Leave a comment

Why Nationalising Northern Rock is a bad idea

So, they’re going to Nationalise the failed Building Society come Bank, Northern Rock. Bad decision. Should have let it go bust. Why? Because of what Biology teaches us.

Evolution. Survival of the fittest. Those who take risks, or are unable to compete effectively and independently, die out. Those that do not take dangerous risks, those who are stronger survive. So it is with companies as it is with animals, plants, and other life-forms.

In the wild, if you make a mistake, you are punished for it. If stock market listed companies make a mistake they are also punished. So why are banks different?

Northern Rock started out as a Building Society. Its members decided, for a small windfall shareout of the reserves kept by for safety’s sake, to become a listed company, and received large numbers of shares for free. The board shared in the spoils with share option schemes that kept them taking risks in order to maximise profits – but therein lies the rub: there was only an incentive to take risks, there was little incentive to play it safe.

For years they took a risky approach to lending, and had run foul of the Trading Standards Office many times for playing fast and loose with their lending policies and business practices. They liked lending to iffy borrowers because of the higher nominal margins available to them. Everything was done to maximise profits – but that’s something a lot of companies can be accused of. The difference, and the decision to Nationalise Northern Rock by turning it into British Rock only reinforces this view, is that Banks will be bailed out by HM Government. I’d be surprised if the EU were not very cross at this idea though.

When non-banking companies lose enough money, they go bust or are taken over. They are not rescued by the government (except perhaps in France). This keeps executives in those companies in check, they do not take the highest risks, they look after their reserves, they do not gamble the company on the premise that the government will bail them out if everything turns sour.

This is good for those companies, good for the government, and good for the taxpayer.

So why are Banks any different? Well, their supporters (who often want to keep on making millions every year from the high and government underwritten risks they take) say that banks underpin the whole economy, that letting a single bank go will crash the system.

Well, they would say that, wouldn’t they? Anyway, the Northern Rock is not a pure bank along the lines of one of the main Clearing Banks, which are rather more important to the economy.

Northern Rock only underpins a few thousand mortgages and savings accounts. There are dozens of these small banks, and one less will make very little difference. After all, Building Societies have been merging for years without affecting the economy unduly. Many other lenders would gladly have taken over many of the NR’s mortgages, even the savings accounts, so customers would have been mostly unaffected. Except for their free shares which might become worth what they paid for them – nothing. But surely, isn’t that the risk they took when they voted to become shareholders?

Greed. It’s the undoing of so many. Beware of it in your own life: it has sharp teeth. Except if you are a bank, of course.

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: