|SocialismToday Socialist Party magazine|
Nationalising Northern Rock
AFTER MONTHS of twisting and turning, desperately trying to avoid dreaded nationalisation, Alistair Darling, Gordon Brown’s finance minister, was finally forced to announce (17 February) the ‘temporary nationalisation’ of Northern Rock. They really had no alternative. In reality, as Vincent Cable, the Lib Dem finance spokesman, had been pointing out all along, Northern Rock was effectively nationalised from the time that the government bailed out the bank with a £25 billion loan and guarantees of another £30 billion.
The government could, of course, have declared the bank bankrupt and proceeded to sell off its assets to recover as much of the capital as possible. But that could easily have provoked a much wider crisis in the banking sector. Instead, Darling, under pressure from Brown, desperately tried to find a private buyer for Northern Rock. But that ‘solution’ would have rested on the government assuming all the risk through providing loans and guarantees, while the private purchaser could have potentially raked in a huge profit a few years down the road.
Why did the New Labour government adopt such convoluted tactics to avoid nationalisation? "The reason for the prevarication was obvious enough", commented Philip Stephens. "Even after a decade in office, the New Labour government is haunted by the Old Labour symbolism of nationalisation. No one really thinks that Mr Brown wants to reclaim what the left used to call the commanding heights of the economy. But mention the 1970s and the prime minister still shudders". (Later not Sooner, Financial Times, 18 February)
Although far from being a ‘socialist’ measure, nationalisation remains the ultimate taboo for New Labour’s ex-social democrats. This is despite the fact that leading voices of big business, including both the Financial Times and The Economist, clearly accept that nationalisation is the only effective measure.
The last hope of Darling and Brown was to sell Northern Rock to a consortium led by Richard Branson’s Virgin group. Other prospective buyers, including the Olivant private equity group and Northern Rock managers attempting to organise a buy-out, dropped out of the running some time ago. Branson, however, was out for a super bargain at the taxpayers’ expense. He was proposing to pay between £300 million and a maximum of £500 million in return for government loans and guarantees of £54 billion. If Virgin was successful in turning round the bank, Branson could have expected a profit of between £1-1.5 billion! The Economist aptly described this as a "one-way bet". "In the caustic phrase of Vincent Cable… to underwrite a private sale now would have been to retain the risk while privatising potential profits". (Financial Times, 18 February)
The nationalisation of Northern Rock, while it shows the failure of market forces, is not a socialist measure. New Labour (and the sections of big business supporting nationalisation) clearly sees the measure as a temporary expedient to overcome the Northern Rock crisis. The bank will be run according to ruthless big-business methods with the aim of selling it back to the private sector as soon as possible. Darling has appointed Ron Sandler as executive chairman on a salary of £90,000 a month (and no doubt many perks as well). Well known in financial circles, Sandler is a ‘non-dom’, that is a ‘non-resident’ for tax purposes, paying no UK taxes on his offshore earnings.
Darling claims that the bank will be run as a ‘going concern’, and will not be running down the business as some City figures are demanding (fearing ‘unfair’ competition from a bank backed by government guarantees). It is already clear, however, that under Sandler the bank will attempt to reduce the scale of its operations. For a start, 3,000 jobs of Northern Rock employees are immediately under threat. The new management will attempt to reduce its outstanding loans from around £110 billion to something like £50 billion. Pressure will be exerted, one way and another, on Northern Rock mortgage holders to go elsewhere.
It is far from certain, however, that Sandler, even with the advantage of government guarantees, will be able to turn the business round in three to five years. The decline in house prices and a rise in mortgage arrears could have a devastating effect on Northern Rock, as well as other banks and building societies. In the last quarter of 2007 there was a 25% increase in Northern Rock arrears, affecting over 9,000 homes. Northern Rock is currently holding a pool of 1,100 homes that have recently been repossessed. This is only the beginning of Britain’s housing crisis.
Another, truly scandalous, aspect of the government takeover only came out with the announcement of nationalisation. It turns out that at least a third of Northern Rock’s assets do not belong directly to the bank and are not covered by the nationalisation measure. These assets of around £45 billion (out of the total balance of £110bn) are invested in Granite, a Jersey-based trust. A number of commentators say that Granite holds the best quality assets, while more risky assets (for instance, 125% mortgages) are with Northern Rock itself.
Cable commented: "What we are now being told is that in some way this has been hived off to the benefit of a person or persons unknown. It appears to be not public ownership of Northern Rock but an asset-stripping operation designed to benefit whoever, we don’t know. This is a very serious development".
"Northern Rock’s ‘assets’, says Cable, include unsecured debts, such as portions of mortgages in excess of the value of the properties concerned. ‘In other words, the rubbish’." (Evening Standard, 20 February)
Former Conservative chancellor, Kenneth Clarke, said: "The best assets are in Granite. It looks as though there is a contract enabling more assets to be drawn in and it is the rubbish in the assets that we are now nationalising".
Labour MP, John McDonnell, said: "The people who will gain are the participants in Granite, the people who will lose are the taxpayer and the Northern Rock workers who may lose their job as a result".
Already, some Northern Rock shareholders are clamouring that their property is being stolen and they are demanding exorbitant compensation. Leading the pack are two hedge funds, RAB Capital and SRN, headed by the notorious asset-stripper, Jon Wood, a British multi-millionaire now based in Switzerland. Both these funds hugely increased their shareholdings after the Northern Rock crisis broke (they currently hold around 20% of the equity), clearly seeking to profit from the situation. They are demanding that they should be compensated £4.50 a share, even though Northern Rock shares were selling for only 90p immediately prior to nationalisation. Moreover, given that the bank would have been totally bankrupt without government support, the shares were, in reality, worthless.
Darling has announced that he will appoint an independent valuer who will calculate the value of Northern Rock shares on the assumption that the bank could not continue as a ‘going concern’ – in other words, was effectively bankrupt. On that basis, the government would have to pay little or nothing to the shareholders. However, RAB Capital and SRN clearly calculate that if they threaten legal action against the government, on similar lines to the shareholders of Railtrack, they will force the government to pay over the odds in order to avoid the complications of lengthy legal proceedings. Railtrack shareholders claimed £4 a share and eventually settled for £2.50 – despite the fact that Railtrack was effectively bankrupt. James Hamilton of Numis Securities commented: "We believe this value [of Northern Rock shares] to be very close to zero. However, we believe that a payment to shareholders will be made so that the government can avoid a Railtrack.2 situation".
There is a strong case for the government considering reasonable compensation for Northern Rock employees and small shareholders who have put their life savings into Northern Rock shares. But there is no case at all for compensating predatory hedge funds which undoubtedly invested with a view to profiting from a ‘fire sale’ of Northern Rock assets.
Both big business and New Labour ministers are extremely touchy on the issue of nationalisation. The Financial Times accepted nationalisation as the "least bad of limited options" (Editorial, 17 February). For The Economist (18 February) it was similarly "the least worst of several poor options". Yet they clearly fear the implications of nationalisation, the necessity of which in the Northern Rock case demonstrates the failure of the market to solve all problems. Journals of big business were vehement in disassociating this nationalisation measure from any expansion of the state’s economic power. "The differences between this nationalisation and failed nationalisations of the past are clear. Northern Rock’s spell in public ownership will be temporary. It will be managed at arm’s length… anybody who suggests that the Labour government has gone back to the 1970s socialism deserves ridicule. It has made a sensible, hard-headed, non-ideological choice". (Financial Times editorial, 17 February)
"Critics who accuse the government of having reverted to its old socialist leanings of the 1970s", commented The Economist, "are plainly wrong". (18 February)
Nationalisation carried out by past Labour governments was not ‘socialist’ nationalisation: the state took over failed industries in order to manage them better in the interests of the wider capitalist economy. Nevertheless, big business resented this intrusion on its economic power and the increased influence that it gave to governments, especially Labour governments, which in the past could reflect the pressure of the working class.
Today, advocates of ultra-free market capitalism are furious at the nationalisation of Northern Rock, even though it is presented as a one-off emergency measure. Writing in the Financial Times (18 February), Tim Congdon, a right-wing economist, claims that unless the government distributes £1.5 to £2 billion to shareholders – which he calculates as the likely proceeds from future re-privatisation – the government’s nationalisation measure will be "legally invalid and morally outrageous", and a violation of the "principles of private property". The free-marketeers are particularly enraged that the nationalisation bill presented by Darling gives the government powers to nationalise any bank during the next twelve months. This is being denounced as a plot by Brown to grab huge chunks of the financial sector. Ludicrous, of course. Nevertheless, the twelve-month provision reveals that the government fears that other banks (possibly the already shaky Alliance and Leicester, or Bradford and Bingley) could follow Northern Rock, and they want to be armed with powers to bail them out more rapidly than in the case of Northern Rock.
New Labour has renounced even the limited measures of past Labour governments. For instance, the government of Harold Wilson in the 1960s nationalised sectors of ship building and steel making in order to rescue these basic industries from bankruptcy. They continued to be run on capitalist lines. A genuine socialist government would nationalise the major banks and finance houses as a key to controlling the economy. This would be the only way to avoid the catastrophic effects of a meltdown of the finance sector. To be effective, bank nationalisation would have to be carried out in conjunction with the nationalisation of the commanding heights of the economy, the major manufacturing monopolies, construction companies and transportation. Compensation would be paid to small investors on the basis of proven need. Nationalised companies would not be run by City financiers and big-business directors, but by democratically elected boards of management, with democratic workers’ control. Then it would be possible to develop democratic, socialist planning of production in order to meet the needs of the overwhelming majority of society.
The coming crisis of British and global capitalism will lead more and more people to seek an alternative to a system based on the brutal anarchy of the market and big business’s drive for profit. The socialist idea of economic planning under workers’ control and management will increasingly appeal as the only viable alternative to capitalism.