Wednesday, 16 January 2008
When will it end?
Recently, I've resisted the temptation to post anything on Northern Rock. The reluctance stems from a mixture of boredom and anger. I just wish that someone would put the old nag out of its misery.
Today's news that the share price fell another 20 percent forced me sign in and write something. It must now be obvious that there is no "private sector" solution. It is time to wind the thing up.
Nationalization is a bad idea. Should the government take it over, the shareholders might have an opportunity to take legal action. Nationalization also sets a dangerous precedent. Before this housing bust is over, other banks will probably go under. Will they be nationalized too?
There is, thankfully, a very simple solution available that would put an end to all this nonsense. The Bank of England is a creditor. It should call its emergency loan, and put Northern Rock into bankruptcy. It should cease operations immediately and an administrator should be appointed rescue whatever value remains. As solutions go, it would be merciful; it would be all over in a day.
The newly appointed administrator should sell the assets, make redundancy payments to Northern Rock staff, clear off any outstanding tax bills, and use the rest to pay off depositors. If there is anything left, it should go to the Bank of England. If the remaining assets are insufficient to clear the Bank of England's loan, then Mervyn should send the invoice to the Treasury.
Hopefully, the shareholders will get nothing. As the owners of the bank, they took the profits when times were good. Now that the company has failed, it only seems reasonable that they should accept their losses with good grace.
Northern Rock would then do something useful. It would demonstrate to all other banks that failure has consequences. It would show that stupidity and excessive risk-taking has a price. Although, the tax payer could well end up paying out, if it prevents some of the banking sector excesses of the last ten years, it may well be money well spent.