Tuesday, November 06, 2007

The Nationalised Bank?
I am neither a saver or borrower from Northern Rock but now I discover I have lent them £1000, (and if you are a taxpayer, you have too) whether you wanted to or not.

This is because in their indecent haste to bury this particular bit of bad news ahead of the expected General Election the Government instructed the Bank of England to offer the Northern Rock an overdraft, which has now topped an almost unimaginable £30,000,000,000; or roughly £1,000 for each UK taxpayer.

The problems at the bank are simple, profound and known to be disastrous. They borrowed 'short' (i.e. by taking out short-term loan notes from other banks) and lent 'long' (lending for 25 year mortgages) and it all went wrong when the bank loans dried up, and got worse when savers found out and demanded their savings back, too.

There was a systemic failure by the body set up by Labour to protect consumers from financial mismanagement and fraud. The Financial Services Authority found it didn't have the powers to prevent the slowly unfolding disaster from occurring, and neither did the Bank of England who had lost their policing role to the FSA when it was formed in 1998.

The bank, having become insolvent ('unable to meet it's commitments as and when they fall due') should have appointed receivers to sort out the mess, as happened with BCCI in 1991 and Barings in 1995; and thousands of 'ordinary' businesses every year. Savers would have eventually got most of their money back under existing protection schemes and given that the bank insists it has enough security (money owed to it) to meet all it's debts, they should have got back everything once all the mortgages had been sold off to other banks.

But there was an election coming, and the last thing the Government wanted was a backdrop of growing financial crisis and millions of angry savers with their cash locked up in a bankrupt bank to add to the millions of existing pensioners with their savings trapped in worthless pension funds.

So the Government said to NR, "hey, - don't worry chaps - even though no sensible bank in the world will touch you with a bargepole but we will lend you a few billion of British taxpayers cash to tide you over - have as much as you like, Oh and by the way we will offer an unlimited guarantee to all your customers for the money that have already invested." anything, in fact, to get those awful pictures of queuing savers off the telly.

But now they are stuck. Northern Rock is still just as insolvent as ever and nobody wants to buy the bank as it is. The Government (and that means you and I ) is locked in with a cash requirement that is growing daily and the only route out looks likely to be via a massive cash sweetener to whoever is prepared to take the whole sorry mess of the Chancellors hands.

Prudence, eh?

1 comment:

Geoff said...

Do you think if I turn up at a branch with my NI card they will let me draw my share out?

I could do with the cash to be honest.