Cameron: Nationalisation of Northern Rock would be "monumental failure" for Government

David Cameron, interviewed by Jim Naughtie on Today at 8.10am, said that he did not agree with Vince Cable about bringing Northern Rock into immediate public ownership.  The taxpayer should not be exposed to further risk, he said, and a private sale was still the most desirable option.  If the possibilities of a private sale do fall through, however, any nationalisation of Northern Rock would amount to a "monumental failure" by the Labour Government.

The main focus of David Cameron's interview was the housing market - a subject addressed on this page on Sunday.

He will be addressing the Council of Mortgage Lenders later and is set to call for social responsibility from Britain's financial institutions and the pursuit of best practice in dealing with the end of fixed-term mortgage packages and sharing of credit information:

• To avoid a regulatory answer to Britain's looming difficulties in the housing market, David Cameron urged mortgage lenders to "taper" or "stagger" increases in interest payments when periods of fixed-term mortgages come to an end.  110,000 households are seeing fixed-rate packages expire every month and many are facing interest rate payments rising by a third.
• The Conservative leader also called for more sharing of information between financial institutions.  The worst defaults for banks come from people who have already defaulted on previous loans with other institutions.

Currently in the middle of a series of high-level private meetings with major financial institutions, David Cameron is clearly communicating concern about Britain's deteriorating economic situation but he is being cautious in making big policy recommendations.

Related link: Andrew Lilico's Tuesday column examines how British politics would be changed by a recession.

Comments

[James Maskell]

Strangely the nationalisation idea has gotten some traction in the past couple of days and it seems that thats actually being contemplated.

If Cameron had been a little more forthcoming about his plans in the past two years, then perhaps he could have come out with some policy recommendations by now because he would already have laid the policy foundations...

[Sally Roberts]

Nationalisation on its way back...???!! Be Afraid... Be Very Afraid!

[James Burdett]

This is great stuff, for two reasons one that he is right and two that it keeps the pressure on the government. It is also right to eschew a regulatory approach as it would stifle any recovery of british banking from the toxic sub-prime shock.

Mr Maskell, I'd be very wary personally of having a policy for all occasions. It wouldn't be seen as sincere. It would look like saying anything and believing nothing, I'd prefer to believe something and say little.

[James Maskell]

I suspect the public think all politicians and insincere anyway and I doubt the Conservatives being a bit more reluctant regarding it would make much of a difference.

Its not about having a policy for all occassions. Its about fleshing out the general position sooner and being a little less scared of public reaction. As Ive pointed out before, the Conservatives almost point blank refuse to recognise the issue of children in care, despite some rather worrying statistics coming out of the DCSF. The Conservatives dont need a plan but if they wish to promote the image of governing in the best interests of the most vulnerable then they would have spent at least some time thinking about the issue in the past two years and would have a general position at hand which they can flesh out later.

[Sam R]

So the Cableviks, the smaller of the Socialist Parties, is banging the nationalization drum. Nothing new in that.

[Tony Makara]

The Northern Rock debacle will only be extended by Vince Cable's idea of nationalization. What surprises me is that Mr Cable's proposals are getting so much sympathetic airtime?

[Manish Singh]

I agree with David Cameron's remark that it is not Government's job to spend taxpayers money in nationalising businesses. However one can take this view at the start of crisis when one has alternative at hand i.e. to supply liquidity in the market and avert crisis. We are now in midst of deep crisis and free market thinker as I am, I don't think Nationalisation is as bad, in fact it is lesser evil.

Given that underlying mortgage of NRK is not caustic, it makes more sense to nationalise the bank, nurse it to health and then sell it to private entity. A great restructuring story for UK government if it can be pulled off ( implicit assumption is treasury has the skills to handle it. ) and will give Labour government brownie points, which we should be mindful of when formulating our Tory policy response now.

My worst fear is if the bank is sold to a private investor, ( Mr. Darling has said all deposits will be guaranteed in any case whether NRK is private or public)... then if the investor fails to turn it around , the govt. is not out of wood but deeper into it and the misery is compounded, the whole matter becomes a laughing stock and has more contagion effect on the banking system of UK. Raising £30bn debt is not an easy task for any institution. While I don't know the details of offer, frankly am not impressed with the lineup of firms queing to buy NRK and what I have read about their proposal in FT and other press.

[Richard Woolley]

Why should the taxpayer bail out incompetent bankers? It would be a return to the corporatism and interventionism of the 1960s and 1970s. Remember that the Labour Party of old advocated the nationalisation of banks and even land. Wasn't Vincent Cable a Labour MP the once?

[Alex Swanson]

David Cameron urged mortgage lenders to "taper" or "stagger" increases in interest payments when periods of fixed-term mortgages come to an end

Hang on a minute! These are people who've benefitted for years from paying less than the rest of us. Fair play to them - they took a risk and it paid off - but they are not now being asked to pay more than us, nor can they complain that they did not know this would happen. There is no reason why they should benefit still further by - effectively, because this is what it amounts to - being cross-subsidised for a period.

Yet another instance of Cameron being bang alongside personal freedom and responsibility right up to the point where he doesn't like it.

[Andrew Lilico]

I'm a little nervous about Cameron's ruling out of nationalization. I agree that its taking place would represent a monumental failure by Labour, but without saying "I wouldn't have started from here", does Cameron really have another plan? The takeover offers look risible to me, and I would assume that the shareholders, acting with freedom of manoeuvre, would correctly reject such offers. Is the government planning to *instruct* the shareholders to accept some offer or other, over their own wills? How would that really be different from nationalising-and-then-privatising the thing?

We're into Northern Rock for some £25-40+bn. Absolutely unimaginable sums, equating to four per cent of GDP. It may be that only £5bn or so will actually be lost, but there must be a material risk that liquidation would reveal problems that put the government's losses above £10bn - 1% of GDP. There can't be any question of the government risking crystallising losses on this scale, so if a sale can't be agreed, nationalisation may be the least worst option...

[Harry Flashman]

Administration and turning NR into a zombie fund is the only serious option.

[Andrew Lilico]

I'm a little hazy on precisely what Cameron is proposing with the fixed rate mortgage taper. Is he saying (a) that customers should be offered early the option of having higher payments towards the end of their fixed rate in exchange for having their payments rise more gradually to their new fixed rate levels? That might work if it were not so administratively complicated to deliver.

Another possibiity (b), less administratively complicated, might be to offer new fixed rates that are *higher* than would be offered otherwise, but which are back-loaded in payment terms so that in the first few months people are eased into the new higher rates. This could be a good idea, and I suspect that in practice this will be what mortgage companies intend to do anyway - for they are likely to show particular forbearance about missed payments during the initial period.

What *won't* work is to insist (c) that, at the end of current fixed rates, mortgage companies should subsidize the next fixed rate deal by having the rise up to it tapered.

I think that (b) could actually be quite a good idea, and it might be better if there were a little coordination over it, so that companies didn't seek to undercut the higher fixed rate-plus-tapering-in offerings of some companies with lower headline fixed rates.

[Manish Singh]

Following on from my previous comments

I think the choice is very stark : Bankruptcy or Nationalisation,

Private buyers seems to be out of game now, if not fully , nearly. They can't get the finance in place. They could have done in H1, but the world has changed as the markets have.

Nationalisation seems to be a lesser evil when compared to bankruptcy(for the sake of confidence in banking system and UK economy), and shouldn't be ruled out.

Having said that, Nationalisation would mess up the banking system badly though. When Nationalised, as owner of NRK I can't imagine Labour govt giving its approval to possess people's homes when they can't afford to pay their mortgage.

From a purely selfish political perspective, Conservative party can keep quiet, and let Labour make a bigger mess of it. Fairly sure, whatever happens it will be easy to criticise in retrospect

But realistically, Conservative Party cannot be seen to be dithering on having a strong policy response to such an important issue.
I would suggest the following

-Backing Nationalisation reluctantly and making it amply clear in all form on media that Governments action/inaction and lack of leadership has left us with no option.
-Highlighting the trouble it will cause to taxpayers going ahead
-and keep reminding the govt. of its mismanagement when faced with a real economic situtation to handle.

[reality check]

Nationalisation is actually quite a good idea, and certainly better value than the current proposals.

The taxpayer is already on the hook for the deposits, and £25 billion of funding, but currently any improvement in the value of the business goes to the shareholders. The reality is than the shares are worthless, and only trade to reflect option value assuming a soft deal from the taxpayer.

All nationalisation will do is ensure that the taxpayer benefits from any upside. That is a better balance given the taxpayer is already taking all the downside risk.

Best option is to pay off the depositors, and transfer the assets (mortgages) into goverment pension funds. UK borrowing up 3-4% but balanced by gov assets.

I don't think that Cameron shousl play politics with this as his lack of business experience will show.

[George Hinton]

One of the problems with NR is the political impact of Labour voters potentially losing their capital.
This facet crowds the Treasury's thoughts and is probably the reason for Virgin's bid being preferred as it offers something to the shareholders.
Frankly, given the parlous state of NR's balance sheet, inability to raise wholesale finance, they are a dead duck and were so 2 months ago, so why the Bank of England bailout? Politics of course. NuLab cannot afford the loss of such an institution in the fragile North East.
So, rather typically for NuLab, they have dipped their hands into the public till and provided support on a monumental scale. Support to prop up 6/7 MP's and a few lynch individuals. Afterall can't have MP's on the dole when an election is called and they're voted out. Oh, of course, he bottled that one didn't he.
I know its been said, but repeat it I will, if Northern rock had been called Southern B/S and headquartered in Guildford then to the wall they would have gone. I cannot see NuLab supporting tory or Lib-Dem voters.
A pox and plague on these people and lets sue them if there is a shortfall on the B of E advances.

[Editor]

John Redwood: "No-one has explained how taking over responsibility for all £100 billion of the Rock’s liabilities would be better for taxpayers than merely lending them less than a third of that sum against security from their assets."

[Manish Singh]

Dear John, I haven't seen the NRK balance sheet and nor their mortgage books and indeed liabilities are in excess of £100bn as you have pointd. A customer who met the BoE Financial stability Panel was told that NRK didn't have subprime assets. Therefore I presume they have good deal of 'performing assets' just as other 'better behaved' mortgage houses have.

Where they differ from other solvent/working mortgage providers is that they relied on capital market for financing. Liquidity played havoc as markets turned and NRK was squeezed.
In the event that a private buyer cannot be found, who else but Govt, the lender of last resort can provide liquidity and keep it a going concern to recoup 100bn underlying asset (if that is the figure), also importantly preserving the reputational risk of UK banking system by preventing NRK from going bankrupt.
BoE played 'moral hazard' hardball by refusing to provide liquidity and ECB was criticised for their action. Now we know who is covered in more glory post the event.
I am a free market thinker as you are and I hate the word Nationalisation. However if the assets are good and after running numbers there is a feeling NRK can be sustained and all or most of capital investment recouped. Lets go for it and do not oppose Nationalisation on 'free market grounds' which ofcourse is very important ground to hold but it doesn't strictly apply here as the ground has been tainted by Government's inept action/inaction. We are not at beginning of crisis but at fag end of it with harsh reality ahead. Nationalisation seems to me a painful but better option than a certain loss £30bn ( don't have the exact loss given default numbers) for taxpayer and the crushing blow to UK's banking reputation

[A Porter]

>>more sharing of information between financial institutions<<

how Big Brother is THAT?? I do NOT expect my bank/building society to divulge my transactions with them to other institutions. It is already bad enough to have everything about you known by credit agencies such as Experian. I defaulted on six months of mortgage payments at a time of serious illness/not working. The situation was resolved within weeks of recovery/return to work, anything I owed was paid in full with any accrued interest, but I can't get rid of that record for SIX years. And I certainly can't get any credit anywhere, or get a bank account that includes a normal debit card. I've learned to live without credit... it IS possible, and I'm probably a good deal happier without it. I have to live within my means, the way people did a couple of generations ago. Big deal!

[reality check]

John Redwood: "No-one has explained how taking over responsibility for all £100 billion of the Rock’s liabilities would be better for taxpayers than merely lending them less than a third of that sum against security from their assets."

No-One: simple answer as the question is incorrect in assuming nationalisation implies a goverment guarentee. It doesn't - gov owned businsses can and do go into administration . As Redwood knows full well as a former bankser it is called limited liability. By acquiring the business with a newco the goverment assumes no more liability than it already has, but does get any upside.

[passing leftie]

There is no other option than nationalisation, which is why Cameron hasn't suggested anything else. The government's slavery to the unmediated free market would have been mirrored precisely by the Tories, leading to exactly the same crisis. I don't see how the government could have handled it better. The problem is that banks are allowed to muck around with these silly financial instruments, and the rest of us can go to hell of they turn out bad.

[The Banker]

Andrew Lilico asked "I'm a little nervous about Cameron's ruling out of nationalization.... does Cameron really have another plan?"

He didn't and he doesn't. When Naughtie asked him if he opposed nationalisation he said that it would represent a massive failure by Labour, but that he didn't absolutely rule it out. Weak.

Andrew Lilico said "I'm a little hazy on precisely what Cameron is proposing with the fixed rate mortgage taper."

That's because it's all flannel. He's not proposing any changes to the law, just wants banks to, y'know, like, lighten up, yah, and be better people and try not to repossess too many houses, because that's just so not very nice.

No deal!

[Yet Another Anon]

I see no purpose in the Treasury buying a bank, first there is the search for a private seller, if this fails then surely receivers can be called in and perhaps one solution would be to convert it back into a Building Society and it can repay the Treasury in instalments.

If the state were to nationalise it the money would still be owed to the Treasury, there is no reason to suppose Northern Rock is about to go bust, Vincent Cable is just politicking that's all, he knows he isn't going to be held to account for what happens on the issue!

[bill johnson]

I have absolutely no interest in the views of a man who once saw fit to comment on chocolate oranges.