Any Other Business

23 February 2008

In the end, they may have to auction what’s left of Northern Rock on eBay

When the nationalisation of Northern Rock was announced at the beginning of the week, commentators queued up behind the shadow chancellor to declare a return to the dark days of the 1970s and to dance on the ashes of Alistair Darling’s career. It took a little longer for us all to work out what a horrendous task faces the new management duo of Ron Sandler and his chief financial officer, who rejoices in the name of Ann Godbehere. Let’s hope He is, because they’re going to need a miracle to rebuild a profitable business out of the ruins of the Rock and sell it back to the private sector by the government’s real deadline, which we may assume falls a couple of months before 3 June 2010, when Gordon Brown has no choice but to come out of his bunker and face the electorate.

Sandler’s team have two years of hell ahead of them. Every job cut — and there may be 3,000, half the total Rock workforce — will make a hostile headline. Shareholders, demanding £4 a share or better but likely to get less than £1, will have days in court almost as newsworthy as Mohamed Al Fayed’s — and apart from the opportunist hedge-fund investors who will attract little sympathy, there are 144,000 small, loyal and mostly elderly shareholders who will attract a great deal of it. Meanwhile, high-street competitors will howl at the Rock if it offers top-of-the-range deposit rates, because logic says a state-owned bank should be offering no more than National Savings rates, and to do otherwise constitutes unfair competition. But if the Rock cannot offer attractive rates in order to raise the proportion of retail deposits on the liability side of its balance sheet — and thereby rely less on wholesale money market funding — it can never regain its lost stability.

As for the asset side of the balance sheet, ministers have repeatedly said that the Rock’s mortgage book is sound. But in fact it has the highest loan-to-value ratio of any major lender in the sector, meaning the lowest margin of bricks-and-mortar security. In the last few months of its breakneck expansion, it was shovelling out new loans on a formula of up to 125 per cent of the value of the homes offered as security. It also has more than £6 billion of loans in the deeply troubled buy-to-let sector; and it is already a market leader in repossessions. Combine all that with falling house prices — falling most sharply in areas where boom-time mortgage-lending was most aggressive — and there is scant hope that the Rock will look stronger as a lending business in two years’ time than it does today. It may look substantially weaker — and Sandler’s only real hope is that he will also have made it substantially smaller, to the point at which a credible private-sector buyer is prepared to take what’s left of it off the Treasury’s hands at a discount which crystallises the taxpayers’ losses. Darling can console himself with the thought that he surely won’t still be Chancellor when that happens; even on a salary of £90,000 a month, it’s Sandler I feel sorry for.

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