and the conditions of the surrounding ocean
The attemps to find a private buyer
The realisation that temporary nationalisation is the right solution

SEPTEMBER 16th 2007
The investors in Northern Rock were clearly people of careful judgement, with an old and much followed motto: "Every man for himself". Having taken advantage of the excellent managment of Northern Rock to share in the security and growth in the property market, benefiting from but without contributing significantly to the recent bubble effect caused by the band-waggon jumpers in the various sub-prime markets, they showed their loyalty by abandoning one of the soundest ships, just because they overheard a precautionary call for a lifeboat which was duly supplied, quite correctly, by the Bank of England.

Northern Rock's business model was based on funding from its direct investors, following on from its origins as a mutual society, and they benefited accordingly*. Of all the ships to leave this, with its huge portfolio of sound assets, should have been the last, but it was dependent on the solidarity of its passengers.  If enough of the rats leave by gnawing their way out below the waterline, the crew may have to call for help from free-market salvagers, who will take over ownership.

There are those who say the Bank of England should have acted sooner on the general situation, but they are quite wrong. There are lessons that need to be learned here. In the long run, they will be learned by the rats. But as Keynes once said, in the long run....

* I accept this statement by me was unintentionally misleading. Northern Rock borrowed on behalf of its investors, at preferetial interbank low rates, to lend to property purchasers and return a high rate to its depositiors. The lending they did was high quality. But Northern Rock was dependent as I said on the stability of deposits of its small and medium size investors and their support, as well as on the interbank borrowing system to continue to be available for its day to day operation. The gumming up of the latter, due to reasons outside N.R.'s scope, caused panic amongst the former because the Bank of England could not quietly and privately have stabilised the situation but had to go public.

[see also Inflation]

SEPTEMBER 17th 2007
It seems the investors in Northern Rock are indeed intent on destroying their own asset because they cannot show mutual solidarity. All are now blaming the government, hoping that a government can, on behalf of a public both ignorant and divided, impose a collective solution. That can be done, as Hitler, Genghis Khan, Stalin and other have shown. But liberal democracies require of their citizens a level of knowledge and responsibility. In the past, those without that did not have the power to invest and disinvest in the national economy. Now they do. They are in charge, not any government. The same goes for the globe as a whole and the decisions we have to take to limit our procreation, our use of available resources and the effect of our waste products. The universe is perfectly designed, and logic will decide the outcome. Now read my entry for January 30th 2008

SEPEMBER 18th 2007
The Bank of England, the FSA etc have had to take almost absurd steps to stop the lemming-like behaviour of the public. There is no way total guarantees can be given on this scale but if it does the trick for the moment well and good. It is not surprising that there are disagreements on how to deal with this situation but in my view the authorities have done well. The media as usual are just a pain. In the end, however, good will come of this.

SEPTEMBER 20th 2007
The criticisms of the Governor of the Bank of England are unfounded. The MP who bleated: "The public want to know who is in charge of the Northern Rock affair" is unaware of the privileges and responsibilities of our liberal democracy.  Nobody is or can be in overal charge. If people want to go back to a more paternalistic society, OK, but they have clamoured for transparency and for a plurality of independent organisations to oversee and regulate according to ther expertise and the interests they represent or protect. All this is a wonderful lesson which the British Public and some of the more idiotic politicians who think they represent them need to learn.

OCTOBER 1st 2007
I am glad to hear Alan Greenspan today giving UK's Mervyn King high marks for his handling of the Bank of England. He is right, not that he (Greenspan) always has been in the past. He is making sense now, anyway, admitting he did not foresee the present situation. He should have done, as it was obvious to a rank amateur like me who has been saying for over a year that the old economic model is no longer viable and this was about to be proved.

OCTOBER 11th 2007
NORTHERN ROCK may well survive under its original management - but the weather is rough and other ships may well be in trouble.
There are more than 1 million sub-prime morgages in the UK. If interest rates rise, there could be a collapse similar to that in the US. However, the serious fright that is now being felt by borrowers and lenders holding the babies (if they know who they are) can only be for the good. Great care will now be needed to avoid a train wreck yet bring the mis-selling and the consequent inflation to an end. The Bank will not raise rates, but the big banks will tighten the lending and the traders will watch what they are buying. There is a chance of a soft landing....
LATER: Richard Branson rides to the rescue of Northern Rock..... Branson is the Bank Manager's dream. A complete dork, he infallibly spots what millions of dorks will like and buy and follow and invest in. Follow Branson and immediately a queue will form of people wanting to do what you are doing, buy what you are selling, never mind that the man understands nothing about the science or the economics, he has the magic that works for that critical mass!! What else is needed? And he's probably a lovely guy and deserves every success past present and future.

OCTOBER 16th 2007
Now the managers of Northern Rock are getting the third degree from some thugs on a Commons committee on something or other. They were no more guilty than anyone else in this saga and less so than many. Everyone was rowing the boat, some doing better work than others. "You started the first run on a UK bank in hundreds (or something) of years, you should be ashamed...etc etc." growled one of these hirsuit anthropomorphs. "We all saw it coming months ago, wy not you?" The humbled managers mumbled politely that the sudden shutting down of all borrowing facilities for everybody was not actually what anybody has seen coming. Meanwhile the members of the committee were no doubt all busy moving their assets to India as fast as possible to avoid a collapse of the Western economy.

NOVEMBER 6th 2007
Now that the heads of Merril Lynch and Citibank where the really shaky loans were made have bitten the dust and the Governor of the Bank of England has taken the unprecedented and excellent step of explaining his actions throughout the Northern Rock saga to date, we can see that the European Bank was probably correct in its early action but the Bank of England could neither rationally follow suit (due to the particular circumstances and the amount involved) nor avoid the later consequences.

NOVEMBER 19th 2007
The private take-over plans for Northern Rock look like stalling. The government has said the guarantees (other than to depositiors) cannot be counted on after February as the support may be illegal under EU legislation. This means that nationalisation for the time being may become the best option. There is nothing surprising about that.  In 1987 I pointed out in an online Open Uniuversity conference that in the future both Labour and Tory parties would have to have privatisation and nationalisation as proper tools of government in the coming new economic order that would result from globalisation. So far, the government and the responsible institutional bodies have accted correctly in the case of Norther Rock from the start and continue to do so. The hindsight critics are just playing to make points for their own political or prestigious gain.

NOVEMBER 25the 2007

The alternatives today look like a take-over by Virgin or Nationalisation. The Treasury will have to be satisfied that a deal with Virgin will have less risk long term than nationalisation. Obviously if they can avoid nationalisation they will. The shareholders have to agree, or come up with an alternative to administration or nationalisation.  In my view, this is a vialble business with good assets, thrown into turmoil by the obsession we have to ask bankers and businessmen to conduct their business in public, with an ignorant and undeducated population and a media desperate for scandal and crisis to sell their wares. I feel sorry for the employees of NR, the shareholders are not the villains, but the people who get off scot-free are the depositors who ran off at the first sign of trouble. The average Brit is now £30,000 in debt I hear.

JANUARY 14th 2008
Since November 25th I have had nothing to say on this subject. The Branson rescue evaporated to nobody's surprise. Some hedge funds have snapped up shares at their collapsed value, helping nobody and making it even more embarrassing for the government to deal with this in a way that protects depositors and small shareholders. The argument against nationalisation includes the inadvisability of government finding itself on both sides of the financial fence, as both regulator and regulated, in competition with other banks. Nevertheless nationalisation looks probable unless a consortium of major banks were to step in and that would be almost as complex.
I disagree with Lord James who says that the assets of Northern rock are not as valuable as the government claims. According to him the sound mortgages are the property of the householders, leaving the government as sharehold with only the negative equity which is 'worthless'. Not so. All the assets are either actual or potential earners, those not earning pro-rata because of the insolvency of the occupants are still assets which can earn. Their value may fall temporarily but in terms of any major currency they are a durable assets with future earning or sale potential. This value exceeds UK taxpayer liability by a very large degree.
The need now is to reduce the 'running costs' of this whole mess without causing a collapse of the company or unemployment amongst the useful employees, a few of which might be in management but most elsewhere. The current emergency company meeting has just finished and voting is taking place. I am not convinced it is meaningful or in the general interest if in any way it limits the options.
5:15pm: Nothing dramatic happened at that meeting. The hedge-fund entrants did not get their way entirely though they tried to claim they were helping. Be that as it may, in my view in the long term the company has valuable assets and the real ownership of these needs to be established. It's another case of the lady in the dentist's chair who, as he starts in with the drill, has him by the balls: "We're not going to hurt each other, are we...."

JANUARY 21 2008
Plan makes sense to me. The original Lloyds TSB offer looks cheaper now with hindsight, but would it have gone through? Doubt it.
I happen to think it is as good an investment for taxpayers and others as anything else, so the complaints don't cut much ice.

SkyNews - Monday, January 21 06:00 pm

Chancellor Alistair Darling has warned it would be "irresponsible" to rule out temporary nationalisation of stricken mortgage lender

Mr Darling told MPs it had proved impossible to find a "purely commercial solution".

He added there was "no chance" of striking a deal backed entirely by private finance in the near future.

The Chancellor said the bank would "ideally" remain in the private sector without any government support.

But "current uncertain market conditions" made that impossible.

He said ministers' preferred solution of converting the Rock's £25bn Bank of England loan into guaranteed bonds offered the best hope of maintaining financial stability.

But temporary public ownership, or "nationalisation," remained an option and legislation was being prepared in case that was necessary.

Shadow Chancellor George Osborne complained the loans and guarantees amounted to a £2,000 "second mortgage" for every family in the country.

No British Government had ever provided taxpayer support on this scale to a private company.

"It's bigger than British Leyland, bigger than British Steel. This is back to the 1970s," he said.

He added: "Life in Brown's Britain is like an episode of Life on Mars."

The bond scheme has been drawn up by the Treasury's financial advisers, investment bank Goldman Sachs.

The Treasury had originally hoped that private sector bidders would be able to pay off up to £15bn of the lender's BoE debts up front.

But would-be rescuers have struggled to raise financing following the global credit crisis.

Three private sector teams are vying to take over Northern Rock - a consortium led by Sir Richard Branson's Virgin, investment group Olivant, and the Newcastle-based firm's own management.

They will have until February 4 to submit their proposals.

Sir Richard, who accompanied Gordon Brown on his official visit to China and India, has claimed he is in pole position in the takeover battle.

However, Olivant's plans are widely seen as the shareholder's favourite as they would not involve a takeover or break up of Northern Rock.

Instead, Olivant would parachute in a new management team in return for an equity stake.

JANUARY 30th 2008
While the government still holds off from even temporary nationalisation (permanent being impossible), hoping for a hybrid solution with serious guarantees to attract private take-over, the measures to prevent this happening again are now being put in place. It has become obvious that the Government and Bank of England must in future be able to act, as they would have in the past, in absolute secrecy to step in to avoid catastrophic financial events of this sort. The BBC claims it would have been ridiculous for them, along with the rest of the media, not to have reported the actions taken in the case of Northern Rock. Very well then, in future such actions will not be made public. It is about time these half-educated people understand the wave theory that forms part of the physics of existence, let alone the biology and psychology.

FEBRUARY 4th 2008
Deadline for Northern Rock bids
Up to three potential rescuers of Northern Rock are expected to submit formal bids for the bank ahead of the government's Monday deadline.

Sir Richard Branson's Virgin Group says it will bid, and investment fund Olivant and the bank's management are also expected to put forward proposals.

The government wants a private sector rescue for the troubled bank, which has needed £25bn of Bank of England loans.

Negotiations are expected to last a couple of weeks, say officials.

'Strong bank'

Sir Richard has already confirmed that Virgin aims to meet the deadline, and is said to be the frontrunner to take on the bank.

"We believe we will create a very strong bank in the future and we hope to make sure the taxpayers will get all their money paid back," he said.

Virgin is offering to put more equity into Northern Rock than the others. It would inject around £1bn in cash of new equity compared with about £800m from investment group Olivant.

The third likely bid, on behalf of a Northern Rock management team, would inject between £500m and £750m.

'Certainty for taxpayers'

Alistair Darling will determine which offers the greatest certainty that taxpayers can be repaid in full
Robert Peston, BBC Business Editor

The bids will be scrutinised by the Treasury, the Financial Services Authority, the Bank of England and Northern Rock's non-executive directors.

The final decision will be made by the Chancellor Alistair Darling.

BBC's business editor Robert Peston believes it is uncertain which if any of the prospective bids will succeed. "Alistair Darling will ... determine which offers the greatest certainty that taxpayers can be repaid in full and without excessive delay," he said.

Shareholders support

Although Virgin is offering most to shareholders in cash terms, some believe Olivant is leading in popularity amongst investors.

Newspaper reports say Virgin has failed to persuade shareholders to back its bid in the run-up to Monday's deadline and is losing ground to the two other prospective rescuers.

Former Abbey boss Luqman Arnold, who is heading the Olivant bid, is believed to have strong support amongst shareholders.

The management team led by former Merrill Lynch managing director Paul Thompson is also reported to have gained a boost after canvassing shareholder opinion last week.

Cheap funds

Northern Rock got itself into financial difficulties because its business model left it ill-prepared for the global credit crunch.

Unlike the great majority of UK banks, Northern Rock relied upon borrowing funds from the wholesale money markets to fund its mortgage business, rather than the usual method of using savers' deposits.

When the credit crunch hit, Northern Rock suddenly found it could not secure the cheap funds it needed, as credit was either unavailable or markedly more expensive.

A recent report into the collapse of Northern Rock by the House of Commons Treasury Committee was highly critical of the UK financial watchdog, the Financial Services Authority (FSA).

While the report said Northern Rock's senior managers had been most at fault, it said the FSA had been guilty of a "systematic failure of duty" in not preventing the bank's "reckless" business plan.

FEBRUARY 17th 2008
It was right to see if a solution other than temporary nationalisation could be found. I assume that the judgment that there were no options that were good enough is good. It certainly seems reasonable. In principle it was obvious from back in the 1980s, when the future shape of politics was becoming clear, that any government, Labour, Tory, Liberal or Coalition, should be able in emergency to nationalise and when in the national interest to privatise. There will be some tricky management decisons coming up but on the whole, since there is no question of Northern Rock now having to make a profit until it is ready for resale, it should not be too difficult to balance the interests of the different parties. Some will just have to be very patient. That is better than losing their shirts. The value of the shares cannot be decided just now so why try? Any attempt to do so will waste time and money. In due course, when the market has a direction and the assets can be identified properly, values will emerge. Meantime it will be up to shareholders to make their own decisions on wha to do next. Good. That is how it should be. They can blow their own noses. Northern Rock is still operating. Well done.

One thing to remember is that the loan-to-value ratio of the Northern Rock portfolio was conservative. The business was efficient, assets are sound. The problem was making loans on the basis that these could be financed in the open market on the basis of rising house prices, the rising house prices being to a significant degree depending on an adequate proportion of all house buyers, not just those with Northern Rock, being able to afford the payments.

Northern Rock to be nationalised

The Chancellor said the public would gain after the market improved
Darling statement
Northern Rock is to be nationalised as a temporary measure, Chancellor Alistair Darling has said.

Neither of the two private proposals to take over the beleaguered bank offered "sufficient value for money to the taxpayer", Mr Darling said.

He said the public would gain if the government held on to Northern Rock until market conditions improved.

Ron Sandler, nominated by the government to run Northern Rock, said savers' deposits would be secure.

'Dither and delay'

But shadow chancellor George Osborne told the BBC that the Conservatives would oppose plans to nationalise Northern Rock.

"After months of dither and delay we have ended up with this catastrophic decision," said Mr Osborne.

"We now have the situation where the government will be making decisions on whether or not to foreclose on people's loans in a falling housing market," he added.

The Government is totally financially inept and I certainly wouldn't give it the keys to my piggy bank
Armand Borisewitz
Northern Rock shareholder

A consortium led by the Virgin group was leading bids to run the beleaguered bank, while a management buyout had also been considered.

But ministers have decided that nationalisation - the first such move since the 1970s - was the only option.

Virgin boss Sir Richard Branson criticised the government's decision: "We believe we had a very strong proposal, an experienced team and one of Britain's best brands.

"We believe nationalisation is not the right answer and that a commercial solution would have been the best way forward."


Explaining the government's decision, Mr Darling said: "It is better for the Government to hold on to Northern Rock for a temporary period and as and when market conditions improve the value of Northern Rock will grow and therefore the taxpayer will gain."

"The long-term ownership of this bank must lie in the private sector".

Northern Rock got itself into financial difficulties last year because its business model left it ill-prepared for the global credit crunch.

It was forced to ask the Bank of England for emergency funding, triggering the first run on a British bank in more than a century.

The bank will be run at arm's length and on a commercial basis
Alistair Darling

Nationalisation will be pushed though parliament with emergency legislation on Monday.

Shares in Northern Rock will be suspended on Monday morning.

Under nationalisation rules, shareholders will be offered compensation for their holding, at a level set by a Government-appointed panel.

Investors could begin legal action if they are unhappy with the amount offered, with BBC Business Editor Robert Peston saying that it was "inevitable" that the government would be sued by shareholders who felt they had been "fleeced".

Job threat

UK taxpayers are now subsidising the bank in loans and guarantees to other lenders to the tune of about £55bn.

The Treasury now feels that nationalisation offers the most certainty of securing these guarantees, Mr Peston said.

It is thought that the business model it proposes will be similar to those put forward by the Virgin Group and the in-house management consortium.

These were likely to see a downsizing of the bank, with job cuts among its 4,300 employees likely, observers say.

Ron Sandler says it will be "business as usual" at the bank

The Treasury had already recruited Mr Sandler, the former boss of the Lloyd's of London insurance market, to lead Northern Rock, in case it were nationalised.

Mr Sandler is widely regarded as having restored confidence in Lloyd's after its years in financial disarray.

He said the changes would have no impact on the guarantees made to lenders, or the government-backed support for savers' deposits.

"It is business as usual," he said.

Mr Sandler is well known to Prime Minister Gordon Brown, and worked for the Treasury in developing the so-called stakeholder pension and investment products that were intended to help those on lower incomes save for retirement.

Chairman of the Commons Treasury Select Committee John McFall said that he welcomed the Government's decision to nationalise.

"They have explored every avenue. At the end of the day the biggest issue is the safeguarding of taxpayers' money. If nationalisation saves that money, that has to be the correct step in the long term."

Liberal Democrat treasury spokesman Vince Cable said that the right decision had been taken, though "belatedly", and that the government should have walked away from the prospect of a private takeover some time ago.

"The important thing now is to do the right thing and the government has got to immediately establish what the problems are with this bank."

NOW CONTINUE IN recession.html

APPENDIX August 4th 2009
In spite of big losses this year, the Government's intervention was right. Barclays and HSBC are making profits, but Northern Rock has sold off its best assets and is stuck with over-egged mortgages and busted debtors. However, that is the hard job it has to face. It has lost its most credit-worthy customers but somebody had to draw the short straw. The government can hold the fort till it can restructure and sell the company at the right price.