Wednesday, February 20, 2008

The Government's Northern Rock agenda

Vince Cable, in yesterday's debate on the bill to nationalise Northern Rock, framed the essential question that the Government are not openly addressing but that is of paramount importance to the question of where Northern Rock goes from here over the next few years:

"May I return to the central question of what kind of bank will now operate? Will it be built up or run down? The hon. Member for Newcastle upon Tyne, Central (Jim Cousins), with whom I have had several exchanges in the past few weeks, put it rather well yesterday when he asked whether this is the end of the beginning or the beginning of the end of this bank. That question is crucial. It is at the heart of the argument about the business model, on which Ron Sandler will presumably be asked to decide. It is not clear to me which of the two approaches is the better. A wide range of options exists, so one can envisage a kind of continuum, at one extreme of which the bank would be run off and would have no new business. The other extreme might involve a highly expansionary strategy—a kind of publicly owned Virgin or “the people’s bank”, as somebody called it yesterday. Alternatively, something between the two might happen." - Hansard, 19 Feb 2008 : Column 193

The agenda that the Government are trying to slip under the radar is something closer to the latter that the former; a highly expansionary strategy. Jim Cousins provided an illustration of the political pressure that the Government are under to deliver such a solution to the problems of Northern Rock:

"Let us be fair about this. Northern Rock was trying to be a big bank based in the north-east that could take on the big boys of the banking sector. That prospect, from the north-east’s point of view, must be retained. It may not ultimately work out that way, but it must be retained." - Hansard, 19 Feb 2008 : Column 198

Cousins is supporting nationalisation because he believes that it is a vehicle for taxpayers' support to be used in an attempt to revive the busted Northern Rock. Why does he believe this?

Such a strategy wasn't mentioned in Alistair Darling's speech and is hardly the impression given by his rather humble talk of "temporary public ownership". John Redwood asked whether the Government had told Cousins that they were going to attempt to run into reality his vision of nationalisation reviving Northern Rock as a big bank:

"Mr. Redwood: As a local Member for the business, has the hon. Gentleman been given any assurances by the Chancellor that he is going for the growth model and not the wind-down model?

Jim Cousins: No, I have had no such assurance; nor, at this stage, would I necessarily look for one. We have had from Mr. Sandler clear comments that he sees the business as a going concern and is preserving the option of growing it on." - Hansard, 19 Feb 2008 : Columns 197-198

If Cousins is representative then Labour MPs share our conclusion that Ron Sandler's unguarded statement on Monday (quoted in the Financial Times) offers the best clue we have yet to the objectives that will inform the business plan for a nationalised Northern Rock.

"The aim is to reinvent Northern rock as a 'profitable, vibrant and sustainable business'"

This is the agenda that the Government won't yet discuss openly but that seems to be underlying their policy on Northern Rock. Taxpayer support is to be enlisted in an attempt to revive the bank. There are a number of issues with this:

1. It ups the ante by committing taxpayers money to the risky venture of trying to revive Northern Rock instead of taking the more cautious approach of trying to get value from the assets as they stand. As Stephen Dorrell put it: "The state would be used as a sort of turn-around venture capitalist" (Hansard, 19 Feb 2008 : Column 200). The ill-fated Phoenix Consortium attempt to turn around Rover as a mass-market car manufacturer shows the risks of a hubristic failure to accept that a company has had its day and might need to be wound down.

2. Regardless of Ron Sandler's abilities he will be operating a nationalised industry and subject to the political pressures that make the lives of many brilliant private-sector executives' lives hell when they switch to the public sector. Jack Lemley, the project manager brought in to run construction of the London Olympics venues, told the Idaho Statesman:

"Well, I’ve never walked away from a project ever until I retired from the London 2012 programme, and it was so political that I think there is going to be a huge difficulty in the completion both in terms of time and money and it’s much more difficult because there’s so much time being lost now. [...] I don’t want my reputation ruined being able to deliver projects on time and on budget."

3. This will be a massive market distortion. There will be one player in the mortgage market with a guarantee from the taxpayer behind them. This will allow the bank to offer more generous interest rates than its competitors. Potential competitors with a revived Northern Rock are rightly furious.

The Government are deliberately keeping the plans for what happens next with Northern Rock obscure. However, their plan to make taxpayers play venture capitalist trying to revive a busted bank with a wrecked brand is becoming clear anyway. It is a political agenda that puts taxpayers' money at huge risk and could create damaging distortions in the British economy.

Cross-posted from the TaxPayers' Alliance blog.

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