Monday, February 18, 2008

Why Northern Rock is Worse Than Black Wednesday

Labour Ministers are understandably keen to avoid comparisons between the Northern Rock fiasco and Black Wednesday. Yes, there is a very crucial difference. Trying to keep Sterling within the ERM cost the taxpayer £10 billion at the most, whereas the public liability for Northern Rock is eleven times as much. There is another crucial difference too. Black (or White, depending on your viewpoint) Wednesday and leaving the ERM laid the foundation for the strong economic performance for the rest of the decade and beyond. Sure, I'm the short term Britain"s reputation was damaged, but nothing like it has been over the last few months during the Chancellor's dithering over Northern Rock. Today in the Commons he will have his day of reckoning - aided and abetted by the Liberal Democrats.

Nick Robinson adds to the Chancellor's discomfort HERE.
Guido says Seventies style socialism is back.

39 comments:

greenspam said...

Answer: it's not. Though keep trying to talk it down.

I am sure Boy Osborne will go beige with staged apoplexy in parliament today. Yet, on Today this morning when asked he had no alternative to offer. If he doesn't even possess 20:20 hindsight how can he be a creditable Chancellor? Bizarre since he has 6 months to think of one?

Whatever happened to the British ability to stand back and coolly assess a situation before the inevitable strategic retreat? Black Wednesday (a Tory fiasco I remember) started this modern trend to panic at the first sound of drums.

Alistair Darling today has restored some backbone to the British financial system. Jellyback Osborne, the Right's contender can only look on in awe at his opponent's cool demenour.

And no I am not a Labour troll - just someone with many years experience of the financial system who doesn't have a political axe to grind.

greenspam said...

What is clear is that the shareholders of Northern Rock deserve not a penny in compensation. The whingeing of various hedge funds who it must be emphasised bought shares AFTER the collapse of Northern Rock's business is almost unbelievable. In fact they took on a high risk strategy and lost.

They claim to have bought shares at say 100p in the belief that they were really worth 400p. In fact they believed no such thing. As holders of 15% of the Bank's stock they hoped to interfere in any future sale that would result in the them being paid a nuisance value well above 100p (but almost certainly nowhere near 400p) to agree quickly with sale. Even though they could not legally stop the sale in the long-term they could have caused it to be delayed by instigating complicated legal action. This is a standard trading strategy of many equity event desks in the City and the fact that they lost a relatively large sum of money in this case should concern noone but themselves. The certainly need to be ignored by headline grabbing journalists (I mean you Anatoley Koletsky)and consigned to the footnotes of this debacle.

WALKDEN MOOR said...

I remember it well 16.9.1992.
I was short Ftse100 futures.Walking with my dog I had instrument with up to date future prices.
I met a lady ,asked me what was I looking at.
I told her that every pont that figure goes down I make £30.
Well we talked and walked then suddenly when the FTSE 100 future was about 2280 it started to reverse very quickly .
I ran to a phone box to close my position.
That day I piled into equities it was the bottom of the market.
Seven trading days days later FTSE was up 16%.
Seven years later in 1999 the FTSE 100 went up 3times from 1992 bottom of 2260 to 1999 top of 6950.
I would have called it Golden Wednesday.

Colin said...

Anyone who is in any doubt at all that this is a catasrophic moment for Brown and Darling should read Anatole Kaletsky's excoriating front page commentary in the Times today, which he follows up with more withering analysis on an inside op-ed page. He dissects the incompetence of the whole NR fiasco without sparing the guilty. Darling especially will find it difficult to hold on to his job after this. Both he and Brown should be howled down in the Commons today. And, of course, its quite possible that the EU will declare the whole exercise illegal anyway!

NR should be nationalised only with the objective of running it down, and getting our money out as soon as opossible. Of course, our money shouldn't be there in the first place as the Rock should have been allowed to go under back in September.

Time for a vote of no confidence in the Chancellor?

Anonymous said...

"Aided by the Liberal Democrats". A bit harsh - Vince Cable knew this was going to happen and called for it months ago. Spot on though about Alistair Darling's dithering. Wasn't there a dithering, spineless "Darling" in the Blackadder series? Can't get that image out of my head now.

tyger said...

Worse than Black Wednesday?

Oh pluuuueaze! Comparing numbers is not that simple.

Errr. Have you ever heard of assets, Iain?

not for profit said...

the prinicipal benefit of the nationalisation of NR is to remove the shareholders from interfering in the process as they have been. Not simply trying to minimise their losses (institutional investors have long since divested their shares to game playing hedge funds) they have been trying to make significant profits.

Now the Chancellor can look to recapitalise the bank from the point of view of a set of assets and liabilities. Should they not find a buyer under the new improved circumstances they can then run the bank down as many claim they should already be doing.

Note that any money paid by new shareholders will now go towards recapitalising the bank and not the profits of vulture hedge funds. This will incidentally decrease the risk of the government backed bonds.

I doubt anybody outside the self-serving world of hedge funds finds this at all unfair.

Anonymous said...

FACT ! How deviating from their own policy was a 'cunning plan' from the Tories to boost the economy !!

FICTION ! Losing money on something is not the same as the amount you have exposed to a risk !

TODAY'S TOP TIP..Don't try and get a job in the city if you can't tell the difference...

Gary Elsby stoke-on-trent said...

If I attempt to decipher your logic with my Natinalising,revoloutionary Communist mind, then the 'Black Tory Wednesday' was a good thing because of the economic boom that came next.

Wow!(phew).

Forgive this inept intrusion, but likewise, isn't it just wonderful that this Governement is doink similar?

The Torie deliberately(or not)banklrupted the Country for our benefit? It's a squeeze, Iain, but I give you a whole 8/10 for having the gall to suggest such an aproach.

NB. It was David Cameron's advice that gave us 'Black Wednesday'.(joy)

Gary
(Don't you just love the smell of Nationalisation before breakfast?)

Newmania said...

The difference is Iain that after Black Wednesday lots of people lost their houses and had no money . Thus far the same thing has not happened. Also Northern Rock has not cost the tax payer anything really it only appears that way if you think the business is worthless which it is not .
People keep saying " Why are the Conservative not doing better ?” the reason is that the travails of Brown are experienced in the media and not so far , in the pocket . It is likely y that will change over the next year and then you will see labour’s reputation plummet . Their problem is that state share if the GDP has crept up over ten years during period of prosperity . When the economy dips the share will rocket as social payments do. They will not able to borrow and they will have to tax
That’s when you will see the end of Brown not just because of a few headlines , he will straining veer sinew to put this off until after the GE .

Anonymous said...

taxpayers 1 - hedgefund parasites 0

Nick Drew said...

such a pleasant irony that outgoing NR chairman, academic and doctrinaire writer Matt Ridley, banged on endlessly on the theory of why nationalisation was a Bad Thing

lettersfromatory said...

I almost feel happy to have the Lib Dems onside for this impending attack on the Government. Even though nationalisation is a shameful act, the Lib Dems can still stick the knife in.

Anonymous said...

Stay clear of "no confidence" votes they are pretty pointless waste of energy and will be defeated - just let Brown, Darling and Labour continue to slowly sink.

By far better - for both the Conservatives and LibDems to abstain on the bill to nationalise "The Rock" rather than vote either for or against. It will pass on Labour votes alone but they will be shown to be solely responsible for the whole sorry mess because of Brown's dithering and indecision in the autumn when the whole matter "kicked off".

TrevorH said...

As a rightish wing tory I should point out to you that the amount 'lost' on Black/ white/ golden wednesday was about 3 billion. Currently our 100+ billion is only at risk, not yet lost. Yet.

What is going to be lost are 6000 jobs. This will cost, and no doubt on top of this will be millions os sweeteners from the govt to prop up its vote in the north. (I come from the North btw)

I very much doubt that a state owned bank can or will be allowed to 'compete' commercially with the rest of the banking sector. I doubt that all manner of EU rules will allow that.

It will be, certainly should be, wound down, this is not nationalisation but state administration, something which should have been done by the Bank of England 6 months ago.

Lets not forget the real scandal, and this is why neither the conservatives nor anybody can offer a real alternative to the present situation because we should not have to be here in the first place.
The real scandal is that NR was allowed to ger intom this state. The scandal is the failure of the cats cradle of a regulatory system invented by Gordon Brown.

Browns much vaunted 'independence' to the BoE was in fact an emasculation. Browns creation - the FSA - failed in its first attempt.

John Miller said...

On the Today programme, I think John Humphries had a bit too much on his plate in his dissection of the worm that is the Chancellor and he missed an interesting slip.

Darling said "and now Ron will look at the books" a truly novel suggestion that could result in reduced professional indemnity premiums for we accountants - do the due diligence AFTER you have bought the company.

No confidence in this lot? They couldn't tell their arse from their elbow. The whole government is riddled with weird inconsistencies. they push through the HIPs package (to increase their tax take) to allegedly inform us when we are making a private purchase - which is none of their business - but when they make a purchase (costing more than our defence budget) it's all done on the back of a fag packet (you can still smoke in the Commons bar, which is where this must have been thought up).

Julian the Wonderhorse said...

Black Wednesday happened on one day whereas this has dragged on for nearly six months.

Furthermore, it appears the Government has acted more because of the EU deadline than anything else.

Nice to know our Government has no control or authority over our financial future any more.

Alex said...

Except that the Consercative government didn't spend anything like £10 billion. It may have exchanged a lot of our foreign reserves, but it ended up getting a lot of sterling funds in return. Te value opf those went down on the day, but went up again a week later.

canvas said...

Actually, it's not worse than black Wednesday.
It's what everybody wanted - it's just that it took them so long to decide.

Anonymous said...

Iain,

What would the Tories have done? I can't seem to tell. They criticise and then change their minds a lot.

I think it's because Osborne is so horribly out of his depth.

Iain Dale said...

If you had been listening to the Today Programme this morning you would have heard what George Osborne would have done. All this guff anout the Tories not having an alternative is utterly preposterous and a Labour smear.

radio free europe said...

maybe Iain, but when I heard John Humphreys ask what he would have done I missed the initial 5 seconds of the interview and by the time I turned around to listen he was peddling the Labour econonomic mismanagement line they must have stayed up half the night finessing for delivery via this morning's soundbites. Had he taken 30 seconds to explain his own strategy in a bit of detail and how, when and why he arrived at it he would have seemed less like a happy pig in shit complaining about the mess he found himself in and more like a future Chancellor.

Anonymous said...

Is this worse than Black Wednesday? Answer - no.

Black Wednesday was caused by Conservative policy (the consequences of Chancellor John Major going into the ERM at a ridiculously high rate, all so he could announce an interest rate cut on the eve of a Tory party conference).

Northern Rock was caused by a monstrously reckless business plan, pursued by a bunch of greedy City wide boys.

If there was some wider systemic breakdown caused by the government, then why is Northern Rock the only bank affected? It is down to Northern Rock, not the government.

That's the difference.

And you're wrong Iain - the Tories have no policy other than to oppose whatever action the government has done. The only politician to have come out of this with any credit is Vince Cable - and certainly not the clueless Boy Osborne.

PoliticalHack said...

I did listen to Gideon on the Today programme this morning and he was vague about what he would have done. Perhaps Darling should have moved sooner, but he did give the beloved markets every opportunity to find a solution - which it signally failed to do.

As for the comparison to Black Wednesday, you are flailing about on that one. Clearly, Cameron was well-placed to know all about financial incompetence, as he was a close advisor to one of the least effective Chancellors since the war. I didn't know that the crash and the hourly hikes in interest rates were actually part of a plan to restore the economy.

I'm sure that the borrowers who briefly faced a threat of 15% interest rates would be delighted to see a return to those days. Black Wednesday cost the Treasury £3.4 billion (around £5 billion today) excluding the on costs of the recession that followed.

We don't yet know what the costs (or potentially profit) might be from NR, so comparisons even on that basis are facile.

David Boothroyd said...

Black Wednesday actually cost us £billions, whereas Northern Rock is just an 'exposure' (a theoretical risk). As shown by the big rises in bank stocks on the exchanges this morning, there's a possibility that the government will acquire Northern Rock for a knock-down rate, Ron Sandler and team will rebuild it, and when it is sold off we will all make a tidy profit.

The Conservatives might be more credible on this if they had adopted a more consistent approach other than first agreeing and then disagreeing with the government. Being a good opposition is not quite the same as being a good alternative government, and the whole Northern Rock saga has shown the difference quite starkly.

Lee Griffin said...

It's nothing nearly close to as bad as Block Wednesday. As others here have said, the implications of the situation are dire but the reality is that with some risk management (which Northern Rock was unable to do) the public purse can potentially benefit from this kind of nationalisation.

This isn't the 70's where we're bailing out British Business in the time of dire economic performance, and while I don't agree that Labour should ever have got so involved in the private market like this there is a hint of investment in this type of move.

Gary Elsby said...

Political Hack has probably got it more or less accurate.

The addition to his final conclusion must be the 'collapse'theory, that would have seen Norther Rock, fold.

The consequences of a bank, within the banking system, being taken out must be even too horrendous to imagine even the few Tories who frequent within this blog.

As a rule of thumb, always trust the socialists to do the right thing, and always expect Dave to hide in the background.

The Tories are in danger here, of wishful thinking for a banking collapse to score a political point over a here today, gone tommorrow chancellor.

I will always turn up for your funeral and I will lay a NR bankers draft upon your corpse.

Gary

Manfarang said...

Black Wednesday was the day when people no longer regarded the Tories as sound managers of the economy. George who?

curly15 said...

It would have been cheaper to provide economic regeneration to the North East region after Northern Crock's death, rather than throwing it a £100bn tax payer's lifeline.

rupert tube said...

The standard lines of defence, sometimes simultaneous, seem to be

1. What would the Tories have done?

2. Northern Rock is not as bad as Black Wednesday.

Spot the incompatibility. I have no recollection of Labour screaming that we should quit the ERM during 1992. In fact, I seem to recall that one G Brown was careful to make himself extremely scarce on the Wednesday in question, lest he should be put on the spot about what *he* would have done to avoid the fiasco.

And talking of incompatibilities, where does GB think "his" much-vaunted "ten years of uninterrupted growth" all began?

What about foot & mouth, Gordon?
"Ten years of uninterrupted growth!"

Why are there pips in oranges?
"Ten years of uninterrupted growth!"

Why don't you pack it in, you clunking incompetent?
"Ten years of uninterrupted growth!"

Scary Biscuits said...

The big difference between NR and the ERM debacle was that the latter marked the end of a recession; NR most probably marks the beginning of one.

The Labour trolls on here should remember that.

It is true that no actual money has yet been lost: but virtually nobody in the private sector believes that it won't, otherwise they would have snapped it up already. The true figure to be lost depends on how the market goes. Lloyds TSB's requirement for a £30 billion guarantee gives you an idea of how much they thought would be lost. This might not be as much as the £110 million quoted by Guido but it is still significantly more than the costs of Black Wednesday.

The most objectionable thing about this is Labour taking from the poor to give to the rich. Guaranteeing retail depositors was one thing; doing the same for £100 billion of big buck bond holders who knew exactly what risks they were taking - indeed who encouraged the NR management on their reckless expansion - is something else entirely.

Unless the fairyland ending comes true and the government amazes everybody except Labour trolls and Vince Cable by actually managing the bank well but without upsetting its private sector competition, tax payers already struggling to make ends meet will be putting money in the pockets of the mega rich who gambled and won on Northern Rock.

Casino in Hull anyone?

P.S. The Tories do have an alternative - administration - but it is a bit difficult keeping up when Labour keep making it worse. It now looks as though about 3,000 jobs will be lost, more than if NR had just been put administration immediately. Gary Elsby (above)said, "As a rule of thumb, always trust the socialists to do the right thing." Really, Gary? Can you think of any other nationalisations that have gone well, Gary? The coal mines (1938)? The railways (1946)? British Leyland (1975) perhaps?

Don't be fooled by Darling's claim of 'temporary' nationalisation. That's about as meaningful as Tony Benn's claim of 'partial' nationalisation of BL. There's already moves afoot to renationalise British Rail. It really is the 70s come again. If you think the railways are bad now, just wait till the government's fully in control.

scott redding said...

I think that the nationalisation of Northern Rock is an opportunity.

Now, the government has a powerful lever to promote loans for energy efficient housing, ecological renovation, and loans to small-scale and ecological enterprise.

Manfarang said...

Scary biscuits
"Can you think of any other nationalisations that have gone well?"
Bank of England (1946)

Newmania said...

'The consequences of a bank, within the banking system, being taken out must be even too horrendous to imagine even the few Tories who frequent within this blog.'

Well thanks for that ,passing mendicant. Rubbish of course, the whole lie has been that this was to do with sub prime lending it was not and “The system”. It was to do with a suicidal business model constructed by people who saw themselves as social entrepreneurs. It deserved to go under and it has not quite simply to save the 6000 jobs .

All those in the South who are made redundant this year will rightly ask whey the country is not lending them a few thousand each,. The answer is clear , because we do not matter to Brown and he does not have an election coming up anyway. That the astonishing prac6ces in N Wreck continued is Brown’s fault as he organised the regulatory frame work which ( being the FSA) did not work.



Teflon Brown cannot escape the blame for htis as he did Tax credits and how did he do that ?

Newmania said...

Iam interested to know what any knowledgable cove might have to say about how our ability to borrow as a coutry might be affected by this present we have aquired.

I can only see real harm for brown is it actually hits pockets . If he loses the tax payer money it will not mastter unless he has to get it back in the next two years .

Travis Bickle said...

"taxpayers 1 - hedgefund parasites 0"

Blimey 100 billion for a 1-0 win, know we all know how Roman Abramovich felt with Jose in charge. (I wouldn't call inheriting another 100 billion pound debt as a victory for anyone though, least of all the taxpayers)

Anonymous said...

I just wish I had seen the headline
"Newcastle, Brown, Ailing"

greenspam said...

Travis Bickle - if you took a financial rather than a political view of the NR nationalisation you would realise that getting rid of the parasitic hedge fund chancers from the negotiating table improves the chances of the other stakeholders esp. taxpayers to arrive at a reasonable outcome.

What is the point of irrelevant references to overpaid football managers? - the playthings of the Eastern European kleptocracy. Try to keep your moronic comments to yourself if that is the best analogy you can come up with as you clearly know bugger all about finance.

greenspam said...

Newmania - answer to your question. Nothing that is statistically relevant. My own analysis of the change in the UK gilt rate shows no discernible effects along the lines you suggest.