Monday, February 18, 2008

UK Bank nationalized

In a last ditch effort to prevent a Titanic, the British government is going to temporarily (whatever that means) nationalize the Northern Rock Bank while it reorganizes; and freeze trading of the stock. This is going to put the Brown administration in the unenviable position of having to foreclose on some of its own citizens.

This move was made after two buyout offers were deemed by the government there to be insufficient. For a party (Labour) that finally appeared to give up on the concept of nationalization, this is déjà vu.

I don't know whether the UK has deposit insurance such that exists in Canada and in the US which theoretically protects innocent depositors in case of a "run" on a bank, but there are two things that bother me about this. One is that it sets a very dangerous precedent and that beyond the deposits, British taxpayers could be on the hook for £55 billion, the value of the distressed loans the bank itself owes. If another major bank gets into trouble, it'll be huge if for no other reason that Northern Rock is rather small compared to the other majors there. (An apt comparison in Canada would be the National compared to the other Big Six Banks.)

Two is that this is indicative of just how much the sub prime crisis has gotten out of hand and that no one did anything to stop it. I generally favour free markets as the best place to determine loan risks, but I also wonder what business the banks around the world had in granting mortgages to high risk people as well as people who decided to hedge on whether those loans would be paid back. Some towns in California and in Ohio are facing foreclosure rates of 25%. This is insane, especially when people were given 125% mortgages meaning even if they lose they still win. The loanees, that is; the loaners are the ones stiffed. Surely there should be some guidelines if not outright regulation to ensure those who take out money can pay it back.

This is truly a case of damned if you do, damned if you don't. Frankly, this extraordinary step could be the end of Gordon Brown who is mostly a lame duck here on in. While I'll be glad to see New Labour go, the presumed alternative of the Conservatives are hardly appealing either -- I'd want to give another look at the Lib Dems (ironically they're supporting Labour on this one, although they say it's very late in the game to have had to taken this step).

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