Northern Rock (plc) nationalised

[Francesca R]

http://news.bbc.co.uk/1/hi/business/7249575.stm

Probably the least bad decision. Not great for Brown to see a wheel come off the wagon he spent a decade building, or meddling with (the regulatory architecture, I mean).

I assume shareholders will get nothing, not that they had much left anyway.

I think the correct thing for the government to do is close the bank to new business.

The privately funded rescue schemes were all hoping to make money out of the taxpayer. As one of those taxpayers, I didn't relish subbing Richard Branson's latest venture much.

[Rolfe]

Did you see Dispatches on Channel 4 this evening. Blamed the entire British banking fiasco on Gordon Brown, and not without some fairly compelling evidence. I don't think he'll be using any of that as a PPB any time soon.

Cameron might, though....



So might Salmond....

Rolfe.

[JonWhite]

Yeah, Dispatches certainly made for interesting viewing.

Brown's meddling allowing for a complete lack of worthwhile regulation and that they (Gov, FSA, etc) were warned of the Rock's inevitable decline yet prefered to keep their heads in the sand was damning stuff.

I wonder if the next proposed round of hits due to the circular insurance scams that the programme stated as due will really be as deeply damaging as claimed? Other than the Rock, all the other banks that have been hit appear to have managed to weather their huge losses OK thus far - that they're making such vast profits that they can do so is pretty gob-smacking in itself.

[Soapy Sam]

Personally, I believe it should have been allowed to sink or swim.
If it went under, it went under. If it took a chain reaction of banks with it, so it goes.

The free market is either free , or it is not.
Choose one.

[Francesca R]

Personally, I believe it should have been allowed to sink or swim.
If it went under, it went under. If it took a chain reaction of banks with it, so it goes.A bank run you mean? People who never even banked with them losing their life savings because of Northern Rock's flawed business model? Would you have emptied your bank account?

The free market is either free , or it is not.
Choose one.Why "choose one"? Anyway, please point out a banking system anywhere which is free. None of them are.

[Soapy Sam]

Then they damn well should be.
Bank runs don't destroy banks. Poor business decisions do that. The run comes at the end and few people in the queue get what they are owed anyway.

People lose their savings all the time because businesses collapse. Once government sets a precedent of bailing out one business, why in hell should anyone else worry about whether they go bust?

Would I have emptied my account? Of course I would if I had the chance. That's a perfectly rational course of action. Stop lending to a business that is dead in the water. The British government had the chance to make that decision and has chosen otherwise. I think they have made a serious error. Let's hope I'm wrong.

[Francesca R]

Then they damn well should be.What are you referring to? That banking should not be regulated? That's preposterous.

Bank runs don't destroy banks. Poor business decisions do that. The run comes at the end and few people in the queue get what they are owed anywayI don't agree. Confidence in the security of banking is a public good, which can not be provided by any individual institution and which has to be provided by all of them collectively under the implicit guarantee / insurance of a lender of last resort. Yet any one institution, if it is large enough, has the ability to undermine confidence in the whole system. If Northern Rock's depositors had not had their savings guaranteed by the government, the bank would probably have been insolvent after another couple of days and many savers would be out almost their entire account balance. Then everyone who saves elsewhere would have seen a big bank default to its customers and this would have triggered self-fulfilling fears of default by other banks too.

While poor business decisions were the original cause of Northern Rock's undoing, the excessively adverse negative consequences they could have led to in the banking system generally, if allowed to propagate unchecked, justified government intervention. I am speaking of the deposit guarantee made last September here, not necessarily every other machination the government has made to try to resolve the situation to its liking.

People lose their savings all the time because businesses collapse.You're probably talking about the shareholders here. That is a different subject to the bank defaulting to its depositors, who are not the owners of the business (unless it is a mutual society, but NR wasn't). Bank deposits are not supposed to carry a risk of default beyond the miniscule. If they had the same risk as shares then many more people would not save with them. Large banks do not collapse all the time.

Once government sets a precedent of bailing out one business, why in hell should anyone else worry about whether they go bust?Again, the government is not bailing out the owners of the business, except slightly and indirectly because they would have lost everything last September, rather than almost everything today.

Would I have emptied my account? Of course I would if I had the chance. That's a perfectly rational course of action. Stop lending to a business that is dead in the water. The British government had the chance to make that decision and has chosen otherwise. I think they have made a serious error. Let's hope I'm wrong.I was alluding to contagion. If the flight of NR savers had not been arrested, the "rational course of action" would have been for depositors with all other banks to rush to withdraw too.

[ponderingturtle]

People lose their savings all the time because businesses collapse. Once government sets a precedent of bailing out one business, why in hell should anyone else worry about whether they go bust?

So businesses that you don't invest in should be able to make you lose your entire savings?

[Soapy Sam]

What are you referring to? That banking should not be regulated? That's preposterous.
No. That they should be free to fail.

I don't agree. Confidence in the security of banking is a public good, which can not be provided by any individual institution and which has to be provided by all of them collectively under the implicit guarantee / insurance of a lender of last resort. Yet any one institution, if it is large enough, has the ability to undermine confidence in the whole system. If Northern Rock's depositors had not had their savings guaranteed by the government, the bank would probably have been insolvent after another couple of days and many savers would be out almost their entire account balance. Then everyone who saves elsewhere would have seen a big bank default to its customers and this would have triggered self-fulfilling fears of default by other banks too.
Agreed. I still think it should have been allowed to fail. Either we believe in the invisible hand, or we believe in central control by government. Which?


You're probably talking about the shareholders here. That is a different subject to the bank defaulting to its depositors, who are not the owners of the business (unless it is a mutual society, but NR wasn't). Bank deposits are not supposed to carry a risk of default beyond the miniscule. If they had the same risk as shares then many more people would not save with them. Large banks do not collapse all the time.
You must bank with a different company from me. I see no guarantees , in any of their documentation, of 100% security.

Again, the government is not bailing out the owners of the business, except slightly and indirectly because they would have lost everything last September, rather than almost everything today.
And someone else would have profited. That's how life works.

I was alluding to contagion. If the flight of NR savers had not been arrested, the "rational course of action" would have been for depositors with all other banks to rush to withdraw too.
See above. I'm not arguing with your thinking. I just disagree with the conclusion. Chacon a son gout.

So businesses that you don't invest in should be able to make you lose your entire savings?
They ARE able to. That's a fact of life. Some do it by competing with your favoured organisation, some do it to themselves through sheer inefficiency.

I'm not saying it's good. Just that it happens.

[Francesca R]

No. That they should be free to fail.I agree with that and think Northern Rock pretty much has failed (although this is not clearly the government's intention). I think it should have been nationalised and wound down sooner.

Agreed. I still think it should have been allowed to fail. Either we believe in the invisible hand, or we believe in central control by government. Which?It's not either/or. Adam Smith didn't think so either. What makes you think that state protection and free competition cannot co-exist? If you truly believe in the invisible hand I contest that you should disagree with limited liability also.

You must bank with a different company from me. I see no guarantees , in any of their documentation, of 100% security.The government stepped in to guarantee all Northern Rock's depositors' funds on 17 September.

And someone else would have profited. That's how life works.Hence, the government is not bailing out shareholders. The shares have lost 95% of ther value in a year and are currently suspended.

See above. I'm not arguing with your thinking. I just disagree with the conclusion. Chacon a son gout.What exactly are you disagreeing with? It seems that you do not think that the state should insure deposits placed by members of the public into the banking system, but you don't come out and say it. In fact it is because the insurance provision in the UK has been actually very partial (low) that the Northern Rock affair precipitated its customers to flee for the exit. That was a public bad. It is the kind of thing that can start depressions. Do you really think that it that would be a price worth paying to avoid the cost taxpayer-funded deposit insurance?

[NeilC]

No. That they should be free to fail.

Agreed. I still think it should have been allowed to fail. Either we believe in the invisible hand, or we believe in central control by government. Which?



This is a false dichotomy. I believe in something in between as do the governments of most democratic nations. Why would you go for either extreme when various combinations are workable?

I think people need confidence in banking. The average person is in no position to analyse a bank's finances and work out how risky they are as a place to keep their money. This surely is the job of the FSA. The last thing we need is a run on the banks - a potentially ruinous yet avoidable price to pay.

[Soapy Sam]

I disagree with the conclusion that because the collapse of a financial institution would be a BAD THING for the British financial service industry, it is the responsibility of central government to support that institution using funds which belong to the taxpayers they purport to be working for.

I disagree that the government has any business at all deciding that salvage plans proposed by actual businessmen are unacceptable. I think the people who operate banks should be allowed to sink or swim just like anyone else. (And yes, that includes the customers. Banks publish annual reports. If you can't be bothered to read them, then maybe you shouldn't bank with them.)

If a corner shop runs out of money, it goes bust. If the British Steel Industry, the British Shipbuilding Industry and the British Coalmining Industry can be allowed to die because they were purportedly unprofitable, why should a bank be any different?
Is it remotely possible that the difference has more to do with bankers having more in common with politicians than people who dig coal?

[ponderingturtle]

It's not either/or. Adam Smith didn't think so either. What makes you think that state protection and free competition cannot co-exist? If you truly believe in the invisible hand I contest that you should disagree with limited liability also.

Which would be interesting in this case, the account holders would go after the investers assets.

[ponderingturtle]

This is a false dichotomy. I believe in something in between as do the governments of most democratic nations.

Well if you use the standard Soapy is there are no democratic nations, but various forms of republics at best. True dirrect democracy is not practiced anywhere I am aware of.

[NeilC]

Well if you use the standard Soapy is there are no democratic nations, but various forms of republics at best. True dirrect democracy is not practiced anywhere I am aware of.

I don't think this is pertinent to the discussion.

[Francesca R]

I disagree with the conclusion that because the collapse of a financial institution would be a BAD THING for the British financial service industry, it is the responsibility of central government to support that institution using funds which belong to the taxpayers they purport to be working for.It is a widely held belief that the damage would extend beyond the financial sector if a bank failed taking customers' deposits with it.

I disagree that the government has any business at all deciding that salvage plans proposed by actual businessmen are unacceptable. I think the people who operate banks should be allowed to sink or swim just like anyone else. (And yes, that includes the customers. Banks publish annual reports. If you can't be bothered to read them, then maybe you shouldn't bank with them.)Quite the contrary, if firm is licensed by the regulatory bodies in the UK to operate as a deposit taker, I require a level of government-backed safety if I place a deposit with them. I do not want to be reading annual reports. By the way, I don't think Northern Rock's report would have said "We're coining it in right now but if something comes out of left-field to increase interbank LIBOR spreads by more than 50 basis points for a few months then we're fooked". I believe your caveat emptor logic is appropriate for equity investors in the bank but not banking customers. The positive externalities of a solvent and liquid system of financial disintermediation by deposit-taking banks are so great, and the negative externalities of a confidence crisis so adverse, that I believe the state providing the architecture and an adequate level of deposit protection is the only workable way to go.

If a corner shop runs out of money, it goes bust. If the British Steel Industry, the British Shipbuilding Industry and the British Coalmining Industry can be allowed to die because they were purportedly unprofitable, why should a bank be any different?
Is it remotely possible that the difference has more to do with bankers having more in common with politicians than people who dig coal?No. It's because if a corner shop goes belly-up, that does not cause customers at Sainsbury's down the street, or Mr Oza's Food & Wine round the block to drop their shopping baskets and run away.

By the way, those industries you mention have certainly received state support in the past.

[NeilC]

I disagree with the conclusion that because the collapse of a financial institution would be a BAD THING for the British financial service industry, it is the responsibility of central government to support that institution using funds which belong to the taxpayers they purport to be working for.


That surely depends on how bad a thing it was and the effects it has. If it led to a complete collapse of confidence in british banking and regular runs on banks everytime there is a profit warning then you might come to a different conclusion.


I disagree that the government has any business at all deciding that salvage plans proposed by actual businessmen are unacceptable. I think the people who operate banks should be allowed to sink or swim just like anyone else. (And yes, that includes the customers. Banks publish annual reports. If you can't be bothered to read them, then maybe you shouldn't bank with them.)


I don't know the details of the salvage plans. If they were good then that would be the preferred method but did they guarantee savers' money? It's not a matter of the people who run banks being allowed to sink or swim, it's a matter of whether you leave savers (who might be ex coal-miners btw) in that same state. I think it's ludicrous to expect normal people to be able to understand annual reports to a useful degree. Annual reports are no guarantee of a complete picture anyway.


If a corner shop runs out of money, it goes bust. If the British Steel Industry, the British Shipbuilding Industry and the British Coalmining Industry can be allowed to die because they were purportedly unprofitable, why should a bank be any different?
Is it remotely possible that the difference has more to do with bankers having more in common with politicians than people who dig coal?



Since when did the corner shop industry involve people's savings? Hardly a relevant comparison. Coal-mining doesn't rely on trust. Banking does. No I don't think your implied class-war cause is remotely possible.

[Jekyll]

Is it remotely possible that the difference has more to do with bankers having more in common with politicians than people who dig coal?

Coal mines go bust because there is too much coal in the market, and they're no longer needed by the consumer.
When banks go bust they're still needed, they still owe everybody money that people want back.They're just trying to pay out more than is going in.
The government isn't stepping in to protect bankers, it's stepping in to protect the people that the bankers owe money to.

[Soapy Sam]

It is a widely held belief that the damage would extend beyond the financial sector if a bank failed taking customers' deposits with it.
I don't doubt it.

I don't think Northern Rock's report would have said "We're coining it in right now but if something comes out of left-field to increase interbank LIBOR spreads by more than 50 basis points for a few months then we're fooked".
I think here you are getting close to the important question. What in hell were all the regulatory bodies and the government doing while the banks piled up profits from castles built on sand?

I believe your caveat emptor logic is appropriate for equity investors in the bank but not banking customers. The positive externalities of a solvent and liquid system of financial disintermediation by deposit-taking banks are so great, and the negative externalities of a confidence crisis so adverse, that I believe the state providing the architecture and an adequate level of deposit protection is the only workable way to go.
Fair comment. Is this not the big question though? What level of government intervention is appropriate? How can government guarantee anything? And why, if government is to be the arbiter, did it not whip institutions like this in far earlier?


By the way, those industries you mention have certainly received state support in the past..
Indeed so. Then it was pulled. Either one, or both policies was therefore wrong , or both were right at different times, or both were wrong at different times. If the decision is made on a purely financial basis rather than (say) a long term strategic one, then it is correct to pull support of non profitable industries, irrespective of the social devastation resulting in the areas concerned. Why reverse this policy for a bank? It might be that the present gummint values a reliable supply of money more highly than previous gummints valued a supply of steel or coal. Or it may be that bankers have more effective clout in the corridors of power. I can't recall a retired cabinet minister recently taking a post as night shift forman in a pit, but maybe I'm just a grouchy old cynic.

That surely depends on how bad a thing it was and the effects it has. If it led to a complete collapse of confidence in british banking and regular runs on banks everytime there is a profit warning then you might come to a different conclusion.
No, I wouldn't because I see it as a matter of principle, but I can get pig headed at times, like anyone else. I'm sure you are right that the severity of any such chain reaction was paramount in the decision , but everyone involved would have a different point of unacceptibility. Mine is just more extreme than most.


Aside- Anyone else finding that posts don't post when you hit the button? The wee dots just keep going round. I have to back out of the thread then come in again and sometimes the quotes are there and sometimes not. DARAT! I demand we nationalise this board!

[Francesca R]

The government isn't stepping in to protect bankers, it's stepping in to protect the people that the bankers owe money to.Not even all creditors. Just depositors. If Northern Rock eventually stops trading and goes into administration having not paid for toilet paper for its staff toilets, I don't think the supplier will get a government cheque.

[Rolfe]

I(And yes, that includes the customers. Banks publish annual reports. If you can't be bothered to read them, then maybe you shouldn't bank with them.)


I don't think that's fair. Have you been following shpalman's refutation of Lionel Milgrom's "quantum metaphor for homoeopathy"? There is no hope in hell I would ever be able to understand what he's saying. My brain isn't built that way.

Ditto an annual report.

And I'm held to be reasonably intelligent, and my day job involves poring over columns of numbers and making sense of them. What hope has Joe Bloggs with his nest-egg?

I think here you are getting close to the important question. What in hell were all the regulatory bodies and the government doing while the banks piled up profits from castles built on sand?


Very, very good question. If you didn't see the Dispatches programme I mentioned above, go find it.

Rolfe.

[geni]

I think here you are getting close to the important question. What in hell were all the regulatory bodies and the government doing while the banks piled up profits from castles built on sand?

Leaveing to build castles on the sand. The turnover rate at the FSA is impressively high.


Indeed so. Then it was pulled. Either one, or both policies was therefore wrong , or both were right at different times, or both were wrong at different times. If the decision is made on a purely financial basis rather than (say) a long term strategic one, then it is correct to pull support of non profitable industries, irrespective of the social devastation resulting in the areas concerned. Why reverse this policy for a bank?

Describeing northern rock as non-profitable is kinda questionable. If you can borrow at the kind of rates the UK goverment can it has the potential to be highly profitable.

[Francesca R]

I think here you are getting close to the important question. What in hell were all the regulatory bodies and the government doing while the banks piled up profits from castles built on sand?This is where most of the criticism has been levelled at Gordon Brown, who changed the regulatory structure on day 2 of Labour's entry to power in May 1997. Specifically, the Bank of England was relieved of the responsibility to supervise banks, the Financial Services Authority was given that responsibility, but the UK Treasury alone had the authority to intervene in a banking crisis. The FSA screwed up by not being bothered enough about the effective leverage that Northern Rock routinely ran (which was a lot higher than other large banks). In addition, the UK's deposit protection arrangements (of which the FSA is guardian) are not very generous and apparently take a very long time to spit out compensation. The implications of this is that if there is a confidence shock then it is that much harder to convince the UK public that they don't need to empty their accounts.

In short the regulators ********** up. But this is a reason for effective regulators, not to delegate responsibility to individual customers (who, as Rolfe points out, should not be expected to study annual reports, which in any case are largely investor-relations documents that have an incentive to hide risks rather than disclose them)

Fair comment. Is this not the big question though? What level of government intervention is appropriate? How can government guarantee anything? And why, if government is to be the arbiter, did it not whip institutions like this in far earlier?A taxpayer-backed guarantee of deposits, which is what chancellor Darling announced in September, is--I think--a very precarious thing to do and it carries large moral hazard. But by the time this became necessary I think the government was backed into a corner and there is nothing else they could have done. At that point, it was the right decision absolutely, but they deserve much censure for getting to that point.

Indeed so. Then it was pulled. Either one, or both policies was therefore wrong , or both were right at different times, or both were wrong at different times. If the decision is made on a purely financial basis rather than (say) a long term strategic one, then it is correct to pull support of non profitable industries, irrespective of the social devastation resulting in the areas concerned. Why reverse this policy for a bank? It might be that the present gummint values a reliable supply of money more highly than previous gummints valued a supply of steel or coal. Or it may be that bankers have more effective clout in the corridors of power. I can't recall a retired cabinet minister recently taking a post as night shift forman in a pit, but maybe I'm just a grouchy old cynic.On a purely financial basis, society was better off by the government guaranteeing Northern Rock's deposit base on 17 September than it would have been if they had not. But in any case, governments do not make all decisions on a purely financial basis. I don't want a government that does. Do you?

[Francesca R]

Describeing northern rock as non-profitable is kinda questionable. If you can borrow at the kind of rates the UK goverment can it has the potential to be highly profitable.The bank was highly profitable until mid 2007.

As regards to the unfair competitive advantage it may now have if, under state control, it expands--that is the reason why I don't think it should accept new business, unless/until it is placed back in private hands first. The taxpayer would gain if the government exploited its unfair advantage, but at the expense of the private sector. So, well . . . not fair.