George Osborne, possibly an even less successful salesman than he is Chancellor of the Exchequer, has managed to flog publicly-ownedNorthern Rock for a full £400m less than was paid for it back in 2008. The Rock’s owner, Richard Branson, the subject here of a withering Daily Mail profile, must be chortling all the way to his new bank.
And it gets better. Aside from the loss on the sale, the government – or, in other words, you and I – are continuing to underwrite the bad loans that Northern Rock managed to rack up during its years on the credit derivative Kool-Aid.
You might remember the story. Northern Rock, one time sober redoubt of Newcastle property markets, leapt through the empty space where financial regulation used to be, freeriding the greatest credit bubble in history. No more sleepy north eastern backwaters for their aggressive new management, headed by chair Matt Ridley and chief executive Adam Applegarth, who were not about to allow a mere total lack of qualification hold back their vaulting ambitions.
Siphoning easy money straight out of the interbank lending market, they mainlined it directly to their own lenders in the form of dirt cheap mortgages with minimal scrutiny. Gorging on the resulting excess, Northern Rock inflated itself to Britain’s fifth largest mortgage lender by early 2007, Applegarth’s gloriously hubristic annual reports promising ever faster expansion.
As the US sub-prime defaults gathered pace from 2006 onwards, this fly-by-night business model crumpled. By mid-2007, interbank lending markets had started to freeze up. Big banks became increasingly nervy of each others’ bad debts. But Northern Rock, leveraged by now some glorious distance beyond mere dangerous speculation, depended critically on that supply of credit, some 75 per cent of its funding coming directly from wholesale markets. When the flow dried up, the entire bank was exposed to collapse.
Applegarth and Ridley – a staunch libertarian who had once claimed that governments “do not run countries; they parasitise them” – were forced, cap-in-hand, to the Treasury for an emergency bailout. Government assurances were given to reign in the first run on a UK bank for 140 years. A rescue was needed, but it became clear no reputable buyer would touch the stricken bank. The Treasury was compelled, teeth gritted, to take Northern Rock into public ownership in February 2008, taking on the bank’s festering loan book.
It’s that £20bn pile of dodgy debt that is precisely what isnot being passed on now. Branson, no fool, likes his business models clean and simple – heads, he wins; tails, we lose. Osborne appears to have quite the opposite persuasion. Perhaps he is at heart a simple, well-meaning soul, given to acts of charity for those down on their luck.
Far better to have kept the bank in public ownership, and used its experience with mortgage lending – and it has some, quite legitimately– and its regional base to run as a public utility, in the public interest: providing much-needed investment in those areas of the country hardest hit by Osborne’s recession.