We're all bankers now!

We each have a share, a fairly large share, in Northern Rock, once it became nationalised.

This will be a brief holding while the bank is in temporary public ownership (the "n" word is not mentioned by the Government.) "Temporary" here must be several months at least if,as expected the economy suffers some turbulence this year and next.

It would be difficult to sell when others are anxious about their own positions and until they see how the arrangement will work out. There will also have to be time for shareholders to undertake the threatened court action for justice in compensation at the takeover of their assets.

Further costs/losses may arise through payment of staff redundancies, - well over a quarter of staff could go. If they take their pensions with them this would involve further outlays. For those leaving and for those staying there might have to be payment into pension fund if it is in deficit.

If the bank has to foreclose on defaulting mortgage payers, it is possible that trying to sell the properties in a depressed housing market could mean that the bank receives less than the money owed by their borrowers.

There is a risk, and problems may take several months to be quantifiable. If assets are worth less than their book value, or potential buyers may suspect or anticipate that they will be, then buyers of the bank will pay a lower price, and tax payers will lose.

When the bank first found itself in difficulties, the cause was essentially two-fold.

In the first place the bank had grown rapidly by the "unwise" principle of borrowing short term and lending long term. It lacked sufficient deposits from investors and savers to finance long term mortgages of borrowers, so it borrowed money from the banking market which was returnable at short notice.

The policy came to grief, in the second place, through the sub-prime loans which had been sold on throughout out the world and which produced losses for many banks when the loans became worthless as American borrowers were unable to pay their mortgage interest and defaulted. As a defensive reaction the banks demanded higher interest rates in loans to other banks.

As a consequence, Northern Rock found that instead of being able to borrow cheaply from other banks and lend at higher rates to mortgage borrowers, the difference being a very acceptable profit margin, they now found that the margin had shrunk to almost nothing. Added to this as part of the general defensive retrenchment by many banks, they were prepared to lend fewer funds to others, even at the the higher interest rates. Northern Rock's strategy was in ruins, made worse when depositors panicked and queued to withdraw deposits.

So is it all just cruel luck?
No - the supervision plans put in place by Gordon Brown as Chancellor left responsibilities unclear. Previously the Bank of England monitored all banks, and would have seen the problem coming. The new system was tripartite, responsibility lying with Treasury, The Financial Services Authority and the Bank of England. Brown had created the possibility of a Northern Rock "failure" happening.

Brown added to this by dithering, perhaps because he thought he could blame it all on the Bank Governor and almost certainly because there was an election in his mind for October/November.
When LloydsTSB offered to take on Northern Rock, the offer was declined, perhaps because of the tax-payer guarantee to Rock depositors in the run up to an election.

After five months of dithering, when it became clear that Richard Branson was going to acquire a very valuable asset at knock-down price and bearing no risk, Brown pulled the plug.

The result is that tax-payers have to shoulder enormous risks, with £110 billion the latest estimate. Of course since uncle Gordon is helping his new chancellor some of the magic may rub
off. The economy could recover quickly and greatly, with no tax-payers' money lost, but I wouldn't bet on this!