Monday, 18 February 2008

Too Big To Fail

Today the UK government confirmed they don't believe in free market capitalism by bailing out Northern Rock for idiotic business decisions. From Bloomberg:

U.K. Government Starts Northern Rock Nationalization

Prime Minister Gordon Brown's government will introduce legislation today to nationalize Northern Rock Plc after the Treasury rejected a private rescue for the only U.K. bank to suffer a run on deposits in a century.

The Newcastle-based bank was suspended from trading in London today, and an independent panel will determine how to compensate shareholders. Brown will hold a press conference at 11 a.m. in London, and Chancellor of the Exchequer Alistair Darling will outline the emergency legislation in Parliament at 3:30 p.m.

``There will have to be some threat to jobs,'' said Alex Potter, a London-based banking analyst at Collins Stewart. ``The priority will be to reduce the asset base of the bank.''

The first bank nationalization since 1984 will damage the credibility that the Labour government has established for managing the economy since it took office a decade ago. It will leave Treasury officials responsible for 113 billion pounds ($222 billion) of Northern Rock assets and 6,500 employees.

``There is a perception that Darling is not up to the job,'' said John Curtice, author of ``The Rise of New Labour'' and a professor of politics at Strathclyde University in Glasgow. ``He will only hope that people are rational and that there are no queues outside Northern Rock branches.''

Ron Sandler, who advised the government on pensions and brought back Lloyd's of London from the edge of bankruptcy in the late 1990s, will earn 90,000 pounds a month acting for the government as Northern Rock's executive chairman. Former Swiss Re Group executive Ann Godbehere will become finance director.

Click on the link for the full story. I'm sure taxpayers will delighted with this outcome. The UK government has invoked the too big to fail argument. That same discussion is going in the US right now. Given the state of many US financial companies this is bound be a topic that gets plenty of attention in the coming months.