Northern Rock Compensation

Well, yes, I can see what the aim is here:

The Government is facing the embarrassing prospect of being forced to reveal its planning in the build up to Northern Rock's nationalisation after the lender's largest shareholder, hedge fund SRM Global, joined private shareholders yesterday in suing the state for fair compensation.

When Railtrack was bankrupted/nationalised the revelation of what Ministers et al had been talking about in the lead up to it was sufficiently embarrassing that compensation at the suspension price was indeed paid. It was quite clear that a great deal of brow beating, if not an intention to bankrupt whether it was necessary or not was going on.

However, I'm not all that sure that this will be the case here. Oh, undoubtedly there will be embarrassments to be found, but it doesn't really matter whether Northern Rock was insolvent or just illiquid. A bank is equally bust in either case.

SRM said: "The Government's compensation scheme can be expected to produce a nil value whereas Northern Rock's book value was at least £4 a share."

That might even be true, but shareholders would only have got that £4 if the liqudators had been able to realise that sum. Given that the credit markets still have not recovered and a liquidation would be well under way by now then I seriously doubt it.

In fact, if we applied the Bank of England's own haircuts to the Northern Rock mortgage book, I'm not sure there would be any equity left at all.

I put this in the nice try but not much hope class.