Redstate

I read a little bit more of the background material on Northern Rock on the FT site and what I don't understand is why the government is trying to "rescue", and now nationalize, the bank in the first place. If the leadership of Northern Rock made some bad decisions then the bank should go under. I am presuming that they have something like FDIC insurance over there? This is when the insurance needs to be called upon. Pay the insured depositors their money, those that weren't insured can sue the defunct corporation for the rest, and move on.

Pejman --

Are you sure you know what your are talking about regards Northern Rock?
A quick look at the most recent annual report (year end 2006) shows the following:

Assets of the bank grew from 82.7 to 101.0 billion pounds year over year.
Shareholder equity at year end 06 was 3.2 billion pounds.

31 Percent of new lending in 06 was in loans which combined secured and unsecured loans. Some 23 percent of loans in place at yearend were secured/unsecured transactions.

Investment securities held by the bank were 6.6 billion pounds.

Imagine for a moment that much of the investment securities held represented one or another type of subordinate tranche of securitizations (46 billion pounds) the bank had done.

We know now that many bonds of this type have collapsed in value. We know also there had been a run on the bank by depositors and lenders. We know that the run was only stopped when deposits were effectively guaranteed by the British government.

We know that real estate prices in the UK are falling. So, if a significant number of loans appear to have been made with no true downpayments, then many of the borrowers appear to be without any equity in their underlying properties.

So, if the bank would have failed without government intervention, if the very real possibility exists that liabilities outweigh assets, why should stockholders be entitled to anything?

You quote the head of a small shareholders group as saying they believe the bank is being stolen away from them.

You say:

As well they should be. This is Chavezism run amok and its consequences for the British banking industry could well be disastrous. Nationalization of industry and resources only serves to distort the market, promote inefficiencies and, as the story indicates, utterly and completely deprives shareholders of their holdings. This lack of respect for basic property rights will only serve to undermine confidence in Britain's management of the intersection between the rule of law and economic prosperity.

Shadow Chancellor George Osborne is quoted as promising to fight and defy efforts to nationalize the lender. Here's hoping that he succeeds. Nationalization is a disastrous policy, no matter how many times it is tried.

Pej, I regularly read most of what you post and agree with the majority of it. In this case, however, it may well be that Northern Rock is insolvent, that the proposals made to the UK government called for regulators to eat the bad assets giving a cleaned up version to proposed acquirors.

You might have mentioned that SRM is also a large shareholder in Countrywide Financial Corp., now in process of being acquired by Bank of America.

SRM is unhappy also about terms of the CFC transaction. http://online.wsj.com/article/SB120308160672671445.html?mod=googlenews_w...

If you find this response in any way disrespectful, then I apologize. However, it doesnt appear on the face of it that you grasp the way in which mortgage banking was operated the past several years, nor the differences between resolution of these companies and nationalization of basically sound enterprises.

In sum, SRM made a series of bad bets and is being punished for them. The small shareholders cannot at this point be surprised as headlines on the British Bank have been on financial pages for months.