Northern Rock, nationalisation

Why Northern Rock shareholders can’t expect to get their money back

18.02.2008

by John Stepek

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It’s ‘business as usual’ at Northern Rock this morning.

That’s a direct quote from the second paragraph of the government press release put out last night to say that the ailing bank was being nationalised.

Of course, it’s not actually a bad description. It is indeed ‘business as usual’ at Northern Rock. The bank’s still bankrupt, and the government is still the only thing keeping it afloat.

The only thing that’s changed is that now it’s official…

The Government has nationalised Northern Rock after deciding that neither Richard Branson’s offer nor the one from the Northern Rock management team would offer good value to taxpayers. Basically, all the risk fell on the taxpayers, while most of the upside would have gone to the private sector.

So instead the government will run the bank until such time as it can be released back into the private sector. Given that it’s taxpayers who were taking all the risk anyway, they might as well get the benefit of the upside too. As the ever-reliable Liberal Democrat Treasury spokesman Vince Cable put it: “The Government had already nationalised the risks. It has now nationalised control.”

Of course, that means that current shareholders (or certainly the ones who bought in after the collapse) have gone from hopes of a big potential windfall, to the prospect of seeing nothing at all. And understandably – though not justifiably – they aren’t too chuffed at this turn of events.

No sympathy for speculators

I feel some sympathy for people who’d held onto these things since they demutualised, and probably hadn’t looked at their share certificates until the run on the bank came along. But I can’t say I feel at all sorry for the hedge funds and speculators who bought in after the queues had started forming outside Northern Rock’s doors.

In fact, I find the complaints from shareholders quite breathtaking. Here’s the UK Shareholders Association. “The only reason that the Government has chosen nationalisation is because it ‘offers better value to the taxpayers’. This is equivalent to a thief telling you it offers better value to him to steal from you, than to enter into a commercial transaction with you.”

Excuse me. I’m a taxpayer. The only reason this fly-by-night company is still limping along is because the government has decided – without my permission – to use my money to prop the company up. And I’m certainly not happy about having to shell out more money to own the thing. So as far as I’m concerned, taxpayers – the involuntary guarantors of a company which would have collapsed long ago had it been in any other industry - are the only ones who matter.

So how much are shareholders likely to get? Well, let’s see. As Martin Wolf in the FT points out, shareholders should be compensated according to how much the company would have been worth without the government there to prop it up.

No prizes for guessing how much a bankrupt bank is worth. “I would expect competent valuers to conclude that the shares are indeed worthless.”

The funny thing is that the same UK Shareholders’ Association which is complaining about thievery apparently agrees. According to Bloomberg, even as he called for legal action, spokesman Roger Lawson said: “It is clear that the shareholders will get nothing. It will be valued as though the government loans were not available, which would mean the company is worth nothing.”

Yet Bloomberg goes on to say that hedge funds SRM and RAB have suggested “the government will have to pay Northern Rock’s book value of around £4 a share.” This is an interesting one. What I can’t quite understand, is if the book value is £4 a share, then why can’t the government – despite its desperation to get this embarrassment off its hands – find a single private sector buyer willing to snap up the Rock at the current, positive bargain price of 90p a share?

An editorial in the FT just reiterates the point. The “book value may still be substantial”, but the bank’s only still around because of taxpayer intervention. “The independent valuer who determines the compensation should not force taxpayers to pay for the value of their own support to the bank.”

In any case, don’t expect the hedge funds to let this one go quietly.

What nationalisation will mean for the Rock

As Wolf also points out, the perhaps more interesting question is how the bank will now be run. The Government now owns the bank that was the most aggressive mortgage lender of the past few years. Some of those mortgage customers are arguably among the most vulnerable to the housing crash.

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So will it extend its largesse beyond the bank’s depositors and use its newfound influence to bail out its borrowers too? It’s an interesting possibility - but a government-run mortgage lender would be very unlikely to pass muster with the European Union.

Even so, it’s hardly reassuring to know that as a nation we are now collectively liable for one of the most reckless lenders of the housing boom. Edmund Conway in The Telegraph argues that taxpayers might make a profit out of this deal. “Unless the housing market suffers a major crash there is every chance of squeezing some profit out of the company.”

That’s not a bet I’d like to take. With the housing market looking wobblier than at any time since the early 1990s, Mr Branson may yet be thanking his lucky stars that he dodged this particular bullet.

Turning to the wider markets…

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US economic data weighs on stocks

In London, the FTSE 100 index tumbled from a high of 5,915 in afternoon trade on Friday to end the day 91 points lower, at 5,787. The broader indices were also lower. Miner Vedanta Resources led the FTSE risers following an upgrade from broker UBS, whilst Firstgroup took the bottom spot as it fell in sympathy with fellow transport stock Go-Ahead. For a full market report, see: London market close

On the Continent, the Paris CAC-40 closed 86 points lower, at 4,771, and the Frankfurt DAX-30 was down 129 points at 6,832.

Across the Atlantic, some horrid economic data showing falling consumer confidence and declining factory activity in the New York region - along with electronics retailer BestBuy's lowering of its 2008 forecast - saw stocks fall for a second consecutive day on Friday. The Dow Jones lost 28 points to end the day at 12,348. The tech-rich Nasdaq was 10 points lower, at 2,321. Howeve, the S&P 500 reversed its losses at the very end of the day to close one point higher, at 1,349.

In Asia, the Nikkei had risen by 12 points to 13,635, but the Hang Seng was down 389 points, at 23,759.

Banks rise on hopes of Qatari cash

Crude oil futures had risen slightly to $95.78 in New York this morning, and Brent spot was last trading at $95.50 in London.

Platinum hit a new record high for the thirteenth day in a row today, climbing to $2,090. Spot gold had risen to $904.10 and silver had dipped to $17.01.

In the currency markets, sterling was trading near a two-week low against the euro, at 1.3328, and was also down against the dollar, last trading at 1.9516, as the Government's plans for Northern Rock raised concerns about the state of the UK economy. The dollar was trading at 0.6827 against the euro and 108.24 against the dollar.

And in London this morning, banking stocks led a FTSE rally on hopes that Barclays and Lloyds TSB would raise their dividends this week following news that Qatar plans to spend up to $15bn on US and European banks.

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