The nationalisation of Northern Rock is an unmitigated disaster. The only difficult thing is trying to work out which of the many unwelcome consequences of the "Northern Wreck" debacle will do the most damage to business and the wider economy.
First, and most obviously, Northern Rock tarnishes the UK's reputation for excellence in banking and is a symbol of massive regulatory failure. Britain claims to be the world's pre-eminent financial centre and yet has been forced to nationalise a mortgage bank.
The world is right to wonder how things came to this. After all, unlike the fraud at the French bank Société Gé*érale and, further back, the collapse of Barings, there was no rogue trader secretly undermining Northern Rock's foundations. The bank was doing that itself, in full view of the regulators.
Indeed, its business model – borrowing short term in the credit market to fund a rapid increase in its mortgage business – was much commented upon, but the Rock was not constrained.
What is worse is that since the bank first ran into trouble last September, the "tripartite" authorities tasked with overseeing the financial system – the FSA, the Bank of England and the Treasury – have been unable to sort out the mess.
After the run on the Rock, the Governor of the Bank of England, Mervyn King, reportedly accused the Chancellor, Alistair Darling, and the Prime Minister of a lack of urgency, saying that they were "unable to focus because morale throughout the Government is so low". Had they quickly offloaded Northern Rock to Lloyds TSB last autumn, albeit with a limited government guarantee of funding, the present imbroglio might have been avoided. The second disturbing message that nationalisation sends out is that any financial institution that mismanages itself will be saved by the government. This is the "moral hazard" that Mr King has warned about repeatedly since the crisis started. It may encourage some banks to be more reckless but that is unfair on their prudent counterparts and setsa bad precedent.
And finally, the whole of Northern Rock's £100bn of liabilities will be now crystallised and loaded on to the public accounts, making a mockery of the Government's much-vaunted fiscal rules.
As a publicly-owned entity, it is unlikely Northern Rock will be allowed to operate as a full commercial rival to the other banks and its brand is a busted flush anyhow.
The business will have to be run down and, as a consequence, its staff will become increasingly unwanted.
The redundancy cheques for 6,000 staff and the costs of compensating shareholders (including legal fees) may run into hundreds of millions of pounds, another charge on the Exchequer.
Plus, the commitment to Northern Rock is now open-ended; no one can possibly know what the eventual cost to the taxpayer will be.
The loss of Gordon Brown's reputation for economic competence in these circumstances may be a tragedy for one man and his party, but the damage to the economy of the United Kingdom will be a burden for us all.Reuse content