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The rock that became a millstone

Inside Politics – The Policy Exchange newsletter (London), 22 February 2008

The formal nationalisation of Northern Rock is only the logical conclusion to the Government’s months-long involvement with the failed mortgage lender. Since it was bailed out after last year’s run on its deposits, the people ultimately in charge of it have been Gordon Brown and Alistair Darling, and it will be them who will pick up the political bill for any mistakes. The financial bill, however, will go straight to the taxpayer – including the reported £90,000-a-month salary to Ron Sandler, the Rock’s new chief executive.

The desperation in the government’s efforts to sell the company revealed a lot about the task it faces. Brown and Darling know only too well that for them to get away unscathed, nearly everything needs to go right; but only a few things must go wrong to make Northern Rock a liability at the next election.

For example, the chances of selling the bank in a few years’ time depend on Northern Rock’s ability to revive its business model or, preferably, invent a better one. Yet the current troubles in the financial sector and the housing market suggest that will not happen for a while. ‘Temporary’ public ownership could well become a permanent millstone around the government’s neck.

But whatever the new business model will be, it is likely to be a Catch-22 dilemma. If it is unsuccessful, lots of employees will have to be laid-off, causing damning headlines. If it makes too much money, however, the EU will reprimand it for uncompetitive practice. And if such problems are not enough already, there are also long legal battles ahead with the Rock’s furious shareholders.

None of these problems will be solved quickly so we can expect Mr Darling and Mr Brown to spend a lot of their time over the next few years trying to sort them out. But while nationalisation may have been hard to avoid at this stage of public involvement, it would have made more sense to close it down, sell off the assets and wind it up. It is not the task of government to take over failed businesses and restructure them. The stability of the economy would not be endangered if Northern Rock branches now disappeared from our High Streets.

Lawrence Kay, Economics Research Fellow
Dr Oliver Marc Hartwich, Chief Economist

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