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The Northern Rock fiasco

The inevitable has happened. The British government has nationalised Northern Rock, the stricken British mortgage lender and bank that got itself into terminal trouble last year as a result of its ambitious, nay, reckless policy of relying on funding itself through the short-term money market. When inter-bank rates spiked, as they did as a result of the credit crunch caused by the US sub-prime mortgage meltdown, Northern Rock suddenly found it impossible to go on funding its mortgage products. It was ruined.

As I have said several times before, the most logical, if painful step, would have been to let the company go bust; depositors would be protected if necessary, but otherwise, the company would be wound up. It would have been a painful, even traumatic example of how unwise lending policies can go unstuck. It would have served, for years to come, as a harsh reminder about the dangers of trying to run a bank without sufficient savings to back it up its lending. Instead, the government’s move to pick up the tab for Northern Rock’s problems will act, however marginally, to weaken the necessary harsh message that should come out of the Northern Rock fiasco.

Now, I know that Samizdata readers will not give a brass farthing about the EU angle, but a thought does occur to me, as it has to others: how on earth can the company be allowed to offer highly attractive savings rates, which are more attractive than those of some of its competitors, when Northern Rock is able to enjoy the status of a tax-funded company, when other, rival banks, such as Alliance & Leicester, are not? How, exactly, is the British government going to be able to square its actions with the single market of the EU?

Just asking.

8 comments to The Northern Rock fiasco

  • Thon Brocket

    They probably won’t.
    Key paragraph:

    Even if politicians at Westminster are unwilling to ask such questions there can be no doubt that others will. It is quite likely that the European Commission will veto the business plans for Northern Rock unless these provide for a rapid rundown of both its lending and deposit-taking operations.

    They know this, but they’re in headless chicken mode right now, so the’ll give it a try anyway. Gunna be fun watching ‘em.

  • CountingCats

    How, exactly, is the British government going to be able to square its actions with the single market of the EU?

    Through dishonesty, deceit and mendacity?

  • Thon Brocket

    Dept. of Silver Lining: If this all plays out centre-stage, and the EU squelches Broon and Darling, it will wake a lot of voters up to who really rules the UK.

  • pete

    Let’s hope that the government does as it wants and ignores any EU interference. The affair is a complete mess and the government has made the wrong decision but anything is better than EU interference.

    The EU is a bigger menace to the UK than the Northern Rock affair.

  • MarkS

    It isn’t the only nationalised bank in Europe. CGD of Portugal is owned by the Portuguese State. I’m not sure how it works there. I expect there are other examples. Anyone care to name names?

  • steve_roberts

    how on earth can the company be allowed to offer highly attractive savings rates, which are more attractive than those of some of its competitors, when Northern Rock is able to enjoy the status of a tax-funded company, when other, rival banks, such as Alliance & Leicester, are not?

    Quite. The only rational way to handle the Crock is by stopping new lending and new deposits, stopping all sales and marketing (cutting costs a lot), and increasing rates to borrowers (encouraging solvent borrowers to repay and borrow elsewhere). The business will naturally shrink as mortgages are repaid to the point where it is saleable to another mortgage bank.

    Unfortunately I can’t see BrownDarling being so practical

  • Rob

    I wonder if nationalisation will put a stop to this kind if thing.

    “Northern Rock gave half-a-million to Labour’s favourite think-tank, the IPPR. It also employed Gordon’s personal pollster, Deborah Mattinson, as an adviser. Of all the pollsters to seek advice from, why her? Why give money to that think-tank? Nowadays it is very rare for publicly quoted companies to make politically partisan donations.”

    http://www.order-order.com/2007/11/northern-rock-ceo-sold-millions-in.html

  • R C Dean

    How, exactly, is the British government going to be able to square its actions with the single market of the EU?

    It will be very interesting to see if the self-interest of the EU “governments,” expressed in looking the other way to preserve their own freedom to nationalise a bank if it takes their fancy, will outweigh the pressure brought on them by their banks.

    But will anyone be interested in enforcing whatever EU rules are violated for their own sake? Please. We’re trying to be serious here.