properly regulating its showpiece industry and the industry itself equally incapable of solving its own problems in a market-driven manner.
The Government's depiction of itself as a hapless victim of events beyond its control, with no ultimate option but to nationalise as the least worst solution, is simply not credible.
The bottom line is that this is an almighty mess which nationalisation in the manner proposed, with an "incentivised" Ron Sandler determined to run the Rock as a going concern for ultimate resale to the private sector, will more than likely make worse.
The opposition can hardly be faulted for opportunistically jumping on the Government's embarrassment. It's what Tony Blair and Gordon Brown used to do all the time and with devastating effect while they were in opposition. Mr Brown supported Britain's membership of the ERM, yet that didn't stop him pouring scorn on Britain's humbling retreat.
After a certain number of years in power, all governments become accident-prone. There is a steady build-up of negative news which saps and undermines their reputation for economic and operational competence. Never mind whether the Chancellor and his colleagues are directly responsible for having to take £110bn of mortgage funding on their books at a time when the housing market is showing signs of growing distress, they are going to get the blame anyway.
Sir Richard Branson was behaving with as much good grace as he could muster yesterday, yet it is with good reason that behind the façade of resignation he's spitting tacks with anger. He seems to have been led up the garden path by an indecisive Government incapable of backing the private-sector solution it claimed to be seeking. Months of work and effort have gone down the drain.
John Kingman, the senior Treasury mandarin on the case, had been pushing for nationalisation all along, but the Government, wracked by memories of the economic failure associated with nationalised industries, was desperate to avoid it, or at least that was what it pretended. In the event, both the Virgin and management bids seemed to satisfy virtually all the demands made of them by ministers, yet still the Government wouldn't sign up.
Why was this? One possible explanation is that from the beginning the Prime Minister was more settled on nationalisation than he admitted, but needed to satisfy the public that all other options had been exhausted before pushing the button. Virgin and others were merely used to show that procedure had been followed. Yet my understanding is that the decision – taken at the last moment some time on Saturday night or Sunday morning – was more overtly political.
The thinking was that either Virgin would fail with trying to revitalise the Rock, in which case the Government might end up having to nationalise anyway at a later stage and at greater cost to the taxpayer, or it would succeed, laying the Government open to the charge it had lined Sir Richard's pockets at the taxpayers' expense. Hedge fund investors in Northern Rock scarcely helped matters by promising both to block the Virgin bid and sue the Government if it nationalised. In fact, the first of these two threats was just sabre-rattling by the hedge funds. When push came to shove, they would almost certainly have backed the Virgin proposal, yet it was not a risk the Government felt it could take. Ministers would have looked stupid if they had opted for Virgin only to have shareholders turn them down. In threatening the Government, the hedge funds may have overplayed their hand.
As it is, we seem to have arrived at the worst possible outcome. To the fury of rivals, the Government says Mr Sandler will be allowed to operate the bank at arm's length as a going concern. Mr Sandler has already declared himself open for business both for new deposits and new mortgages.
If that's not unfair state competition, I don't know what is. Rivals already have to compete with the state-guaranteed deposits of National Savings. Now there's a second state-backed organisation jostling for position in the market. Yet if alternatively Northern Rock is perfectly capable of competing for this business without infringing European rules on state aid, what on earth is it doing in the public sector at all?
The Government's nationalisation of Northern Rock is riddled with contradictions which provide both the ammunition for litigation by investors and for political opponents the charge of double standards. If Northern Rock were being nationalised to be put into run-off, that would be one thing, but no, it is to be managed as if still in rude health, with access to wholesale funding others can only dream of. Why is such special treatment being meted out to a business which far from being a strategically important company of vital national interest is in fact just a largely transitory creation of the 10-year credit boom? Other industries and companies have unsentimentally been allowed to go to the wall, the most recent example being Rover, with their employees asked to accept the disciplines of the marketplace without complaint.
Banks are meant to be different because of their central importance to the payments system and therefore the national economy. If one of their number is allowed to go bust, there is a real risk of a domino effect of funding problems with potentially catastrophic consequences for the wider economy and the credit that makes it function.
Yet what is being proposed here is not an orderly run-off for the benefit of the taxpayer and other creditors, but a commercial endeavour with the ultimate purpose of making a big fat profit for the Treasury. No wonder investors are complaining of expropriation. When the Bank of England first dipped its hand into the Northern Rock fires, it said it was providing temporary liquidity support for what was fundamentally a solvent bank battered by an again "temporary" dislocation in credit markets.
Over the months, that position has changed dramatically, though without explanation, to one in which the Government says investors cannot expect any compensation from nationalisation as the Rock would have been bust without its support last autumn.
According to the Prime Minister yesterday, it was the business model that was at fault. Really? That's not what ministers said when the lender-of-last-resort facility was first used in September. Nor is it cited as an explanation for the hundreds of billions of support the European Central Bank is similarly providing to distressed banks on the Continent.
For whatever reason, Britain, its Government and its regulators have handled the Northern Rock crisis with particular clumsiness, compounding the nature of the problem rather than making it better as intended. I see no reason to believe nationalisation is going to break the pattern.
Gordon Brown repeatedly insisted yesterday that the test of economic competence was economic stability, the latter of which he seemed to be asking us to take as read. Things don't feel that stable to me right now.Reuse content