Comments on: Politicians on the Northern Rocks- let them take a third way liferaft

By: Cliff

Cliff — Wed, 21 Nov 2007 17:30:47 +0000

John:
Perhaps rather than nationalise NR, perhaps we should de-nationalise the PO and allow it’s managers to manage. The PO is closing branches, but it still has many in small villages, the kind of places a building society would be unlikely to see sufficient customers to justify opening a branch, but combine the two services and it may be viable. NR has many branches on high streets. Combine NR and the PO and this may kill two birds with one stone. Both business’ are likely to benefit from the takeover/merger. In towns where there are both a PO and a NR branch, one could close and be sold off, this would generate additional working capital for the new company. Both services would then occupy the one building, with each service complementing the other.

Is the idea at all feasable?

Reply: I do favour introducing private capital into the Post office with a mixture of new shareholders and employee shares. It is proving difficult enough to get the government to do that, without the complication of also having to arrange a takeover and offer for sale of Northern Rock as part of the package.

By: Cliff

Cliff — Wed, 21 Nov 2007 11:51:18 +0000

John,

I am neither an academic or an economist, however I read on another website, a suggestion that the Post Office should be allowed to buy NR for a nominal amount. This would give both companies access to a vast branch network and allow the PO to diversify.
Is there any credibility in this idea?
I notice that a new board has been appointed to NR, have the Government been able to put one or more of their people on that board using the amount of public money as the excuse to justify it?

Reply: As the taxpayer owns the Post Office that would mean nationalising Northern Rock, which I would not favour. No, the government has not proposed a Director, though they could if they wished in the cirumstances.

By: mikestallard

mikestallard — Tue, 20 Nov 2007 16:48:27 +0000

I do not understand money at all.
However, here are some other observations:
1. Mr Brown’s boasting about having made the Bank of England independent is now revealed as a very dodgy transaction. In fact, now that we can read the small print, we can see what a tricky little fellow the ex Chancellor turns out to be. As a result of this fiddle, the Bank of England was prevented from handling the whole thing behind closed doors as it has done so effectively in the past. But no - this time, the new bureaucracy kicked in and caused this terrible disaster. Further proof that the Central Government ought to keep out of matters it simply does not understand.
2. Of course, if you do not allow discussion, rumours spread. The sums talked about on (leftie) BBC last night were in the region of

By: Neil Craig

Neil Craig — Tue, 20 Nov 2007 15:27:10 +0000

I agree with your assessment & think that the current zigzagingof policy is damaging. Nonetheless I view putting in a liquidator with some equanimity. It is possible for a liquidator to keep a company running for a considerable time while searching out a buyer &/or selling off bits. Bankruptcy under these terms is a well established procedure which effectively deals the shareholders to the end of the queue (nationalisation puts them & their inevitable lawyers at the front). It also makes negotiations to buy purely between the liquidator & prospective purchasers, which greatly lessens their ability for arm twisting over government guarantees of future hidden subsidies. Since the company is now effectively without leadership this may be the best option.

We are told that the prospective purchasers all say that the current share value “overvalues the company” though whether that means it has a negative value, which would require hidden subsidies has not been disclosed. In any case the existing share value clearly depends on an assumption of government help & there is no ethical reason whatsoever why they should get it. The legal maxim is that the value of something is what the market is, at the time, prepared to pay for it & that looks like about nothing just now.

Reply: This company is trading and solvent according to its Directors and regulators. Companies can only be put into liquidation if they are unable to pay their bills and creditors take action.

By: Michael Taylor

Michael Taylor — Tue, 20 Nov 2007 13:29:53 +0000

(Not for publication).
Yes, the “banking skills” get transferred, but only as credit assessors who get paid on results as advisors to the money market funds. Meanwhile, if their “skills” turn out to be abject, what happens is that the quoted value of the money-market unit gets marked down to reflect the losses. But, of course, that’s not a matter of life and death (and certainly not a matter for universal deposit insurance!) because, after all, if the markets have been doing their job, the holder will already be getting a better dividend from having voluntarily and knowingly have opted for a ride at the riskier end of the risk/reward curve.

The idea was much more extensively worked-through by Randy Kroszner whilst he was seconded to GT in Hong Kong under John Greenwood. You might like to look up his paper “Banking in HK: Regulation, Stability and the Role of Money Market Mutual Funds.” Mr Kroszner, I discover, is now a Fed governor in Washington, so who knows, it may happen. . . . rgds

By: Michael Taylor

Michael Taylor — Tue, 20 Nov 2007 10:11:38 +0000

The level of serial cascading institutional incompetence revealed by the Northern Rock panic is astounding and very disturbing. Indeed, from a party political point of view, it’s probably a watershed event.

The way forward now depends on a) the NR assertion, presumably certified by regulators, that it has only a liquidity problem, not a balance sheet problem and b) the extent and terms of current government support. Obviously, if we don’t really know b) then we can’t be sure about a). Over to you, Mr Darling. . .

Then there are surely various ways forward. The most obvious is to turn the government support into convertibles - perhaps into higher-yielding preference shares. This is the way the Japanese govt helped rescue their financial system in the late 1990s, and ultimately this not only allowed the banks to (just about) trade their way out, but it also eventually seems to have made the government some profit. But question? Can this be done under existing EU regulations? If not, what is the penalty for breaking them?

Finally, rather than rush to universal deposit insurance schemes, I would urge you to consider whether commercial banks as institutions still play any useful part in the financial world. Seems to me that their original role of agglomerating savings and then allocating them may have been useful in the 17th century. However, we now live in a world in which information is widely - universally - distributed with virtually no distribution costs, so that rationale no longer holds good. Savings would be better (ie, for a higher return and/or lower risk) allocated by savers themselves by picking amongst a universe of daily-quoted money market mutual funds of differing risk/reward profiles. Whilst we continue to tolerate banks, and their absurd and dangerous inability to assess risk responsibly, we will continue to have to bail them out. Deposit insurance only encourages them! Take the opportunity offered by the Northern Rock debacle to encourage the growth of an alternative set of financial institutions based on the technology of the 21st century, not the 17th.

Reply: I prefer the government acting as bank manager and requiring repayment of the