If the first bailout doesn’t work, try a second. If the second fails, try a third. If the third flops, try a fourth.
If Northern Rock Plc. was a normal company, it would now be dead three times over. But Gordon Brown doesn’t want to recognize the fact. Three bailouts over four months have all failed to provide the conditions under which the stricken UK bank can have a viable future in the private sector. It ought to have been declared bust or nationalized a long time ago. But having invested so much of his own political credibility in this mess, the UK Prime Minister is preparing to roll the dice with taxpayers’ money yet again.
The first bailout was just a loan from the Bank of England; the second a guarantee of depositors’ cash; the third a broader guarantee. The latest scheme, devised by Goldman Sachs Group Inc., turns the government’s loans into government-guaranteed bonds. The significance of this is that what was supposed to be temporary government life support is now to become a medium-term crutch. No one knows when, or if, the state will finally extricate itself from the liability.
As the credit crunch has dragged on, the prospect of getting private sector money to take the place of the Bank of England has receded. But Brown’s latest generosity may make it possible to raise a sliver of equity to complete the Rock’s recapitalization. There are three different schemes in the works. But even the most ambitious, led by Richard Branson’s Virgin Group, envisages only £1.3 billion (Rs9,997 crore) of new equity—a tiny fraction of what the government is planning to guarantee.
No wonder Branson is overjoyed. If he clinches the Rock, he will be taking a risky highly geared bet financed largely by taxpayers. If things turn out well, he will make a big multiple of his investment; if things turn out badly, he will lose only his upfront stake.
The pay-offs for taxpayers look different. The best they can expect is to get a small slice of the upside; in the worst case, they face a significant loss.
The government’s plan does contain some elements that mitigate the potential damage to taxpayers. The state will receive a fee for providing its guarantee; a “buffer” will be created so that shareholders rather than taxpayers suffer the first of any losses; and the state will receive a share of the upside. The government is also maintaining the threat of nationalizing the Rock in the event that a private sector solution can’t be finalized on these terms.