With Alistair Darling coming under increasing pressure after the loss of the personal data of twenty-five million people by Her Majesty’s Revenue and Customs, Martin Vander Weyer reviews how Darling and Gordon Brown have also moved into the firing line in the whole Northern Rock debacle. They along with its employees and shareholders now have the most to fear from the crisis.
No one seriously argued, ab initio, that the Northern Rock fiasco was the government’s fault. Not even Gordon Brown’s worst enemy (a title more hotly contested than Strictly Come Dancing) tried to claim he was the evil mastermind behind US sub-prime mortgages, or the vast growth in the securitised debt market which Northern Rock relied upon for funding, or any other aspect of Northern Rock’s over-sophisticated business strategy. Nor did anyone suggest it was dull-dog Alistair Darling who taught hedge fund managers how to make fast bucks by short-selling bank shares on the back of mischievous rumours. When David Cameron, in his lame-duck pre-party-conference phase, tried to suggest that the culture of debt encouraged by Brown was the root cause of the whole crisis, he was mocked and ignored.
But so profound has been the swing of the political pendulum since then, and so intractable and multi-faceted has the Northern Rock problem turned out to be, that the government has somehow managed to manoeuvre itself squarely into the spotlight of blame. It was the three-way division of regulatory authority between the Bank of England, the FSA and the Treasury – devised by Brown in Treasury control-freak mode in 1997, with Darling as his junior – which allowed Northern Rock to pursue its high-risk course for a crucial few weeks too long without a safety net. It was Darling’s vacillating public statements on the day that made the queues outside branches longer and more anxious. According to the Governor of the Bank of England in a BBC interview (though he later tried to un-say most of this) it was Darling who effectively blocked a deal with Lloyds TSB that would have headed off the disaster before it happened, and who had earlier shunned the idea of increased depositor protection for just such an eventuality.
Now Darling’s instant depositor guarantee – widely praised at the moment that he made it – has given rise to a £24 billion commitment on behalf of the taxpayer, which could rise to £40 billion, dwarfing great chunks of essential departmental public spending. And no one – including the frontrunners in the bidding process, JC Flowers and Virgin Money – is willing to take on Northern Rock’s assets and liabilities without a continuation of that guarantee at least for the duration of any predicted downturn in the housing market.
Given that Northern Rock’s assets are for the most part good-quality mortgages on which any ‘lender of last resort’ is unlikely ultimately to lose, the taxpayers’ exposure is perhaps not as dramatic as the big numbers make it sound. But the complication is that EU rules may make it illegal for the state’s guarantee to be retained beyond six months and that may leave only the options of a winding-up, in which shareholders are likely to lose everything and thousands of jobs will go too, or nationalization on the Railtrack model, which may still means shareholders lose everything while taxpayers take on an even more open-ended commitment.
And even the shareholders-lose-everything aspect of the story is now turning against the government. Early in the crisis there was much talk of ‘moral hazard’: the bracing effect on corporate behaviour generally of leaving shareholders to their fate when the managers they appoint make strategic mistakes. Labour backbenchers and free-market economists seemed to agree on the point. Now however, there is a groundswell of sympathy for the 140,000 shareholders in Northern Rock, many of whom hold shares because they were customers at the time of flotation and can claim that they held on to them as a gesture of support for a local business which is woven into the fabric of the north-east and does much good work through its charitable foundation. More to the point perhaps, many of them live in constituencies in and around Newcastle, mostly Labour held, and many of them are now convinced that the action or inaction of Brown and Darling has been a major contributing factor to the potential losses.
How this story will play out is still anybody’s guess. If you’re a Northern Rock depositor, your money is apparently safe because Darling cannot possibly reverse out of his guarantee and risk another run which might extend to numerous high-street lenders besides Northern Rock. If you’re a mortgage borrower, your only real worry is a major collapse of house prices provoked by a seizing up of the mortgage lending market, but no one is predicting that yet. If you’re a shareholder or a Northern Rock employee, I fear you must face facts that the news can only get worse. If you’re Gordon Brown or Alistair Darling I guess you may not be regular readers of this column so first of all, hello and welcome: but how galling it must be that a market eruption that was so clearly not of your doing in the first place has evolved into a government crisis that may one day contribute to your undoing. Politics, it seems, is even riskier than banking.