Monday, January 21, 2008


"First" of the Day: Britain nationalizes a bank

The scale of the financial support the Chancellor has today promised to provide to Northern Rock is breathtakingly large and without precedent.

No British Government has ever provided financial help on that scale to a business.

—Robert Peston, business editor for the BBC, writing in "Rock rescue explained."

I've tried to keep you posted on the interesting tale of how a modern neoliberal globalist government—Britain, to name names—finds itself in the odd position of being on the verge of nationalizing a bank—Northern Rock. Actually, the British government is scheming in every way to avoid such a fate. As Peston wrote in a previous post,

They [Prime Minister Brown and Chancellor Darling] have signalled that they are deeply scared of the political ramifications of nationalising Northern Rock, and are prepared to accept almost any price to avoid nationalisation.

The British Treasury hired Goldman Sachs (America's one major investment banking firm to come out of the mortgage debacle in a said-to-be healthy condition) to advise it in the Northern Rock crisis. I'm sure they're worth every penny of their fee, already in the hundreds of thousands of dollars, for the sound suggestions they've offered the government. The basic trick here is to use some financial legerdemain to nationalize the bank in such a way that the public won't notice and Parliament won't have to approve.

Here's the latest—

The Treasury would be guaranteeing the principal and the interest on bonds or “notes” to be issued by the Rock.

That effectively turns those notes into Government bonds, gilt-edged stock.

It means that Rock will be able to raise a colossal sum and at a relatively low rate of interest....

In return for propping up the business, the Treasury is taking control of what happens to the troubled bank, turning its shareholders and board into bit-part players.

The Treasury will determine which of the groups promising to rescue the Rock offers the best business plan.

So to call what’s on the table a private-sector rescue is a misnomer.

Really it would be a partial privatisation, or a public-private partnership.

Which is still a bit of a humiliation for the Government, because it was never its explicit ambition to go into business with a provider of commercial mortgages.

What’s more, the Chancellor can’t be certain that a private-sector rescue will be agreed, even with the provision of so much taxpayer help.

So he also lays out the basis on which the bank would be nationalised, if all else fails.

As I’ve said before, nationalisation would be carried out through legislation.

And the Treasury would pay to shareholders what it thinks the shares would be worth absent any taxpayers support – which it believes would be pretty close to zero.

We are speaking here, of course, of the utter failure of Britain's eighth largest bank, which in September was said to be holding 24 billion pounds ($48 billion) of customer deposits.

In the U.S., direct rescues of failing banks are being carried out not by the American government, which would never stoop to owning a bank, but by the sovereign wealth funds of our Far Eastern and Middle Eastern "trading partners." Why it is ideologically superior for foreign governments to own our banks than for the national government to do so I cannot say. Perhaps it would make us lazy.

1/22/08 — Julia Werdigier of the NY Times adds,
Some analysts have noted that while turning Northern Rock assets into bonds and selling them on the market might keep the bank from being nationalized, it was just such a technique that contributed to the current credit crisis in the first place.

1/22/08 — And Carter Daugherty offers this fabulous quote from one of the thinkers in the company advising the British government during its time of trial—
“Ten days ago, only a very few people thought this [recession] would be a bad one,” said Erik Nielsen, chief European economist at Goldman Sachs in London. “But now you have people debating just that.”

It must be wonderful to be that mind-bogglingly stupid and get paid for it.

Related posts
Shades of 1929 (9/15/07)
Free-Market Objective of the Day (11/10/07)
"First" of the Day (12/27/07)
British Treasury between a Rock and a hard place (1/15/08)


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