Treasury to take Rock stake
Gordon Brown's decision to provide a Government-guarantee for up to £25bn of new Northern Rock bonds means something startling.
The prime minister is promising that the taxpayer will finance the bank for five years or until markets recover enough to allow it to stand on its own two feet again.
Make no mistake, there is an element of nationalisation in this.
If Sir Richard Branson, or Olivant, the company itself or any other potential rescuer agrees to do a deal on this basis, the risks at Northern Rock would be shared between the owners of the business and the taxpayer for many years to come.
It would be a public-private partnership, or a partial nationalisation, depending on your point of view.
In fact, I expect the Chancellor to say on Monday that the Government may end up owning a piece of the Rock -- though initially it will probably take an option on shares, via what are known as warrants.
It would make sense for the public sector to end up with a stake in the Rock.
Because if we as taxpayers were to shoulder many of its business and financial risks going forward, surely we should be rewarded with any future gains - if there turn out to be any.
Alistair Darling will also say that he'll decide which of the rescue plans, if any, will be agreed -- and that the Rock's board and shareholders will become almost bystanders
Why this sudden determination to take charge? Well he's the one with the money -- provided by all of us as taxpayers -- that the rock so desperately needs.
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It seems to me that the government - if the stories are correct - is going to come out of this quite well. There's a definite element of disappointment in many commentators stories today.
There is another way of doing this and that is for some or all of the interest due to HMG to be placed into the hands of a "Custodian" alongside the assets owned by shareholders.
Not difficult, bearing in mind that a charity already owns 15% of the Rock, and another nominally owns the £50bn assets in the Granite SIV.
Using an LLP as a framework HMG and Northern Rock's existing shareholders then simply share proportionally in the net profits, or net losses in respect of the augmented capital which constitutes the equity in the LLP.
It's not Rocket Science is it? And since it's Equity - albeit in an LLP - not debt, there is no PSBR embarrassment either.
In fact, conceptually this "Capital Partnership" is actually what Islamic Financiers call "musharakah" so Goldman shouldn't have too much difficulty flogging his "units" in the LLP in the Gulf either...
There is another way of doing this "Public/Private Partnership".
All interest due to HMG is routed to a "Custodian" which will also hold all the other Rock assets, which belong to shareholders.
Let's face it, we're half way there already, since 15% of Northern Rock is owned by a charity, and all of the £50bn Granite SIV assets are also nominally held by another.
In this way we augment the "Default Pool" of resources/ regulatory capital there which takes the hit of defaults.
Using an LLP as a framework HMG and Northern Rock's existing shareholders then simply share proportionally in the net profits, or net losses.
It's not Rocket Science is it? And it's essentially Equity in an LLP, not debt (so no PSBR embarrassment either, Gordon.
In fact, conceptually this "Capital Partnership" is actually what Islamic Financiers call "musharakah" so Goldman shouldn't have too much difficulty flogging his "units" in the LLP in the Gulf either...
For many years, the government owned a substantial slug of BP. There have been times when BP has not been the world's greatest company, but in the end the stake proved profitable.
Eventually, the housing market in this country WILL recover. The banks WILL start lending to each other again. Financial governance WILL be changed to make sure that the sub prime disaster we have witnessed will not recur. At such time, the government stake can be sold off at a profit as BP was.
In the meantime, one cannot help but think that those who invented and ran the business model of the Northern Rock should be called to account and so should the FSA bosses who let the Rock sleepwalk into disaster
We seem to be between a Rock and a Hard Place.
The Government can keep the Rock and run it themselves - we all know that this is not a core competency.
They then have an option of having a great marketing team to re-brand and re-vitalise the Rock - but it's a hard place because they have to take some risk.
I'm all for the hard place, Virgin may make Banking fun and have a track record of making business's successful. They may also make some money for all of us - but I wouldn't hold my breath.
Robert - tomorrow we may have defining moment in British history ?
This part-ownership will only benefit us taxpayers if (i)the contract is tight enough to prevent the private partners from wriggling out of their part of the deal - whatever happens (ii) the economic future starts looking up - what's happening with the US 'recesion'? (iii)any rewards that are realized do actually get ploughed back into public services for the people who need it most.
How many years ahead are we looking at? Is it possible that a new/different government might change the rules in future?
Too many unknowns.
All things considered I feel the bank should be nationalised outright. That way the Govt has full control and avoids any partnership complications or conflicts down the line.
I have only just discovered that staff at Northern Rock got a £200 plus 2% of annual pay as a christmas bonus. As well as a 4% pay rise...
What about the Police Officers? Can this government not backdate a payrise back to September?
I think Gordon Browns slightly miffed that his economic policy has gone to rats**t and is trying to save a bank that through its own ineptitude, failed to look after its cash properly.
If Brown's travel partner - you know who - ends up being successful, it would be an absolute scandal.
Much meretricious tosh has been written all along about this debacle. Sensationalist journalism - alas, not least from Mr Peston - by many who quite obviously are grasping for some thread of truth.
Virgin have had absolutely nothing to do with Goldman's proposals. 'Other organisations' who do not rely so heavily on overpowering PR machines have been working extremely hard for weeks to make the Goldman proposals viable.
Now that Brown has accepted these proposals, lo and behold Branson steamrollers in and starts knocking on the doors of these 'other organisations' (no, I won't name them). The stuff his press office is now churning out is nothing short of pathetic!
The package that's right for the Government, NRK staff and NRK shareholders must be allowed to win the day. If the Virgin deal's not up to the task, let's not let some bucaneer's bravado succeed just because he's great mates with the PM.
Why this sudden determination to take charge?
Hopefully because he has stepped back and taken a long hard look at the pile of poo he finds himself in charge of on our behalf.
Do you think Alistair Darling would lend me £5bn to save Jaguar and LandRover and so preserve the reputation of British engineering?
Difficult decision isn't it? Save a bank that's helped drive up house prices or keep a world class engineering company in UK hands.
In fact it would make a great trade off. Let Virgin or whoever take NR so saving the City's reputation provided the City agree to cough up to buy Jaguar and LandRover as well.
Beginning of the end or the end of the beginning?
Banks are allowed to have huge amounts off the balance sheet - in other words hiding a major part of their profit and loss from shareholders, the public and the government.
Makes me wonder which bank will be the next Northern Rock.
What about the future for NR? The much maligned 'business model' was deemed to be at fault. Has it now been corrected or are we throwing good money after bad?
Of Alastair Darling, Robert says "Well he's the one with the money -- provided by all of us as taxpayers -- that the rock so desperately needs."
Surely that is factually incorrect?
As I understand it, the BoE conjured this 'taxpayers money' up out of thin air, because it is within the Banks remit to be able to do precisely that.
Somebody tell me I am wrong.
It would be most enlightening to see what has been happening at the operational level at the Rock during the last twelve weeks or so. At the moment we do not know the level of retail deposits still left in the company. How many new mortgages have been agreed using taxpayers funds to finance them? Is the company sliding ever deeper into negative territory? As a taxpayer I do not want to provide one penny to shore up this company. Why should it be allowed to compete against more prudent financial institutions which did not have a reckless business model. How much have we had to pay Goldman Sachs to come up with some financial alchemy to get Mother Brown off the hook? One further question. Will Mother Brown guarantee that all taxpayer funds given to the Rock will be paid back in full? Yes or no.
Sticky Northern Rock
There are only 3 possibilities available for a situation like Northern Rock's ~ Privatisation, Nationalisation, or Liquidation.
The rumours sweep us from Privatisation to Nationalisation and back to Privatisation again. Why isn't Liquidation on the Government's list?
If the desire is to recover the Taxpayers' loans and relieve us of the oh-so-hasty guarantees, then liquidation would be the obvious choice.
Unless, of course, there is a doubt about whether there are assets enough to meet all the liabilities. If that is the case, then it would explain why the problem is still here, and sticking to Brown and Darling.
WHEN NRK is re-floated - is the same investor pool whose capital is being bandied about with so little regard be expected to subscribe to a new IPO?
The share holders were not briefed the liquidity of NRK was so poor - though it seems the institutions were, the BoE, the FSA and the treasury.
How did a company that was capitalised at floatation at 2 billion manage to finance up to 55,000,000,000 GBP.
Even the most basic credit score would self destruct on those calculations.
Lamenting Citi Group, Merry Lynch, UBS and others for the mis-judgement of the US property mortgage business and the write downs they have made - are as nothing to the UK executive team in the BoE and the treasury to lend an insolvent business 10 times its capital with dubious asset security. The loans may be worth nothing if the UK property market follows the UK defaults on mortgage business.
Managing cash and money is a key core competency expected from a democratic government.
can't we just sell it off to some middle eastern fund
Re: 11. 'preserve the reputation of British engineering' and
'keep a world class engineering company in UK hands'
===================================
Ford, an American company, owns Jaguar and Land Rover (albeit not for much longer). For the record, Ford bought Jaguar in 1989; it bought Land Rover in 2000 from BMW, which is German.
Also, Jaguar was a bit of a mess before Ford took over. Bill Hayden, the Ford executive in charge of Jaguar in the 1990s, said the plants were almost the worst he'd ever seen, beaten only by one in the Russian city of Gorky where workers painted over bird droppings that landed on a car roof!
Thus your point falls over on both counts... (that is, if it ever managed to stand up in the first place!)
Winners - bankers and friends of brown ie branson. losers the tax payer. everything else including this debate on the forums is hot air.
If the private sector is to be present in NR then it is vital that taxpayers are rewarded for taking the risk by retaining a commensurate equity interest. Given an adequate slice of the possible reward, in exchange for the risk taken, taxpayers and new investors should have no cause for complaint. Too often in the past the taxpayer has been ripped-off by smart investment bankers.
Why is tax payers money being used on this at all ? Banks need to fail from time to time. If they dont banks assume that they can do anything investment wise and will always be bailed by the government.
The best commerical offer should be accepted. If there is no best commercial offer the bank should be allowed to fail.
Anything else distorts behaviour. If doing bad things doesn't hurt people will keep doing bad things.
What everyone seems to be forgetting is that the BoE lending to Northern Rock is secured on its assets (mortgages). So, presumably, would any Bonds be. These mortgages are basically sound. (Not like the US sub-primes.) so the risk taken by HMG is small. The reason LIBOR and the cost of three month money went up to unaffordable rates was not that NR could not offer good security, but that banks needed to hoard cash to cover their own exposure to the US sub-prime market.
Why the government is so reluctant to nationalise Northern Rock seems crazy, they've loaned them billions already and will now retain the risk even if they find a private buyer. The government is surely missing a trick as they already own National Savings & Investments, so why not nationalise Northern Rock rebrand as NS&I and then gain the benefit of promoting their products through a network of branches? But of course, those making the decisions are politicians not business people so we know by now not to be surprised when they make a mess of things!
the chancellor says this deal best protects the taxpayer? how? if the taxpayer is still exposed, how can this be a protection?
I'm constatntly hearing that Northern Rock has a "High Quality Mortgage Book".
I'm surprised that this has gone largely unchallenged in the media.
Aren't Northern Rock the lender who were taking on massive numbers of high LTV mortgages in the market just as the housing market was reaching it's peak?
How are all those 90% - 125% LTV mortgages going to look if house prices fall by 20% (relatively modest by some estimates). What percentage of NR mortgagees will this push in to negative equity?
So what do the "experts" know about the mortgage book that makes it such high quality?
Hmm.... so he's agreed buy and sell pieces of paper at an agreed date in the future, with borrowed money. And you're saying all we need are a few moe controls and everything will be hunky dory? Can anyone else not see the inherent madness of this situation.