Alistair Darling has got off to about as bad a start as any Chancellor of the Exchequer in living memory.
He was already facing accusations that he pinched much of his Pre-Budget report off the Tories, that he had made a monumental hash of his reform of capital gains tax (CGT), and that he had been humiliatingly undermined by Gordon Brown when the Prime Minister announced a U-turn over CGT without even consulting him. his alone was enough to raise questions about his suitability for the job.
Under the circumstances, the last thing he needed was Mervyn King to open up a new debate about his handling of the Northern Rock (NRK) debacle. But that is what the Governor of the Bank of England did this week – and a good thing too.
The Treasury’s role in the Northern Rock debacle has so far gone largely unexamined. All the blame has been focused on the directors of Northern Rock, the Bank and the FSA. Darling’s own appearance before the Treasury Select Committee, scene of a mauling of the other key players, was a non-event. That’s all the more surprising given that the rules of the Tripartite system, which dictate the handling of financial crises, place ultimate responsibility in the hands of the Chancellor. Whatever mistakes were made by the Bank and FSA once the storm broke, the buck stopped in Whitehall.
True, King did not directly criticise Darling in quite the way some press reporting has suggested. In fact, he went out of his way to praise the Chancellor, not least for his decision not to provide the £30bn line of credit that Lloyds TSB was demanding to finance a rescue bid for the Rock.
As King noted, providing loans to finance takeovers is not the normal business of the central bank. And given that any assistance offered to Lloyds would have to be offered to other bidders and other banks in distress, there was no knowing what the ultimate call on public funds would be. Governments can’t write blank cheques.
Still, King was being disingenuous. His comments make it sound as if handing £30bn to Lloyds was the only option on the table and that, when it fell through, the decision to keep the Rock afloat with emergency lending – which now totals £23bn – became inevitable. But there were alternatives open to Darling and King – and their failure to take them is one of the mysteries of this whole affair.
One option was to agree to loan Lloyds the money, but at a higher rate of interest – which is what the Bank ultimately offered to the Rock itself. Of course, that would have considerably reduced the amount Lloyds was willing to pay, possibly wiping out the shares completely. That might not have been a bad thing. The shareholders would have paid the price for a flawed business model, Northern Rock would have been quickly transferred into the arms of larger institution, and the UK would have avoided the humiliation of the first run on a bank in 150 years.
So why didn’t it happen? My understanding is that King did raise this option, but it was dropped because it was felt the Rock board would not agree to a rescue on those terms. But that isn’t convincing. After all, the Bank had all the cards. It could have threatened to withhold emergency lending, forcing the Rock into bankruptcy. That would have led to a run on the bank, but it happened anyway. Besides, if administration paved the way for a swift Lloyds rescue, the crisis would have been over in days. The Bank seems to have worried a quick rescue would fall foul of the Takeover Code, but the Takeover Panel was unlikely to insist on a formal 60-day bid process while depositors queued up.
Somehow the Rock seems to have been allowed a veto on what the authorities decided, with the result that despite all that has happened, the shares still have some value. Perhaps that’s simply because the Rock had some of the smartest advisers in the City on its side. Bizarrely – and inexplicably – the government didn’t appoint its own advisers until nearly a month after the run on the bank. It is also indisputable that the Rock is well-connected. It has two of Brown’s trusted advisors on its board and close links with the North East political establishment. This is bound to have helped the board get a hearing during the crisis.
How forcefully did King push the hardball option, which would have allowed Rock shareholders to be wiped out if necessary? If the answer is “not very”, then he deserves criticism. But if he did push this option only for Darling to veto it, then he’s the one with explaining to do. This was – as King has helpfully reminded us – a political decision concerning the proper use of public money. But given the sums involved, it was vital this decision was taken in the national interest and free from political considerations.
King’s intervention is a reminder there are still big unanswered questions about this affair. Until we get the answers, this debacle will continue to damage the standing not only of all those involved, but of the UK itself.
Simon Nixon is executive editor of Breakingviews.com