We had a good news story last week in the form of our old friend Northern Rock being in much better shape than expected and now being worthy of yet another infusion of cash. Although lacking both taste and judgement, the 10% staff bonus story concerns me less than the £10bn infusion package.
I mean, WTF? So it makes sense to reward the most reckless UK lender with a package to allow it to outcompete viable businesses and undertake yet more malinvestment? How about rewarding more responsible institutions (e.g. Nationwide / Cooperative / etc) that deserve to survive? Nah, far better to force them out of business and let Northern Rock survive. World gone mad...
I've held the view from the start that Northern Rock should have gone to the wall as it was painfully obvious even in 2006 that it would be the first bank to fail with its' suicidal business model. Hence it would be wasted ammo needed for bigger problems downstream. But that's not a popular position to hold.
The problem with everything associated with Northern Rock is the notion of moral hazard. Namely, the responsibility for managing risk. If bad decisions have no consequences, such as being left to collapse when your whole business model falls over, then it leads to more and more bad decisions.
Now, having bailed out most of the UK banking sector, a queue of begging bowls is forming with many major employers (particularly foreign owned) ready to blackmail the government to get their share of the cash that the bond market is just dying to throw at UK PLC over the next few months for 0% return*.
It's unfortunate that the good banks and businesses that deserve help the most will be at the back of this queue, so probably won't see the money. Is this really the best way to heal the economy?
* - bold section is ironic!
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Moral hazard is now well and truly embedded and the day of reckoning for the bankers, regulators and politicians is still years away... (but maybe, just maybe it will come)
ReplyDeleteStrangely I think Northern Rock is one of the "better" places to channel money through these days! (although I'm not sure what's wrong with the Post Office / National Savings?) The board of the Northern Rock was removed, a new management team put in place and they were actually delivering to the sensible objective of paying down debt and returning tax payer's money. The bonuses were relatively small in the scheme of financial institutions (esp compared to Merryl last month) and seem to have correctly incentive-ised the company to start remedying the mess it had made. So, a year on, NR looks relatively "sane" compared to the RBS, HBOS/Lloyds. Its ashame the same can't be said of the government injection...
Also, while giving money to successful businesses to allow them to pick up the pieces is a far better approach that rewarding the losers, giving mutuals the money doesn't sit well with me. The mutuals are undoubtedly the shining stars in the whole sorry mess by sticking to their straight forward model and not attempting to redistribute their money to traders and shareholders. I see nationwide is advertising 5000 new savings accounts / day for the past year which probably explains why they still are trying to lend me money...
In some ways, I think they could end up over capitalised as people start to realise the advantages of staying clear of the chumps who have wrecked the economy before government money arrives with inevitable strings attached and pushes them to make risky loans to "support" the economy - another would be a grim prospect.