Northern Rock scraps 125% mortgages and nationalisation faces opposition in Parliament
22 February 2008 / by Rachael Stiles
Politicians opposing the nationalisation of Northern Rock – the biggest nationalisation in British banking history – cite taxpayers' interests as the predominant argument against taking the bank into public ownership, because it would be like signing a blank cheque.
Taxpayers are already saddled with a contingency loan to Northern Rock of £28 billion and a £55 billion guarantee to its depositors, but nationalising it could see this exposure double to £110 billion. There is much concern regarding the speed with which legislation is being proposed in order to nationalise the bank, compared to the five months of dithering it took to come to this conclusion. If it is nationalised, the bank will face regular scrutiny to ensure that it is not at an unfair advantage to rival banks.
The emergence of Granite, Northern Rock's offshore company, has further damaged the bank's image, because it could see the taxpayer liable for another £49 billion if new chief executive Ron Sandler (who is set to announce his new management team later today) decides to terminate the relationship between the two companies. This would mean Northern Rock would have to buy back the mortgages from Granite and pay off its bondholders. The Government continues to insist that Granite poses no additional risk to the taxpayer.
The financial reality of Granite for Northern Rock could have contributed to its decision yesterday to scrap 125 per cent mortgages, due to fears that the risky loans were exposing the bank to further losses, though they may have already left thousands of first-time-buyer mortgage customers in negative equity.
Michelle Slade, analyst at Moneyfacts.co.uk described the move as a sign of Northern Rock giving in to "external pressures", and its decision to "reprice its whole mortgage range to an uncompetitive position compared with the rest of the market" as "an attempt to stave off taking on any new mortgage business."
Despite Parliamentary opposition to nationalisation, the Government has managed to win the approval of the public, as half of Britons support nationalising the stricken bank and seeing Alistair Darling continue as Chancellor, according to a poll carried out by The Times.
The research shows that three-fifths of voters blame the Government for the problems at Northern Rock, but 64 per cent blame the Bank of England or City authorities; the management of Northern Rock are the prime suspects for 76 per cent of the populous.
On BBC's Question Time last night, Fraser Nelson, political editor of The Spectator accused the Government of being "asleep at the wheel" as Northern Rock spiralled out of control, making Britain the "the laughing stock of the world". Secretary of State for Transport, Ruth Kelly, defended the Government's role, and blamed Northern Rock's predicament on its "unsustainable growth path", adding that it would no longer exist if not for Government intervention.
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