We got there in the end. Ever since the British government lent tens of billions of pounds to Northern Rock, and guaranteed its deposits, nationalising the bank has looked the best way to protect taxpayers’ money. There has been five months of delay during a search for a private sector buyer, but the right choice has now been announced by Alistair Darling, the chancellor.
Nationalisation was never an attractive option; it was the least bad of the limited options available. A private rescue that needed no public money would have been ideal, but Northern Rock was in too much trouble for that. Insolvency, the normal solution for a troubled company, would have been fine if it did not mean chaos for retail depositors under Britain’s current laws.
The government’s preference was to find a private buyer to inject new capital and so provide greater protection for the taxpayers’ loans. But there were always two problems with that. First, existing shareholders kept voting control of the company, and could hold the process to ransom. Second, it was likely to mean handing over most of the potential returns to the private investors, while the taxpayer kept most of the risks.
Whether nationalisation is a good deal for taxpayers will depend on what they have to pay shareholders in compensation. That amount should be nominal. Northern Rock’s theoretical book value may still be substantial, but the equity only has any value because of government loans, and because of speculation about a private sector solution. The independent valuer who determines the compensation should not force taxpayers to pay for the value of their own support to the bank.
Once the bank is in public ownership it will be possible to look to the future. Northern Rock has a future. It may even be a bright future. The inflated £100bn-plus size of its loan book will have to be scaled back to reflect its deposit base, but Northern Rock has efficient operations and some well-located branches.
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. Most of all, nobody claims that Northern Rock will perform better under government control, only that it is necessary because of the straits it is in.
Therefore anybody who suggests that the Labour government has gone back to 1970s socialism deserves ridicule. It has made a sensible, hard-headed, non-ideological choice. But there remain legitimate questions about why it took five months to get there.
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