Misunderstanding Northern Rock

There are two points surrounding yesterday's events at Northern Rock that really need to be cleared up.

First, the BBC's Business Editor, Robert Peston, is very enthusiastic about Bradford & Bingley's offer to help out at Northern Rock:

"In the worst case of the Rock being nationalised, it could take assets off the Treasury's hands and lessen the very substantial burden and risks for all of us as taxpayers,"

So, Bradford & Bingley are going to take a load of the rather unreliable Northern Rock debt off the taxpayers' hands?  How good of them!  Should Bradford & Bingley shareholders be up in arms about their company's directors using company funds to bail out the Treasury?

Probably not.  The truth is that Bradford & Bingley's directors wouldn't be looking at buying Northern Rock Assets if that move didn't have the potential to be a good deal for the company.  Not because they're bad people but because they have a legal and moral duty to look out for the interests of their shareholders.  So, unless we think the Treasury has somehow outwitted them - an idea so far fetched it would have to be retrieved from the moon - the proper question to ask is:  how are Bradford & Bingley going to get value from a deal for Northern Rock assets?

The answer is obvious.  They'll take some of the best assets - the most reliable mortgages - at a low price.  We'll have a smaller liability but the range of assets that Northern Rock will be left with to pay off its massive debts to the taxpayer will be more than commensurately smaller.

This is particularly worrying thanks to the other big new Northern Rock story.  We've now guaranteed to wholesale lenders that they won't lose money on Northern Rock.  There are two important things to notice here:

1)  Taxpayers are now covering almost all the downside risk.  This is so close to nationalisation that the final taking of the bank into public ownership is increasingly of totemic, rather than material, importance.

Research into privatisation (PDF) for the Competitive Enterprise Institute by Eli Lehrer and Iain Murray seeks to redefine the concept of privatisation and nationalisation in terms of who bears the downside risk as the question "who will lose money if it goes under" is often more important to incentives and real control than nominal ownership.  If we accept Lehrer and Murray's analysis then Northern Rock is already pretty much nationalised.

2)  We've effectively been booted way down the queue of creditors looking to get paid in the event of Northern Rock going under.  When its assets are sold the wholesale lenders will now need to be paid, in order to satisfy the new guarantee, before we are.  With Northern Rock's mortgage book in doubt and plenty of existing claims on its assets - even before any Bradford & Bingley stripping - we should have very little confidence it will be possible to get taxpayers all of their money back.

All in all, the last forty-eight hours have brought a lot of worrying news for taxpayers.

Comments

[ATFlynn]

Well, whatever did you expect? Go back to LTCM., and then Enron. It was ever thus.
And don't forget that two of Arthur Anderson
employees or partners, are now members of the Labour Party and I believe, part of this Government.
Apart from that, a number of them work at the HM.Treasury and many other Government Departments. What you are seeing today, was presaged at that time. And it is not without indication that a financial services
melt-down will take place at the end of the first quater, April.
Not forgetting, that all the time Central Banks issue more money, Inflation steps up another yard. (sod those Metre's)
Oh yes! This does have one good point to it. The European Union Economy is now on the point of collapse. By the end of 2008, the Euro will be a thing of the past.
Now, to recover as best we can, the Taxpayers, that is the working Taxpayers, must take charge of all Taxation and Public Service Spending. Those silly Bumholes at Westminster and Whitehall should never, never, never again, get their creepy hands on your money. And only you, the poor bloody Taxpayer, should have the power to set the rate of Taxation and spending, in your Parish and Town Councils.
I have discovered a short cut to my postings on the internet. Just enter my e-mail address, " flynn354@btinternet.com " in the Yahoo search engine.
Regards, ATFlynn.