Chutzpah at Northern Rock

The Yiddish word Chutzpah roughly translates into English as Bare Faced Cheek.

There is a fair bit of that about at the moment, especially over the Northern Rock fiasco. Not only do the shareholders want £4 a share from the taxpayer for their worthless bank, the lawyers and investment bankers advising the government are billing £100 million in consultancy fees too, even though the sale did not go ahead.

First the shareholders. Without government intervention, their shares would have fallen to being worthless and Northern Rock would have gone bust. But for state intervention, they would have lost their money months ago. The closing price of 90p was due only to a government guarantee. Furthermore, it was shareholders complaining that they were not going to get enough for their shares that helped to scupper the private sector buyouts. Ultimately, it was shareholders who elected the management of the bank that got it into such a mess in the first place. Yet still they behave as if they are hard done by and the whole thing was someone else’s fault.

As for the advisers, they are more likely to get their money. Their contracts will have been written in such a way as to ensure that they will receive most of their fees, even though they were unable to find a buyer for Northern Rock. Sure, there may be some quibbles about how you define a successful outcome, and whether that included nationalisation, but the final payment will probably not be far short of the £100m.

As Guido says, Vince Cable advised the government to nationalise Northern Rock months ago. That advice was given for free. With a bit more courage, the government could have gone ahead and done what it is about to do this week back in September and saved itself a lot of money. Andrew Hill makes an interesting comment about this in the Financial Times:

It is a sure sign of how far the credibility of Britain’s “tripartite authorities” – the Treasury, the Bank of England and the Financial Services Authority – has fallen that the government’s public statements on the nationalisation of Northern Rock give a prominent mention to the plan’s endorsement by Goldman Sachs.

It used to be the case that the UK authorities’ own authority was such that they didn’t need to lean on a private-sector institution for support, at least in public.

In other words, the government feels that it needs external experts to give its decisions credibility. Which, if the truth be known, is one of the reasons why a lot of organisations hire consultants.

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