By announcing plans to convert Northern Rock’s £25bn Bank of England loans into bonds, so they can be sold to investors, thereby hastening the sale of the stricken lender to a private buyer, the Government has set a dangerous precedent.
Let’s just be clear on this. The Government is using £25bn of taxpayers’ money to underwrite these bonds until further notice, while £30bn of taxpayers’ money was used to guarantee Northern Rock deposits 100 per cent last September.
The scheme announced today to turn Northern Rock debt into government commits UK taxpayers to Northern Rock for many years and brings the bank’s support package to an unprecedented £50bn.
This is all fine and dandy if it enables Gordon Brown and Alistair Darling to escape the humiliation of nationalising Northern Rock.But the support given to Northern Rock’s savers last September alone, has already had the knock-on effect of forcing the Government into a humiliating U-turn on the issue of compensating the 125,000 pension victims of collapsed final salary pension schemes to the same level as the Pension Protection Fund.
The Pensioners’ Action Group quite rightly pointed out the hypocrisy of the Government’s £30bn guarantee to Northern Rock savers, when those who had lost their pensions were being fobbed off with inadequate compensation.
Many of the pension victims had joined their schemes as a condition of employment or had been told by Government agencies that their benefits were guaranteed. By contrast, no one was forced to save or borrow with the Northern Rock
What other pressure groups will the Government now be beholden to as a result of the Northern Rock bail out? The mind boggles. There could even be hope now for the Equitable Life victims and any other group of investors who have suffered financial loss as a result of company mismanagement.
So despite the drawbacks of nationalisation, Gordon and Alistair may live to rue the day they chose to save this stricken Northern institution. The real cost of their decision will play out in the years to come.
You are totally right. It is crazy to put billions of pounds of taxpayers’ money on the line to bail out a failed company. It defies many of the principles of capitalism - shareholders take risks and if the management of the company they invest in makes huge mistakes then shareholders will lose their money. To remove that risk, especailly from banks who have behaved so irresponsibly, is just encouraging other banks in future to play fast and loose with depositors’ money. That is bad for us all. Northern Rock has failed. Yet it is still trading. Northern Rock lent money that it should never have lent. Yet British taxpayers, you and me, are now paying to prop up those loans. Why should we be taking those risks? The risk to the financial system should be dealt with by a better system of deposit protection, to stop future runs on banks, but that should not extend to underwriting failed banks for many years into the future.report this comment