Northern Fudge
The extraordinary Northern Rock saga is almost certainly bad for banking, bad for public finances, bad for the reputation and competence of the FSA (which despite various warning signs, and despite having described Northern Rock as a bank "under close and continuous supervision" allowed matters to come to this pass in the first place), and bad for the taxpayer. It promises however to throw up some interesting litigation and regulatory issues.
As all litigators will know, personal sympathy or lack of it is irrelevant to running a case. Personally I think it unfortunate that various people who are shareholders in Northern Rock will lose substantial sums as a result of the collapse of their investment. Many of them will find the loss difficult and it may well impact significantly upon their existing or proposed retirement plans. However (other than receiving the proper value of their shares on nationalisation) it is difficult to see why they are different from, or should be treated any differently from, any other unsuccessful investor. People take the benefit of investments. They also have to take the risks. The public purse is not and cannot be a general safety net.
One of the interesting things about the value of the shares in Northern Rock was the way, having collapsed earlier in the crisis, that the share price had increased during the period in which potential offers or commercial solutions were being considered. (Albeit to nothing like its original levels). That represented the perception that the guarantee of £100,000,000,000 of debt by the government was likely to be on less than commercial terms, with the new business having the security of government support but largely taking the benefit of any upturn in business. Amongst the shareholders are significant stakes held by two different hedge funds.
Rumour has it that before public news of a potential collapse was out, Lloyds TSB suggested a potential takeover involving some £30billion in state-backed loans, which would have been repaid within two years. The Chancellor it is said turned this down. Of course, no decisive action having been taken last autumn, by the time things were moved along the only two bidders were Virgin and a Northern Rock management consortium. The management consortium was never likely to be an attractive option because it would be seen as using public funds to support the management structure which had got the business into trouble in the first place. Although we do not know why negotiations did not succeed, presumably the deal which Virgin were looking for was, perhaps having regard to the lack of effective competition, more than the government could realistically swallow.
In practical terms the business was worth very little. It could not continue without massive state backed loans, nor was anyone willing to buy it other than with massive state backed loans. However the business is being run by the government under the nationalisation (rather than wound down) and there will no doubt be a suggestion that whatever valuation is put on the shares is grotesquely below the then prevailing market price and the real value.
Although difficult to run, there may also be attempted challenges as regards how matters were allowed to come to this state and as regards the regulatory failings. Such claims are fraught with difficulty, but when tens of millions at stake lawyers tend to produce their creative side. Likewise there will be state aid and competition challenges to the government action.
Either way, expect various legal challenges on the shareholder front. It will be interesting to see whether this is matched by the level of litigation on behalf of the government in its new business in pursuing mortgage arrears and possession proceedings against borrowers. Somehow I doubt it, but in fairness judgement should be reserved.