John Redwood

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John Redwood on Northern Rock

19 November 2007

The BBC today offered two visions of the future for Northern Rock. The first is nationalisation, with the Lib Dems recommending compulsory purchase of the Rock, apparently for nothing, wiping out all the shareholders. The second was another Treasury guarantee, this time to small long term shareholders so they do not lose out if things get worse from here.

Both of these ideas are absurb. The taxpayer already has too large a commitment to Northern Rock, and should not be asked to take on a bigger one. It is not the taxpayers job to own and run a mortgage bank. Nor can the taxpayer decide to subsidise one group of shareholders amongst the wider list of shareholders. The compulsory nationalisation of the bank with no compensation to sharteholders would probably trigger law suits from them claiming their shares still had value. The subsidy to some shareholders might trigger law suits from the others claiming the division was arbitrary and unfair.

The Lib Dem acting Leader has pursued a persistent campaign against the outgoing management of Northern Rock in a way which makes offering impartial advice difficult, and has displayed a lack of knowledge of legal obligations and how banking works. That presumably is why the BBC have him on so often on this subject. His advice would put the taxpayer at risk of legal actions by shareholders and leave the taxpayer with larger problems of how to manage the whole mortgage bank.

People ask what could be done? What should the Conservative position be? I think that is obvious, bearing in mind I would not have started from here, as I recommended pre-emptive action long before the bank experienced the run.

What the Chancellor should do with the Bank of England is treat this lending to Northern Rock as if it were a commercial loan. They must agree with Northern Rock the duration and interest payments, with a schedule of repayments. They must take sufficient security to guraantee that in no forseeable circumstance can the taxpayer lose money, and then force the mortgage bank to manage its way out of the debt to the agreed timetable. If they cannot agree a sensible timetable then they have to impose one which they think the bank should be able to meet. Above all they must have enough security to ensure no taxpayer loss. Then they need to agree all that with Brussels, which may be the most difficult part of the obvious remedy. I assume they got Brussels agreement in the first place to temporary assistance - they now need to define how long is temporary.

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