Northern Rock - No Bail-Out for Buyers

The weekend has been spent contemplating the bids for Northern Rock. The British bank that gained notoriety around the world for the long lines of depositors seeking to recover their funds is now the target of as many as ten offers. There are interested parties from the private equity industry, the banking community and Richard Branson's Virgin Group.

What doesn't seem to be on the table, at least it hasn't been revealed so far, is any offer that returns in full the £20 billion that has been borrowed from the Bank of England. This is just not good enough. The government has a duty of care to spend the taxpayers' money wisely.

If there is a viable business in NR then there should be commitments to repay the BoE money in full on a commercial basis. If not, the bank must be left to fail and then be bought back by the government.

Nationalization, effectively.

It is not ideal that governments ever get this involved in the business of markets, but these are exceptional times. The interbank markets are closed. As a result buyers will want a keen bargain, seeking to assuage the government's embarrassment by removing 'the problem'. No doubt some buyers would also like any open-ended government commitment.

It's not on. Shareholders enjoyed the benefits of Adam Applegarth's bold business model. They also must unfortunately continue to bear the brunt of its failure even if that means the shares become worthless.

The market will be best served in the long run not by a firesale and the loss of public money, but instead by enforced bankruptcy. The assets, or the mortgages, upon which there is apparently a very low default rate can then be sold off gradually over coming years. The government in the shape of the treasury could do this in a way that gets a return on the money the taxpayer has already committed.

The government has already become heavily enmeshed in the NR story. It has become a market participant. Like any other market player, it now has a responsibility to get the best return for its 'shareholders'.

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