Tuesday, January 15, 2008

Northern Rock Nationalisation Endgame

Some time I blog posted that Northern Rock has been effectively nationalised by the extension of huge government loans to prop it up. Now, it looks like the de facto nationalisation will be formalised in a week or two. The chances of a private-sector rescue for Northern Rock were always pretty low because of the fundamental state of the business. With a damaged credit rating and a low-margin loan book, Northern Rock would always struggle to be profitable without the cheap finance that was available before the credit crunch. Then there is the business logic of buying into a business with a mortgage book secured on UK houses just as house prices start to slip. It is no surprise that institutional investors are reluctant and so the final consequence of the the government's blundering is likely to be a giant liability in the form of the wreck of a middle-sized financial institution. One thing is not clear, however. What will the government do with the Rock if they get it? There are two options: one is run the business down, fire most of the staff and sell of the assets to refund the public loans. The other is to try and run it as a bank, hoping that it can turn a corner and pay back the taxpayer when the now successful company is sold. Option one, break up and asset realisation, is probably the most sensible. It is also immensely politically painful and that is why the government will probably go for trying to keep the business going. This would be a mistake. Northern Rock is finished in its current form, the market is saying so by refusing to fund a bailout and, for once, the government should listen.

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