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Nationalising Northern Rock
AFTER MONTHS of twisting and turning, desperately
trying to avoid dreaded nationalisation, Alistair Darling, Gordon
Brown’s finance minister, was finally forced to announce (17 February)
the ‘temporary nationalisation’ of Northern Rock. They really had no
alternative. In reality, as Vincent Cable, the Lib Dem finance
spokesman, had been pointing out all along, Northern Rock was
effectively nationalised from the time that the government bailed out
the bank with a £25 billion loan and guarantees of another £30 billion.
The government could, of course, have declared the
bank bankrupt and proceeded to sell off its assets to recover as much of
the capital as possible. But that could easily have provoked a much
wider crisis in the banking sector. Instead, Darling, under pressure
from Brown, desperately tried to find a private buyer for Northern Rock.
But that ‘solution’ would have rested on the government assuming all the
risk through providing loans and guarantees, while the private purchaser
could have potentially raked in a huge profit a few years down the road.
Why did the New Labour government adopt such
convoluted tactics to avoid nationalisation? "The reason for the
prevarication was obvious enough", commented Philip Stephens. "Even
after a decade in office, the New Labour government is haunted by the
Old Labour symbolism of nationalisation. No one really thinks that Mr
Brown wants to reclaim what the left used to call the commanding heights
of the economy. But mention the 1970s and the prime minister still
shudders". (Later not Sooner, Financial Times, 18 February)
Although far from being a ‘socialist’ measure,
nationalisation remains the ultimate taboo for New Labour’s ex-social
democrats. This is despite the fact that leading voices of big business,
including both the Financial Times and The Economist, clearly accept
that nationalisation is the only effective measure.
The last hope of Darling and Brown was to sell
Northern Rock to a consortium led by Richard Branson’s Virgin group.
Other prospective buyers, including the Olivant private equity group and
Northern Rock managers attempting to organise a buy-out, dropped out of
the running some time ago. Branson, however, was out for a super bargain
at the taxpayers’ expense. He was proposing to pay between £300 million
and a maximum of £500 million in return for government loans and
guarantees of £54 billion. If Virgin was successful in turning round the
bank, Branson could have expected a profit of between £1-1.5 billion!
The Economist aptly described this as a "one-way bet". "In the caustic
phrase of Vincent Cable… to underwrite a private sale now would have
been to retain the risk while privatising potential profits". (Financial
Times, 18 February)
The nationalisation of Northern Rock, while it shows
the failure of market forces, is not a socialist measure. New Labour
(and the sections of big business supporting nationalisation) clearly
sees the measure as a temporary expedient to overcome the Northern Rock
crisis. The bank will be run according to ruthless big-business methods
with the aim of selling it back to the private sector as soon as
possible. Darling has appointed Ron Sandler as executive chairman on a
salary of £90,000 a month (and no doubt many perks as well). Well known
in financial circles, Sandler is a ‘non-dom’, that is a ‘non-resident’
for tax purposes, paying no UK taxes on his offshore earnings.
Darling claims that the bank will be run as a ‘going
concern’, and will not be running down the business as some City figures
are demanding (fearing ‘unfair’ competition from a bank backed by
government guarantees). It is already clear, however, that under Sandler
the bank will attempt to reduce the scale of its operations. For a
start, 3,000 jobs of Northern Rock employees are immediately under
threat. The new management will attempt to reduce its outstanding loans
from around £110 billion to something like £50 billion. Pressure will be
exerted, one way and another, on Northern Rock mortgage holders to go
elsewhere.
It is far from certain, however, that Sandler, even
with the advantage of government guarantees, will be able to turn the
business round in three to five years. The decline in house prices and a
rise in mortgage arrears could have a devastating effect on Northern
Rock, as well as other banks and building societies. In the last quarter
of 2007 there was a 25% increase in Northern Rock arrears, affecting
over 9,000 homes. Northern Rock is currently holding a pool of 1,100
homes that have recently been repossessed. This is only the beginning of
Britain’s housing crisis.
Another, truly scandalous, aspect of the government
takeover only came out with the announcement of nationalisation. It
turns out that at least a third of Northern Rock’s assets do not belong
directly to the bank and are not covered by the nationalisation measure.
These assets of around £45 billion (out of the total balance of £110bn)
are invested in Granite, a Jersey-based trust. A number of commentators
say that Granite holds the best quality assets, while more risky assets
(for instance, 125% mortgages) are with Northern Rock itself.
Cable commented: "What we are now being told is that
in some way this has been hived off to the benefit of a person or
persons unknown. It appears to be not public ownership of Northern Rock
but an asset-stripping operation designed to benefit whoever, we don’t
know. This is a very serious development".
"Northern Rock’s ‘assets’, says Cable, include
unsecured debts, such as portions of mortgages in excess of the value of
the properties concerned. ‘In other words, the rubbish’." (Evening
Standard, 20 February)
Former Conservative chancellor, Kenneth Clarke,
said: "The best assets are in Granite. It looks as though there is a
contract enabling more assets to be drawn in and it is the rubbish in
the assets that we are now nationalising".
Labour MP, John McDonnell, said: "The people who
will gain are the participants in Granite, the people who will lose are
the taxpayer and the Northern Rock workers who may lose their job as a
result".
Already, some Northern Rock shareholders are
clamouring that their property is being stolen and they are demanding
exorbitant compensation. Leading the pack are two hedge funds, RAB
Capital and SRN, headed by the notorious asset-stripper, Jon Wood, a
British multi-millionaire now based in Switzerland. Both these funds
hugely increased their shareholdings after the Northern Rock crisis
broke (they currently hold around 20% of the equity), clearly seeking to
profit from the situation. They are demanding that they should be
compensated £4.50 a share, even though Northern Rock shares were selling
for only 90p immediately prior to nationalisation. Moreover, given that
the bank would have been totally bankrupt without government support,
the shares were, in reality, worthless.
Darling has announced that he will appoint an
independent valuer who will calculate the value of Northern Rock shares
on the assumption that the bank could not continue as a ‘going concern’
– in other words, was effectively bankrupt. On that basis, the
government would have to pay little or nothing to the shareholders.
However, RAB Capital and SRN clearly calculate that if they threaten
legal action against the government, on similar lines to the
shareholders of Railtrack, they will force the government to pay over
the odds in order to avoid the complications of lengthy legal
proceedings. Railtrack shareholders claimed £4 a share and eventually
settled for £2.50 – despite the fact that Railtrack was effectively
bankrupt. James Hamilton of Numis Securities commented: "We believe this
value [of Northern Rock shares] to be very close to zero. However, we
believe that a payment to shareholders will be made so that the
government can avoid a Railtrack.2 situation".
There is a strong case for the government
considering reasonable compensation for Northern Rock employees and
small shareholders who have put their life savings into Northern Rock
shares. But there is no case at all for compensating predatory hedge
funds which undoubtedly invested with a view to profiting from a ‘fire
sale’ of Northern Rock assets.
Both big business and New Labour ministers are
extremely touchy on the issue of nationalisation. The Financial Times
accepted nationalisation as the "least bad of limited options"
(Editorial, 17 February). For The Economist (18 February) it was
similarly "the least worst of several poor options". Yet they clearly
fear the implications of nationalisation, the necessity of which in the
Northern Rock case demonstrates the failure of the market to solve all
problems. Journals of big business were vehement in disassociating this
nationalisation measure from any expansion of the state’s economic
power. "The differences between this nationalisation and failed
nationalisations of the past are clear. Northern Rock’s spell in public
ownership will be temporary. It will be managed at arm’s length… anybody
who suggests that the Labour government has gone back to the 1970s
socialism deserves ridicule. It has made a sensible, hard-headed,
non-ideological choice". (Financial Times editorial, 17 February)
"Critics who accuse the government of having
reverted to its old socialist leanings of the 1970s", commented The
Economist, "are plainly wrong". (18 February)
Nationalisation carried out by past Labour
governments was not ‘socialist’ nationalisation: the state took over
failed industries in order to manage them better in the interests of the
wider capitalist economy. Nevertheless, big business resented this
intrusion on its economic power and the increased influence that it gave
to governments, especially Labour governments, which in the past could
reflect the pressure of the working class.
Today, advocates of ultra-free market capitalism are
furious at the nationalisation of Northern Rock, even though it is
presented as a one-off emergency measure. Writing in the Financial Times
(18 February), Tim Congdon, a right-wing economist, claims that unless
the government distributes £1.5 to £2 billion to shareholders – which he
calculates as the likely proceeds from future re-privatisation – the
government’s nationalisation measure will be "legally invalid and
morally outrageous", and a violation of the "principles of private
property". The free-marketeers are particularly enraged that the
nationalisation bill presented by Darling gives the government powers to
nationalise any bank during the next twelve months. This is being
denounced as a plot by Brown to grab huge chunks of the financial
sector. Ludicrous, of course. Nevertheless, the twelve-month provision
reveals that the government fears that other banks (possibly the already
shaky Alliance and Leicester, or Bradford and Bingley) could follow
Northern Rock, and they want to be armed with powers to bail them out
more rapidly than in the case of Northern Rock.
New Labour has renounced even the limited measures
of past Labour governments. For instance, the government of Harold
Wilson in the 1960s nationalised sectors of ship building and steel
making in order to rescue these basic industries from bankruptcy. They
continued to be run on capitalist lines. A genuine socialist government
would nationalise the major banks and finance houses as a key to
controlling the economy. This would be the only way to avoid the
catastrophic effects of a meltdown of the finance sector. To be
effective, bank nationalisation would have to be carried out in
conjunction with the nationalisation of the commanding heights of the
economy, the major manufacturing monopolies, construction companies and
transportation. Compensation would be paid to small investors on the
basis of proven need. Nationalised companies would not be run by City
financiers and big-business directors, but by democratically elected
boards of management, with democratic workers’ control. Then it would be
possible to develop democratic, socialist planning of production in
order to meet the needs of the overwhelming majority of society.
The coming crisis of British and global capitalism
will lead more and more people to seek an alternative to a system based
on the brutal anarchy of the market and big business’s drive for profit.
The socialist idea of economic planning under workers’ control and
management will increasingly appeal as the only viable alternative to
capitalism.
Lynn Walsh
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