Vince Cable’s reaction to the Northern Rock EGM

Following today’s Northern Rock EGM, Liberal Democrat Shadow Chancellor Vince Cable sent out the following update:

With the decision by small shareholders at today’s Emergency General Meeting to reject all but one of the Hedge Fund proposals to restrict the action of Northern Rock’s board, it is clear the duplicitous attempts of these vulture funds to shore up their own position at any cost to the bank and the security of taxpayers money has failed.

Although this is, of course, good news it doesn’t change the fact that it is crunch time for Northern Rock. It now looks highly unlikely that a private sale will be achieved in current market conditions. Although it is just possible that Goldman Sachs will have unexpected success in raising money to support a buy out and repay the taxpayers’ rescue loan (currently estimated at £26 billion, excluding the further £30 billion in asset guarantees) it seems now that even the Government thinks the chances of this are remote.

Unfortunately both meaningful alternatives for the future of Northern Rock – public ownership or administration – appear unpalatable to the Government, and there is a real danger it may try to stagger on. This would be disastrous.

At present the fate of £60 billion of your money and the company’s employees is in the hands of shareholders whose continued stake is only £300 million – the actions of its largest shareholders, RAB Capital and SRM Global – two speculative hedge funds who bought in, in the hope of making a speculative killing show how dangerous this situation is.

At the moment we are footing the bill for the residual value of the shares, the bonuses paid to senior managers and the company’s continued existence yet we have no control over the actions of this company. The Government has nationalised the liabilities but not the assets.

One way of bringing this problem to a head would be for the Government to switch off the life support system and let Northern Rock go into administration. The assets could then be sold off, or the mortgages gradually run off to realise as much value as possible to pay off the creditors, including the Government. Northern Rock would cease to operate as a bank.

This dramatic solution, may well come about though it is doubtful if the employees or shareholders could expect any joy and a distress sale of mortgage assets in a failing domestic property market may well mean we never get all of the £26bn loan back.

My own preferred option, though I do not advocate it for any ideological reason, is to take the bank into public ownership with a view to selling it when financial markets permit a satisfactory sale.  It would of course be necessary to install professional managers.

It is premature to say whether the bank has a good long term future; the answer depends on a close examination of the loan book but nationalisation at least keeps open a wide range of options and the potential to keep the bank running as a going concern, saving jobs in the North East. Importantly though it will ensure that taxpayers get back the money we have lent as well.

Everyone in this country has an investment in this bank, and we need to ensure we get it back – the alternative is increasing national debt or increasing our taxes. Under EU law a decision on Northern Rock must be made before March, in the meantime if you want to help ensure the Government makes the right decision to ensure the safety of taxpayers’ money, you can write to Alistair Darling, the Chancellor of the Exchequer (1 Horseguards Road, London, SW1A 2HQ) asking him what assurance he can give you that all £26bn of the taxpayer loan will paid back, and encouraging him to temporarily nationalise the bank as the best option for Northern Rock.

Yours sincerely,

Vince Cable

There’s also a good blog posting from Robert Peston over on the BBC site about how Northern Rock might mess up Gordon Brown’s Golden Rule for the budget.