Northern Crock

The economic credibility of Gordon Brown\’s government has suffered a serious blow after the Chancellor was forced to announce the nationalisation of Northern Rock – the first time that a major high street bank has been taken into state ownership in modern times.

What\’s it been? 6 months of dithering?

Investors in Northern Rock, which has about 144,000 small shareholders, are likely to take legal action. Robin Ashby, from the Northern Rock Small Shareholders\’ Group, said: "I\’m shocked and appalled. Unless they come up with a fair compensation offer, the big shareholders are going to sue them."

That is to laugh. The shares aren\’t in fact worth anything. Absent the various guarantees that is. Darling is to value it thusly:

Chancellor Alistair Darling said an independent auditor would determine how much shareholders should get, but the bank would be valued as if it had not received any government support, indicating a minimal payout if anything.

Seems fair: the one group of people who really ought to lose money here are the shareholders. That\’s what the game is about, you earn the money if you investment prospers, lose it if it doesn\’t.

Whst do you reckon? 2p a share if they\’re lucky?

19 comments on “Northern Crock

  1. “Whst do you reckon? 2p a share if they’re lucky?”

    The Commissioner For Capital Valuations of the Office of Access To Fairness will no doubt come up with an “appropriate” number.

    We never actually got to see fair value for the business, because it was never put into administration, was it? That’s the problem with interfering further than the basic securing of deposits.

  2. They even messed this up.

    The Chancellor should have muttered something about the guarantees only being valid for another few months, panic ensues, shares fall to 2p, or 0.2p or even 0.02p, government then forcibly buys them at that price (market cap at that stage about £98.73). How can shareholders sue for a loss? The market value was 0.02p and they’ve received 0.02p?

  3. “The Chancellor should have muttered something about the guarantees only being valid for another few months, panic ensues, shares fall to 2p, or 0.2p or even 0.02p, government then forcibly buys them at that price”

    Yes he should have. Then we could have jailed him and associated cronies for insider dealing.

    The problem is that there is no “clean” share price on which to base a valuation: on any day the price has the varying fears of wholesale theft factored in.

  4. on any day the price has the varying fears of wholesale theft factored in

    I like your implication that “not bailing out a bunch of insolvent incompetents” == “wholesale theft”.

    [it’s a shame that Darling didn’t stand up when NR first started looking wobbly to say “we guarantee 100% of deposits, but we don’t care whether the bank fails”. But since he didn’t, this is definitely the least worst outcome…]

  5. “[it’s a shame that Darling didn’t stand up when NR first started looking wobbly to say “we guarantee 100% of deposits, but we don’t care whether the bank fails”. But since he didn’t, this is definitely the least worst outcome…]”

    Yes indeed. It is exactly what he should have done, and what is done in several other countries.

    “I like your implication that “not bailing out a bunch of insolvent incompetents” == “wholesale theft”.

    Well, let’s look shall we. First of all, shall we define insolvent? You are insolvent if you cannot meet your debts as they fall due. It’s a cash thing. You might have other assets, like a valuable painting, that can’t be sold until months after Sotheby’s are called in. So normally an administrator is appointed to stop you splashing cash, Sotheby’s are called in, and months later, after everything is washed up (and fees are taken) you get the remains of what the painting was worth.

    Now, if someone stepped in at the start and said “no, let’s not do the administrator thing, I’ll lend you the cash to pay the gas bill”, and then months later said “See that painting? that’s mine that is”, I think you’d have a fair case for using the phrase “wholesale theft.”

  6. normally an administrator is appointed to stop you splashing cash, Sotheby’s are called in, and months later, after everything is washed up (and fees are taken) you get the remains of what the painting was worth

    In this case, the government is going to compensate shareholders based on an independent valuation of NR without the government guarantee. That would appear to be the same as the above…

  7. “That would appear to be the same as the above…”

    No. An administrator that disposes of assets achieves a real price for them. A valuer makes a guess as to a fair (bzzzzzt, New Labour word alert!) value.

    No-one familiar with the way the Government acted over Railtrack will have any faith that shareholders of the Rock will be properly compensated.

  8. “how is ‘muttering something about withdrawing guarantees’ insider trading?”

    If you possess privileged information about a company not available to the public that would materially affects the share price, and you trade securities to exploit this, it’s an offence. If you created the information then it’s still an offence.

    Organisations can’t “mutter” about material facts (such as takeover bid or a lawsuit). There are disclosure rules to prevent someone distorting the market for shares in order to buy them cheap (or to talk them up and sell them expensively).

  9. “No. An administrator that disposes of assets achieves a real price for them. A valuer makes a guess as to a fair (bzzzzzt, New Labour word alert!) value.”

    …and you think that a firesale of mortgage loans at the height of a credit crunch would have achieved a better return for shareholders than the government’s actuarial valuation will manage? Had the administrator gone down that route, NR’s shareholders would have certainly been wiped out, along with a sizeable proportion of its bondholders.

    “No-one familiar with the way the Government acted over Railtrack will have any faith that shareholders of the Rock will be properly compensated.”

    Railtrack shareholders got 262p a share. That’s a hell of a lot more than they deserved, given that the core operating company’s liabilities massively exceeded its assets.

  10. “…and you think that a firesale of mortgage loans at the height of a credit crunch would have achieved a better return for shareholders than the government’s actuarial valuation will manage?”

    I have no idea, and quite frankly I don’t care. It’s a process that all shareholders should be familiar with. They voted in the management that traded the company in a risky way should there be a credit crunch, and should have either foreseen the risks (as pretty much most commentators and central bankers did) and sold their shares, or fired the management. Every other company in the land is subject to these rules, and I don’t see why Northern Rock should be exempt . Of course the depositors needed protection to prevent queues in the streets outside branches (of other banks).

    “Had the administrator gone down that route, NR’s shareholders would have certainly been wiped out, along with a sizeable proportion of its bondholders.”

    I don’t think the word “certainly” applies here, but either way, it doesn’t matter and I don’t care. The administrators would sell the bank for the best they could get, and in no case could the shareholders legitimately complain.

    I doubt very much that the bond holders would have lost significantly because of the value of the underlying mortgage book, but if they did receive 90p or 80p in the £ then, well, that’s why higher yields are achieved on corporate bonds vs. Government debt. It’s why you hold a portfolio of bonds, and it’s why there’s a warning “the value of investments can go down as well as up”.

  11. I doubt very much that the bond holders would have lost significantly because of the value of the underlying mortgage book, but if they did receive 90p or 80p in the £ then, well, that’s why higher yields are achieved on corporate bonds vs. Government debt.

    I haven’t created a financial model to investigate this, but I have this *teeny tiny hunch* that there might have been wider, rather bad consequences in the real economy had NR’s assets been sold below book value…

  12. “I haven’t created a financial model to investigate this, but I have this *teeny tiny hunch* that there might have been wider, rather bad consequences in the real economy had NR’s assets been sold below book value”

    The way that Italy’s economy tanked when Parmalat when down? Or that the US stalled when Enron exploded? Or the UK folded up its stall when BCCI went under?

    Depositors need special protection because they are financial naive and need to have faith in banks vs. mattresses. Professional investors do not need Governments to step in and underwrite their investments (although it’s nice if you can get it).

    Just remember, the book value is apparently £4.25/share. I think we can all understand why talk of 2p/share generates such anger.

  13. But don’t you think that the equity shareholders must carry some responsibility for Northern Rock’s failed business model? Were it not for the loans provided by the Bank of England and the guarantees by the government the bank would have passed into administration as insolvent.

  14. “But don’t you think that the equity shareholders must carry some responsibility for Northern Rock’s failed business model?”

    I think they carry a large share of it, in fact. Just as I put a large share of the blame for the current woes on the voters who put Tony Blair back into office knowing we’d have an(other) effing awful Prime Minister.

    “Were it not for the loans provided by the Bank of England and the guarantees by the government the bank would have passed into administration as insolvent.”

    Yep, that’s true. And it would be a better option: less whining for sure, and completely transparent. It’s still not too late. The company could put itself into administration. This would be the acid test: to see if the Government resisted this and wanted to still take it over. Then we’d know the true motives aren’t to protect or rescue a bank.

  15. Just as I put a large share of the blame for the current woes on the voters who put Tony Blair back into office knowing we’d have an(other) effing awful Prime Minister.

    Yup, I’m sure Howard and Letwin would have done a much better job, given their proven track records of competence and courage.

  16. “Yup, I’m sure Howard and Letwin would have done a much better job, given their proven track records of competence and courage.”

    I can merely paraphrase Tim (and many others) that the essence of democracy is throwing the current lot out. It matters little what the new lot will do if you never throw out the current pile of dirty nappies.

  17. It’s a distressingly familiar argument that the incumbent government is the best available because the alternative was even worse. That was precisely the consideration which led to Hitler being offered the Chancellorship in Germany in January 1933.

    In the election of November 1932 in Germany, the Communist Party had attracted the second largest number of votes compared with the National Socialist German Workers’ Party – the Nazis.

    In the case of Blair, between the elections of 1997 and 2005, he lost 4 million votes and half the membership of the Labour Party. The turnout at the 2005 election was the second lowest since 1918, the turnout in the 2001 election having been marginally lower. The Labour Party promptly claimed that the re-election of a Labour government for a third consecutive term was a historic achievement while quickly sweeping the other facts under the mat in case anyone noticed.

    The Blair government will forever go down in history as the government where one of its information officers sent an e-mail round after the attacks on America on 11 September 2001 saying that was a good day for burying bad news.

    Btw like millions of others, I didn’t vote in the elections of 2005.

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