Tuesday, November 20, 2007

Taxpayer Bail Outs

"Behold, there come seven years of great plenty throughout all the land: And there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land; and the famine shall consume the land; And the plenty shall not be known in the land by reason of that famine following; for it shall be very grievous." (Genesis 41, 29-31)

Of course, we've had a decade of plenty, so the grievousness is running late. But it's here now, and it's intent on making up for lost time.

The Big Risk for taxpayers is that our blundering interventionist government will now compound its mismanagement during the years of plenty, by spending even more of our money bailing out those who've lived as if the plenty would never end. And Northern Rock is the first major test.
I've been listening to BBC R5's NR phone-in. While the overwhelming majority of calls and texts were from taxpayers angry about the government's half-baked - and almost certainly expensive - support operation, the Rock's small shareholders and employees were there arguing passionately and movingly for taxpayer support.

The shareholders reckon they've been encouraged to buy shares by government, and therefore the government should bail them out. The employees are simply worried sick about their jobs and want government support.

Will Bottler stand firm?

Exactly. We need to be very nervous. Many of NR's small shareholders and nearly all its employees live in the North East, where 28 of the region's 30 Westminster seats are Labour. Indeed, one of the NE's MPs says:

"A huge percentage of shareholders have invested to support a local company. Many are pensioners and can not afford to lose this money.

I also believe it would destroy public faith in buying shares in companies. Small investors, who are vital to the economy, would no doubt look at what has happened and think that if they cannot safely invest in companies like Northern Rock, then no investment is safe."

And that's Peter Atkinson, who isn't even Labour- he's the region's one Tory MP.

But governments should never bail out shareholders. You don't necessarily have to agree with Tyler senior, who's always shunned the stock market reckoning it's nothing more than institutionalised gambling, to understand shares are risky. As a shareholder you really can lose the lot.

But on the other hand, the returns are generally significantly better than what you'd earn on say, a Northern Rock savings account (yes, we know about Mrs T's market leading 6.3% NR Silver Saver account, but look here for some of the miserly 1% and 2% rates they're paying on older accounts for less nimble, non-rate tarts). As a shareholder, your upside is unlimited, and if you buy into a Microsoft in the early days you can make a literal fortune.

In my experience, shareholders- including grannies- generally understand this. They sensibly ensure they are not betting their pension on a single share. In fact, IIRC, it was my own egg-sucking granny who advised "don't put all your eggs in one basket".

And in terms of misleading messages about the riskiness of shares, the very worst thing the government could do now would be to bail out NR's shareholders. What would granny make of that, and why should she be made to pay for the mistakes of others?
So what about the employees? 6,000 precious private sector jobs in the North East. Should we bail them out?

Again, the answer has to be no. The history of government job intervention is dire, costing taxpayers millions and often ending up destroying jobs that might have been saved had government not stuck its nose in.

To take one recent example, regular BOM readers will be familiar with the fiasco at MG Rover. There, government intervention by the appalling Byers eventually led to a complete collapse. When we blogged the subsequent PAC enquiry, we highlighted the £250m it cost taxpayers in redundancy and related costs, the £0.5bn charge on the Pension Protection Fund, and the £1.3bn lost by trade creditors. We concluded:

"If it hadn't been for political interference and DTI's hamfisted meddling, BMW would have sold to Alchemy in 2000. The company would then have been downsized pretty drastically to become a specialist sportscar maker. The downsizing would have been done in a properly planned, orderly manner, paid for by the company itself, not taxpayers. And the creditors would have been paid off. Even the pension fund deficit would have been less problematic because its equity investments were worth so much more in 2000.

And as the specialist producer of MG sportscars, the company would surely have had a much better chance of survival than the clueless fag-end of a defunct volume manufacturer. So a good chunk of the jobs would still be with us today."

If I were an employee of Northern Rock, I'd be steering well clear of the government. I'd be thinking instead about how I could make myself more attractive to a buyer. How about a pay cut in exchange for an equity stake? For some strange reason, that doesn't seem to feature among the Unite trade union's six demands for propective buyers.

PS The MG Rover disaster highlights another important point. Although we'd all like to see a sensible well capitalised commercial buyer take over NR, the emphasis should be on sensible and well-capitalised. The very last thing anyone needs is for some barely capitalised special purpose entity to take it on suppported by extended taxpayer loans, strip costs to the bone, sell off the good bits, and then leave taxpayers to clean up a smoking black hole. A quick-fix fudge means an even bigger problem tomorrow.

No comments:

Post a Comment