Northern Rock Nationalisation Explained for Beginners
On the 17th September it became clear that Northern Rock had become insolvent. For any business like this the inevitable next step is to notify the secured creditors, who in turn will put the business into administration. In other words the receivers will be called in.
At this point the company is protected from its creditors. They cannot successfully sue for debt, nor can they seize assets even if they are specifically secured. Instead they have to rely on the efforts of the receivers to recover their cash. The company will continue to be run as a going concern but overheads will be cut by making most of those staff redundant who are not directly concerned with the process of recovering monies owed to the business or maintaining the value of its assets until such time as they can be sold off.
Once this part of the job is done, the secured creditors are paid off and what is left of the proceeds of the assets of the business is transferred to the Official Receiver, who then distributes the cash from these to the unsecured creditors. If these amount to say £1 million and the unsecured creditors total £10 million, they will get 10% of what they are owed and that is the end of the matter. These rules have always applied to any business that has failed.
When a company wishes to take over or invest in another company there is a process known as due diligence. A firm of accountants go into the target business to make sure that their accounts are in order and that its value as stated in their balance sheet is correct. For something requiring an investment of £100 billion, this would require the services of one of the big three firms; KPMG, Deloitte or Ernst and Young. They would be tasked with conducting an audit to establish that the value of the business is exactly as stated in their balance sheet. In particular they would be looking for instances of voodoo accounting used to either inflate asset values or deflate liabilities. There has not been a word about any such due diligence from the government. Indeed when Lloyds TSB made an approach early on to take Northern rock they were firmly rebuffed and the question arises - Why? Could it be that it was already known by the Bank of England that the consequences for LLoyds could have meant another crisis later on, even with a partial guarantee and this time with one of the UKs largest banks?
However the government continued to try to find a others who would undertake the job of keeping the bank in being while generating enough cash to pay back the taxpayers’ forced loan within three years. Three years by the way is the maximum time left before the next election must be called. Despite Gordon Brown taking Richard Branson his preferred candidate for this job with him on his visit to China, in the hope that their hosts could be persuaded to fund such a venture, this too failed to materialise.
Their next idea was to announce that Northern Rock’s mortgage assets would be divided into what are in effect housing bonds to be offered for sale to the banks as a means of repaying the taxpayers’ cash. Such government backed devices are also known as brady bonds when issued by developing countries.
All this would very likely have been the approach of a competent receiver. Indeed it would have been possible to offer such bonds to the banks who were owed money by Northern Rock in lieu of cash. Whilst an incentive could have been included, an element of ‘take it or leave it’ may well have been succeeded in concentrating their minds, giving it a high probability of success.
Ron Sandler, who has been appointed to run the nationalised Northern Rock on a £90,000 a month salary, has already predicted ‘a scaling down’ of operations which is another way of saying job losses, again in the same way as a receiver would have done. This also confirms that as an ongoing business Northern Rock is considered to be dead in the water despite what Gordon Brown and Alistair Darling are telling us. This is not nationalisation at all, it is simply receivership by another name.
So if nationalisation is simply an alternative to receivership, why is a potential £100 billion of our cash sitting on Northern Rock’s table? The answer lies in a statement by the Labour MP for Newcastle North, Doug Henderson in which he said of a rescue for Northern Rock; ‘It's vital for the region, for jobs in the region and for economic contribution of the region…’ It should be noted that, as the Daily Telegraph reported at the time, out of thirty odd North-East MPs there is only one Liberal and one Conservative. In effect Northern Rock has been turned into what is known in the US as a zombie but with our cash as a guarantee aginst commercial failure, in order to protect Labour's political interests.
This is essentially why Gordon Brown and Alistair Darling forced a rescue through at huge cost to the rest of us and against the wishes of the Bank of England. As with so much else from these two a decision was made without any thought as to the consequences of it. The reputation of the City of London has been dealt a heavy blow by it and what was left of Gordon Brown’s reputation for economic competence has been shredded. What they are now about to learn is that the price for trying to keep six thousand Northern Rock jobs and protect its depositors’ and shareholders’ investments may well add up to a lot more than twenty eight seats in the North East come the next election.
Click here for Daily Telegraph article on the statement by Doug Henderson
Click here for BBC article announcing nationalisation of Northern Rock
Click here for Wikipedia entry on nationalisation
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