Andreas Whittam Smith: My four-point plan to salvage Northern Rock

Does anyone think it a good idea to subsidise private investors so they can profit from the bank's collapse?
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The Independent Online

Dealing with Northern Rock is said to be a terribly difficult problem for the Government. It isn't. My dear Chancellor, Treasury officials, Downing Street apparatchiks, Prime Minister even – just hang on to the following propositions, which I will elaborate below.

One, the shares are worthless. Two, the bank should be nationalised with nominal compensation for its owners – 5p a share would be too much. Three, the Government should then run Northern Rock profitably – as it can do, seeing that the interest rate on its own borrowing is well below what home owners are charged. Four, when everything is back in order, reconstitute Northern Rock as the respected mutual organisation it once was – a building society again – and let the north-east supply the board, the management, the staff and the customers for ever and a day. Job done.

Northern Rock lost the entire value of its brand when frightened depositors queued for days to retrieve their funds. It is as if the name of a famous car manufacturer was for ever associated with motorway crashes. Northern Rock also lost its financial viability when it borrowed its first pound from the Government. Remove that support and the bank would collapse. Ergo, it is bust. Still some hedge fund chiefs are beating the drum for shareholders' rights. They want to keep Northern Rock going in its present form for as long as possible in the hope that something will turn up to justify their hasty purchases of the shares after they had already fallen sharply. But everything these boys say is self-serving. Their million pound bonuses are at risk.

Then there are the various suitors who have indicated that they are willing to buy the bank or parts of it. They comprise consortia put together for the purpose. They have management and capital. They have put their proposals to the board of Northern Rock or will do so shortly. But all that the directors can say is that the bidder should consult the Government about its ongoing support.

Let me compress the likely discussions. Question: "Are you proposing to buy the whole business and finance it in the market place?" Answer: "Er, no, that would be impossible. We could not attract sufficient funds to replace every penny of the Government's support." Question: "Your proposals and thus your chances of making money for yourselves depend, therefore, on subsidy from the public purse?" Answer: "You could put it like that, yes."

We all contribute to the public purse in one way or another, rich and poor alike. Is there a man or woman among us who thinks that subsidising a group of private investors so that they can profit from Northern Rock's collapse would be a worthy use of our money? I do not think so. Especially as temporary nationalisation is a much better route. It would allow taxpayers to garner all the profits that would eventually accrue from putting Northern Rock back on its feet.

The arithmetic is simple. Northern Rock charges its customers close to 7 per cent. The Government can borrow at a bit less than 5 per cent. The resulting gross profit margin of slightly more than two percentage points, spread across billions of pounds of business, adds up to a very substantial sum of money, quite sufficient to cover all costs and earn a profit. Nonetheless, the Government should be aiming to shrink the business to a size that could be self-sustaining on its own during its period of ownership.

Remember that nationalisation as a time-limited expedient is a very different matter from seeking to control the commanding heights of the economy, as the first post-war Labour Government did, taking into public ownership, for instance, the entire British steel industry. Nationalising Northern Rock should have no ideological content. It should be a device to deal with a difficulty, a staging post en route to a non-government solution. But what solution?

Until the early 1990s, all home loans were supplied by building societies and that was all they did. Ownership was in the hands of their depositors. Profits had to be sufficient to cover just costs and the building up of reserves for reasons of prudence. No dividends were paid. Building societies, unlike banks, were well regarded by their customers. Then the law was changed to allow societies to turn themselves into profit-oriented organisations.

I regretted this. I believed that supplying home loans was a social service best conducted by independent, not-for-profit organisations. Of the larger societies, only Nationwide has retained its mutual status. Northern Rock converted itself from a building society into a public company quoted on the Stock Exchange in 1997. It has lasted 10 years before crashing. The Government can give it a second chance. But I hope it will be as a mutual organisation, its status for 140 years, conducting a relatively simply business in a modest way.

a.whittamsmith@independent.co.uk

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