Jeremy Warner's Outlook: Disaster as Rock nationalisation looms

What price for Rock compensation?; FSA seeks new chairman

You might have thought, what with the Northern Rock debacle and the weather, that things couldn't possibly get any worse for the down-trodden North-east. But, just to prove the old truism that when something goes wrong, then everything goes wrong all at the same time, they've gone and re-appointed Kevin Keegan as manager at Newcastle United – a mark of desperation if ever there was one. Meanwhile, nat-ionalisation grows ever more likely for the beleaguered Rock. It is as if the region has climbed into a time machine and gone back to the 1970s.

I seem virtually alone in the British press in continuing to think that nationalisation is an extremely bad idea. Everyone else is urging the Government on from the sidelines, so we can presumably expect a resounding round of applause when Gordon Brown finally pushes the button. I draw my aversion to nationally owned businesses largely from experience of the 1970s.

Perhaps everyone else is too young to remember this deeply troubled decade, or the enormous benefits brought about since then by placing state-owned enterprises back where they belong in the private sector.

Even so, the consensus is very much that nationalisation is not only inevitable but even desirable and, according to Whitehall gossip, it could happen as soon as next week. For what it is worth, Gordon Brown said during Prime Minister's Questions yesterday that a decision would be made in "the next few weeks". In fact, a perfectly viable and, for the taxpayer, low-risk private sector solution still exists if only the Government could grasp it. This is the plan put forward by Goldman Sachs, which is advising the Treasury, to securitise the outstanding Bank of England loans into bonds. Obviously, if it were as easy as this statement seems to imply, then the Government would have done it ages ago.

The problem all along has been that the markets won't lend to Northern Rock. If, on the other hand, the Government were to guarantee the bonds, that would be a different matter.

In order to get round EU rules on state aid, the Government would have to provide this guarantee in the form of an insurance wrapper, for which it would be paid a commercial rate similar to that charged by private sector credit insurers such as monolines.

Some will argue that the effect would be largely cosmetic and wouldn't get the taxpayer off the hook. Yet, actually, it is no different to what the Government did with the Channel Tunnel high-speed rail link when, in order to secure private sector backing, it was forced to guarantee the bonds issued by London and Continental Railways. It is also not so dissimilar to the implicit federal guarantee that underwrites mortgage-backed bonds issued by Fanny Mae and Freddie Mac in the US. There would also have to be a sizeable injection of new equity to put the business back on a viable footing, but that is something that both private sector bidders, Virgin and Olivant, have already committed to.

This may not be an ideal solution but it strikes me as a lot better than nationalisation, where mismanagement of the assets by public officials is a virtual certainty. Outright nationalisation also sets an appaling precedent. It sends out the message that all bank creditors are essentially underwritten by the Government, which will always come riding to the rescue.

It beggars belief that Mr Brown, once installed as chairman-in-chief of Northern Rock, is going to sack workers in Labour strongholds in the manner demanded by the Rock's straitened circumstances, or indeed that he will unsentimentally evict people from their homes in the same way as other mortgage lenders as the housing downturn takes hold. Yet, if he doesn't, he'll be sued to the rafters by rivals claiming unfair competition. The very idea of the Government as mortgage-lender is risible and unacceptable.

What price for Rock compensation?

Yet I fear my argument is going to fall on deaf ears. The Prime Minister wants to be seen to act decisively in addressing the symptoms of financial instability and, what's more, it looks as if he can rely on the support of the press. The body language is increasingly that of nationalisation. Is it also that of nationalisation without compensation?

On that too, the press seems virtually unanimous in arguing that, as providers of the highest risk form of capital, shareholders shouldn't get a penny. They certainly wouldn't in an administration, and the precedents in nationalisations do not bode well.

Even so, as our story on page 42 reveals, ministers appear reconciled to paying at least something, that sum to be determined by independent arbitration. How much is fair? At one extreme of the argument lies the contention that, since Northern Rock would be dogmeat without Government loans and guarantees, the company is essentially worthless. At the other lies the argument run by hedge-fund investors that the company is worth its book value of £4 a share.

This may seem fanciful in present circumstances, but this is a highly unusual situation. Perhaps oddly for a company which is said to be bust, it is still quite profitable and perfectly capable of paying all its bills from cashflow as they fall due. As demonstrated by the sale of the equity release portfolio to JP Morgan last week, the assets also still seem to be capable of fetching book value when sold.

Northern Rock may be an extreme case but nor is it alone any longer in needing constant infusions of central banking cash to stay afloat. Central bankers are pumping hundreds of billions of pounds into the system in an attempt to kick-start inter-bank lending and cure the present liquidity crisis. Without it, we would be in a bear market far more serious than the relatively tame correction seen so far, with extreme consequences in terms of economic dislocation. Are we to say that all banks that borrow from the Bank of England are worthless? Plainly not.

Paying nothing, then, is not an option. Even if the Government thought it reasonable to cut shareholders off without a penny, it might make sense to pay up, if only for the purpose of avoiding the inevitable and protracted legal actions that will follow if it doesn't. Under threat of high court challenge, the Government eventually did pay compensation for Railtrack, despite ministers initially insisting there was nothing doing. In that case, the 262p a share eventually settled on was established by reference to the market price on the day before the company was put into administration. No wonder the Treasury has been merrily trying to massage the Northern Rock price down to more "realistic" levels. Once the shares reach 25p, or par value, the total amount of compensation paid would be a still sizeable but possibly publicly acceptable £100m.

FSA seeks new chairman

The Financial Services Authority is advertising for a new chairman to replace Sir Callum McCarthy, who will not be seeking re-appointment when his contract expires in September. This is nothing to do with the Northern Rock debacle, which some have blamed on the FSA. Sir Callum never intended to serve a second term.

But who would want to take up this particular poisoned chalice? The money is not great by City standards, the position debars you from doing anything else and, as with Northern Rock, the inevitability of eventual regulatory failure carries a high risk to reputation. The obvious internal candidate, James Crosby, former chief executive of HBOS and currently deputy chairman of the FSA, has ruled himself out. No one is yet obviously throwing their hat in the ring.

Nor, in any case, would it be wise to give this vitally important job for the City and the wider economy to someone seeking a personal aggrandisement. The combination required of authoritative City practitioner and strong sense of public service may be an impossible one to find.

j.warner@independent.co.uk