The Chancellor has issued a statement on Northern Rock. In it he said, amongst much else:
Northern Rock would raise the funds it needs from investors by selling assets. The Treasury would guarantee payment to these investors in the event that the assets were insufficient to meet its obligations, for which Northern Rock would pay the Treasury a fee. In this arrangement, shareholders and other providers of capital in Northern Rock accept the first risk; with the Government acting as a backstop.
However, the Chancellor's statement is typical of the solution the private sector might offer to the problem Northern Rock faces.
It is long on promise, including this suggestion that Northern Rock will pay fees to the government for the guarantees that the government is offering to what is, in effect, a bankrupt company. It is this offer of a fee plus interest that lets the Chancellor claim that the proposed arrangement is in the interest of shareholders. There's just one problem with the proposed arrangement. The guarantees will only be called in if Northern Rock has made further losses, but at that same point in time it will not have the resources to pay either the fees or interest due to the government. As such the claimed benefits of this deal exist only on paper, they can never be realised.
That means that what is on offer here is a smokescreen to allow the current loans to continue whilst a sale is sought. It is claimed that a sale remains the best option for Northern Rock, but what is clear is that any sale will involve a massive transfer of value from the government to the acquirer of the company, who will then be able to trade knowing that its risk will be backed by a gilt edged guarantee.
This is not in the interest of the taxpayer. The interest of the taxpayer is best served by having the ownership of Northern Rock aligned with the interests of the taxpayer in recovering their money: any other situation will create a conflict between the interests of shareholders and the taxpayer of the sort we have already witnessed. There is only one way to align these interests, to recognise the true gravity of the situation that is faced and to ensure that the company is managed in the best interests of the real providers of its equity, who are now the people of the UK as a whole. That solution is nationalisation for as long as it takes to ensure that this debt is recovered for the nation.
Nothing else will do. Nothing else is honest. Nothing else gives as much chance of recovery. And as such nothing else should be on the table.
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As someone who is a davout follower of Engles I would ask the question–Why do democratically elected governments feel bound to bail out PRIVATE COMPANIES!!!!!!! Even worse, why do democratically elecxted governments feel the obligation to SELL bonds to the tax payer to bail out private companies?
As a social scientist, I appriciateed that I am not an economist , but wonder who is ginng to benefit in the long term?
In answer to Chris Steel (above, 22-Jan-08 at 3:56 am) I think that this particular government feels bound to bail out this particular private company, based in the Labour stronghold of the NorthEast of England, for one very simple reason: the votes of those people who would be adversely affected, were Northern Rock to face the truth and accept bankruptcy.
It may not make economic sense, it may not be particularly ethical, but it certainly makes political sense.
John D