Northern Rock’s price hasn’t risen by £3.4bn
When the state eventually sells Northern Rock it must now recover an extra £3.4bn thanks to the debt-for-equity swap. As it was worth little more than that at its most inflated price before the collapse, that is surely unlikely.
The mortgage bank’s new management under Ron Sandler is running down the business rapidly but that limits its future earnings potential – which limits its sale value
In the latest half-year Northern Rock lost £585m with an underlying loss of nearly £200m: it is hard to work out how that could translate into £3.4bn of value even if the bank was regarded as worthless when it was nationalised.
The worrying aspect is that Rock is undercapitalised even after running down the business. The new equity injection is almost as high as the £4bn sums raised by the much larger HBoS and Barclays.
With the housing market collapsing it is clear the government bought a pig in a poke when it rescued Rock. But while it would have been tempting to leave the problem to the Virgin group that made an alternative offer, how would that group now be raising new funds to keep the bank capitalised?
Virgin should be pleased its terms were rejected.
The state insists it has taken Northern Rock into “temporary public ownership”. We’ll see. There are few strong banks capable of buying it in a trade sale and a flotation is not a possibility. Certainly the bank cannot be sold for the £3.4bn the government has just injected.
In theory the government could recover its money through dividends or capital repayments, but the Rock’s current cashflow makes either unlikely – even if the bank does not need the capital.
It took 16 years to sell Rolls-Royce after it was nationalised. Don’t expect any short-term sale of Northern Rock and don’t bank on seeing that £3.4bn again.
August 12th, 2008 at 12:51 am
Like most commentators you seem to be under the misapprehension that “taxpayers’ money” has been lost here.
The Bank of England loan to Northern Rock which has been converted to equity has never been anywhere near a tax-payer.
The Bank of England created the credit which it loaned to Northern Rock ex nihilo, as it is entitled to do.
Moreover, since the Treasury, not the BoE (as it was for 300 years) is now in charge of Debt Management it was decided not to “fund” this credit with gilts. So Banks were stripped of reserves instead.
The result was, and is, that the income received by the BoE on its loans - currently 5% (and any penalties) is in fact “bunce”, since it has been paying nothing in respect of this money it created. This income is therefore “seignorage” income to the BoE (and thence the taxpayer) exactly analogous to that the BoE receives in respect of notes and coin it issues.
So the Inconvenient Truth is that the taxpayer has been making in excess of £20m per week, and is between £500m and £1bn ahead so far, albeit this stands to be reduced if losses wipe out shareholders’ capital, which of course they may, in due course.
The mysterious workings of Central Banks - and particularly their power to create Credit = Money “ex nihilo” - constitutes “Financial Pornography” I have yet to see in the UK Press apart from a piece by Tim Congdon in the FT, a while ago.