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News - 25 November 2007

Northern Rock – mercy killing imminent?

There are only three options for the troubled bank and none of them are particularly palatable but one or other needs to be applied quickly. The ongoing uncertainty is bad for the business & financial services sector. A sector that employs over a quarter of Brighton & Hove’s workforce.

The bank that six months ago was the UK’s fastest growing mortgage lender with a share price over £12 has now collapsed to a bottomless pit swallowing vast quantities of public money with an official share price of less than a £1 and a realistic share price that is negligible.

European rules mean that the Bank of England can only go on propping up the bank with public money until March 2008.

The continuing fiasco is in danger of undermining confidence in the financial system and is piling up the debt owed to the taxpayer from funds pumped into the institution by the Bank of England. So far the bill to the taxpayer is £24bn and rising.

One option for Northern Rock is to sell it to another institution or fund that could repay the debt and restructure to salvage what still works. The 145,000 shareholders would lose practically all of their investment but this option would keep some of the bank’s 5,500 jobs (most based in Newcastle – one of the most deprived areas of the UK) and the loss to the taxpayer would be minimised.

Unfortunately buyers are thin on the ground and the couple that are interested insist on the Bank of England underwriting any deal thus reducing the risk to the purchaser but increasing the risk to the taxpayer.

Another option is to force the bank into liquidation which would immediately freeze deposits for weeks or even months and would almost certainly be the catalyst for runs on other banks as consumers decided that their money was safer under the mattress. The assets of Northern Rock would also be highly likely to be sold quickly for far less than they are worth.

The final option would be to nationalise it, which would not be difficult given that the state effectively already owns a significant part of it. It could then be run down in an orderly fashion over a period of time possibly waiting until the markets had improved.

This option is not without its drawbacks. The government might be tempted to keep inefficient parts of the bank running to protect those jobs in Newcastle and the turmoil in the financial markets may get a lot worse before it gets better prolonging state ownership.

Whatever happens Northern Rock is dead. The government will probably announce this week what it intends to do with it and any of the options is better than the status quo.

Read related items on:
Business Services
Bank of England
Northern Rock

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