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spikegifted - Random thoughts


Northern Rock Nationalization

February 19, 2008

I know that there isn't an article on Northern Rock yet, but there are some things that are so stupidly wrong about the whole sorry affair that I'd pass on my 2 cents

1. First of all, what kind of 'emergency funding' was the Bank of England providing? The whole point about emergency funding is to provide credit institutions a bridge over liquidity problems. However, the condition for such funding is so stupid that it would not make sense for a struggling institution: rates of a loan-shark and very strict collateral requirements. Both of these actually wouldn't have help any institution, struggling or otherwise. You need to start a fire to activate the sprinklers.

2. When the funding was eventually approved, thanks to the UK's excellent disclosure rules, the Treasury, the Bank of England and the FSA all jumped up with their megaphones to tell the whole world about it! For those who're not educated in the subtleties of financial services regulations, "emergency funding" reads "bailing out". And that's exactly how it was reported. Before you can finish saying "your savings are safe", people were forming lines around blocks to get their money out. What's wrong with the hush, hush, here's a pile of money, 'sort yourselves out and pay us back within 6 months' approach?

3. Then it was disclosed that there were actually buyers who wanted to buy up Northern Rock, provided that there's a guarantee from the government. But our government sensibly turn the idea away - no, no; taxpayers' money will not be used to bail out private institution. Only to U-turn later as the bank run took place. Nice move! Better yet, it is obvious that giving straight funding to a failing organization is a far bigger risk than giving a guarantee to the failing organization which a third party who wants to acquire... Money out of the door vs. a contingent liability. Someone didn't bother to show up to the Risk101 classes.

4. Once the emergency funding was provided, it was a matter a time before a decision on whether to take the institution into public hands has to be taken. Why? Who in their right mind will buy this turkey without government support? However, given the government's stance as previously described, it is not possible for the government to U-turn again to fund another take-over attempt.

5. While the government was wasting its time trying to figure out what to do, it allowed certain investors to gather large stakes in a worthless stock. When the 'solution' (read: nationalization) finally arrived, these investors will no doubt kick and scream about shareholders' value and shareholders' protection. The government dug a bigger hole for itself while p*ssing away valuable time.

6. Also, the government is trying to behave in an 'ethical' way, by not p*ssing off the shareholders. If it is any normal creditor, it will simply say, if you (equity holders) don't like the terms, we'll simple withdraw the funding, you'd be holding a pile of pretty wallpaper. The only other alternative is a debt to equity conversion and dilute out the existing shareholders. But no! Why should commercial consideration comes in between a good fashion bail-out and a full nationalization? Of course, the longer it took to find the 'solution', the more time for people to build up the idea of of the shares of Northern Rock actually has any value (it's value in terms of pence is in single digits, in my humble opinion).

7. Now that there're some large and vocal shareholders' in Northern Rock, no matter what the government does, they will kick and scream - about protecting 'the little guys'. Now the government is stuck and I mean really stuck! If they walk away, 'the little guys' (and the hedge funds) lose out - that's a poor show. If they somehow protect them, they'd be accused of handing public money to private hands. It's a lose-lose situation.

Just my 2 cents...


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