The Nationalisation of Northern Rock: The last Resort?

The decision to nationalise Northern Rock was very much a last resort for the Government. In an ideal world they would have liked to find a private sector buyer that was willing to pay a high price for the business and also offer a speedy plan for the Government’s loans to the beleaguered bank to be repaid. In reality it looks like the bids from Virgin and Northern Rock’s managers were simply too low. This raised the possibility that the business might be re-organised and then sold back to the private sector during the lifetime of the current Government. There would have been quite an embarrassment for the Prime Minister and his Chancellor if either of the prospective buyers had been able to make a spectacular return on their investment. Imagine the headlines in press if the Virgin Group had pocketed a £1.5bn profit “at the expense of the poor old British Taxpayer”. This could have done irrevocable damage to the Labour Government’s reputation in the same way that the spectre of “Black Wednesday” still haunts the Conservatives.

The clear losers in this whole business are the shareholders. In the wake of the announcement trading in their shares was immediately suspended. It seems likely that the independent arbiters appointed to assess their value will conclude that the shares had no monetary value on the day of the Nationalisation. So should we feel sorry for the shareholders? Absolutely not. As Martin Wolf wrote in the Financial Times on the 17th February;

“That is the market’s judgement. Shareholders live and die by the judgement of the market. In this case they have died. That is what “risk capital” means”.

(Nationalising Northern Rock was the right Move, Financial Times, 17/2/08).

This is very much the message that I tried to get over in Article 5 (“MyTravel on the brink”) in the book. Now you might want to take a look at question 3 (page 67) and attempt to answer it in the context of Northern Rock.