When Northern Rock went into crisis in September 2008, many called for its nationalisation. Now, as the bank’s problems continue, there is a chorus for nationalisation from a number of leading economists and government figures, but for temporary nationalisation, after which the bank would be handed back to the private sector.
Opinion is divided among economists and politicians. Former treasury minister Geoffrey Robinson said Northern Rock should be brought into public ownership if a sale cannot be agreed; leading Liberal Democrats called for its nationalisation. A Financial Times editorial said that nationalisation would be better than “lending to a rump Northern Rock against bad collateral, financing a rescue without charging a penalty interest rate, or subsidising a bidder”.
These reactions stem from shock at the bank’s recent actions and fear of what is to come and the outrage it will create. Northern Rock borrowed £22 billion of public money in the last two months only to now attempt to sell off the profitable parts of the company and leave its debts to the public purse in an unprofitable “zombie fund”. £24 billion of public money will have been loaned by the end of this year – equivalent to around £900 for every UK tax payer, or double the annual primary school budget, or 30 millennium domes. But the total risk to public money is around £40 billion – more than the UK annual defence budget, because the government guaranteed savers’ deposits as well as making very large loans.
Northern Rock has recently asked for bids from prospective buyers and private equity firms. However, none of them want to buy without a commitment from the government to continue to loan public money beyond next February, and at non-penal interest rates. They have also been waiting to see if the government will even waive the £2 billion interest now owed to the government treasury by the bank.
Gordon Brown refused to comment in parliament on whether some of this debt would be waived, citing “commercial confidentiality”. New Labour ministers are doing all they can to resist nationalisation. On TV programme Newsnight, chairman of the treasury select committee, Labour’s John McFall, argued: “London is a financial centre ‘ that rivals New York. I don’t think it would be good if we nationalised a bank. It would send out the wrong signals”.
The aim of potential investors will be to get most of the debts and potential losses written off by public money or hived off into a “zombie fund”, and then make massive profits out of the remainder of the bank in coming years. Some private equity chiefs even started buying Rock shares soon after the crisis first hit, in order to capitalize the situation later.
A layer of senior, highly payed figures have already benefited from Northern Rock. For example, chief executive Adam Applegarth, he will leave with a £2 million pension, which will give him over £300,000 a year from the age of 55. It has recently been revealed that he made £2.6 million more for himself over the last two years through selling his own shares in Northern Rock when the price was high, while at the same time telling employees and small investors to put their money into the company.
The government claims that the public money ploughed into Northern Rock is safe, because the bank has £50 billion of mortgage assets. But these ‘assets’ depend on the mortgage holders being able to repay their mortgages and on the value of their properties holding up. They may not turn out to be worth the balance sheet figure.
Nationalisation is the only way to safeguard the public money put in and to guarantee the jobs of Northern Rock’s employees. As the economy heads towards a deeper general crisis, the particular crisis of Northern Rock could hit any of the other major financial institutions, or indeed any of the major companies that ordinary people rely on for goods, services and jobs.
Compensation should only be paid on the basis of proven need. Why compensate highly payed directors and shareholders for their greed, exploitation and failure? Only workers’ pension funds should be safeguarded and small investors who depend on their share income. A nationalised banking system could not only guarantee savers’ deposits and bank workers’ jobs, but could also offer very low interest rates to mortgage holders and small businesses.
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This post was written by Christopher Vasey