Northern Rock nationalisation: could it happen again?

Institutional investors are threatening to sue the Government over the nationalisation of Northern Rock. But for the rest of us the key issues are: who's to blame, and will taxpayers get saddled with any more ailing banks?

Now that you and I own Northern Rock it is time to draw a few conclusions and apportion a bit of blame. It is also time to raise a cheer for at least one reason. Funds managed by hedge fund geniuses Jon Wood and Philip Richards will probably lose about £200m. I am not sure that investors in their funds deserve to be victims but the reputations of Wood and Richards will take a well-earned plunge.

These guys jumped aboard Northern Rock once the crisis broke. Exactly what prompted them to invest £200m in a bank that clearly had no future and was to all intents and purposes bust is not exactly clear. But apart from a desire to grab headlines and pose as serious financial players they presumably thought that either Northern Rock would be taken over or that some sort of financial rescue package would be stitched together from which Northern Rock, and its share price, could stage a miraculous recovery.

But actually I suspect that they saw their investment as just the sort of super-contrarian bet that hedge fund mangers love, safe in the knowledge that if it comes right they will score a massive bonus. And if it goes wrong it will cost them personally not a penny.

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Now Wood threatens to take legal action against the Government, but I cannot see that he has any case or any prospect of success. I just hope that the huge legal fees that he seems intent upon paying are not charged to those poor trusting souls who have entrusted their money to his hedge funds.

All other shareholders will be losers too. Apparently an independent valuer will be appointed to put a value on the shares that the Government intends to acquire. This value should clearly be zero, although now that politics are involved some token payment may be seen as necessary.

I have no sympathy for the hedge fund managers who boarded the stricken ship in the hope of plundering some booty, and I have little less sympathy for any professional fund manager who invested in a bank with such a risky business model a bank in fact that was heading for an inevitable fall. I have some sympathy for private shareholders in Northern Rock. They were entitled to believe that the system of bank regulation would ensure that any financial institution of the scale of Northern Rock would not get into real difficulties.

In trashing the hapless Alastair Darling the opposition parties are missing the point. Darling was handed a complete hospital pass by his predecessor and has been well and truly flattened by subsequent events. The opposition parties are also wrong to criticise the length of time that the Government has taken to come to a conclusion. This has been a very complicated and important issue, and I would rather that the Government took its time to come to the correct conclusion, rather than rushed into the wrong one. The BHP/Rio Tinto saga promises to go on for just as long and I don't see anyone complaining about that.

What critics of the Government should be asking is why Northern Rock was ever allowed to get into such a mess in the first place, and whether the same thing could happen again? The reasons for its collapse are clear enough, and make a hook from which Gordon Brown should not be able to escape. He sanctioned the reckless growth of consumer debt, and therefore of lending. And he was responsible for the barmy three-cornered system of banking supervision. How could he possibly have thought it a good idea to split this crucial responsibility between the scorned Financial Services Authority, the Treasury and the Bank of England? At the very least give the job to one organisation which obviously should have been the Bank of England and not to three.

Gordon Brown is absolutely to blame for this crisis, and under no circumstances should he be allowed to wriggle off the hook by blaming the collapse of the US sub-prime market, the seizing up of inter-bank lending or a unique and completely unpredictable set of circumstances. Banking supervision is all about ensuring that depositors' money is safe whatever may happen and under Gordon Brown it clearly failed in this crucial respect.

This article is taken from Tom Bulford's free daily email Penny Sleuth'.