Leading article: Some home truths for shareholders and taxpayers

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The Independent Online

Northern Rock's legal status has changed rather dramatically now it is safely in the public sector. But the salient facts about it are essentially the same as they were last September, when it became the first British financial institution since 1866 to suffer the ignominy of a bank run. They are simply stated: its business model has failed; its brand is worthless; it has no future. The fact that the British state now owns Northern Rock does not alter those uncomfortable truths, no matter how chirpy the Chancellor and the Prime Minister try to sound. The only question is for how much longer ministers will try to pretend that they have just nationalised a potentially healthy and profitable financial institution that could be sold on for a nice profit in a few years time when market conditions improve. That is fiction. They have acquired a pup.

It is difficult to envisage, for example, Ron Sandler and his new team of managers trying to push Northern Rock aggressively into the marketplace again. It would be unfair competition, and legally challenged as such. Northern Rock has the unique advantage (apart from National Savings) of boasting an unlimited government guarantee on depositors' savings, which is quite a plus in these turbulent times. It also has the opportunity to borrow on the terms enjoyed by the Government, more cheaply than its commercial rivals. Northern Rock will no doubt be asked to adjust its sums to account for this anomaly and to thereby remove the unfair advantage it has in raising cash, but this is just juggling around with "funny money". Once Northern Rock is owned by the taxpayer it becomes a totally different beast. Is New Labour seriously promoting the idea of a state-owned bank offering meaningful competition to the other banks and building societies?

The most likely outcome is that the Northern Rock book will be quietly run down, with staff numbers being gently slimmed through voluntary redundancy and natural wastage. A humane approach is right. However, it does mean that the Government may not have much of a business to sell on, if and when market conditions do indeed improve to make a sale worthwhile.

The second nasty fact, which admittedly is about to be realised, is that Northern Rock shareholders will receive little or nothing. Smaller investors who benefited (at nil cost) from a windfall when Northern Rock demutualised in 1997, and the huge hedge funds running speculative positions they picked up recently, will suffer alike. Yet there was nothing secret about Northern Rock's fate; there was no fraudulent rogue trader or ministers conspiring to nationalise it. For shareholders, Northern Rock was a punt like any other. They are welcome to sue its old management and the Financial Services Authority for negligence. But the Government is right to say that any value in the shares is derived only from the massive state support for the bank.

There is a case that Northern Rock should have been allowed to fail last September because, as we know now, it was insolvent as well as illiquid. Its problems were bigger than just a temporary problem with funding. The Government could have guaranteed depositors' cash with the proceeds of selling on the loan book. Jobs would have been lost – a big political dilemma for this government – but a rescue mission could have been launched, just as it was in Birmingham when MG Rover collapsed. The financial system would have survived because the essential aim of the Government's policy of propping up the Rock – to protect depositors – would have been secured, but more cleanly.

It was the toughest of the available choices, and the Government ducked it. Now ministers have been left with a long-term, not necessarily temporary, problem.

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