Shareholders stuck between the Rock and a hard place

18 February 2008

The Northern Rock debacle has finally led to the UK's first true nationalisation in 30 years or so.

So what are the real consequences of this move by Alistair Darling?

Well for those who have savings or mortgages with Northern Rock the answer is very little. Despite the worries expressed by some about the government's future stewardship the chancellor has stated that the bank will be run as a commercial operation. It will have to compete in the marketplace meaning savings and mortgage rates will have to remain competitive. After all, customers are still free to vote with their feet and take their business elsewhere.

In many ways Northern Rock is now the most secure bank in the UK as its owners UKplc are less likely to go bankrupt than any other private owners.

For shareholders the situation is a lot less rosy. Basically your shares are going to be pretty worthless. But can you blame the government for that? If the Bank of England hadn't stepped in and bailed Northen Rock out of its self-created hole the Bank would have collapsed leaving its shares worthless. Different path but same result.

The only path that could have led to a better result for shareholders was for the government to accept one of the tabled offers for the bank. However, both proposed deals left the taxpayer out of pocket. So should the majority suffer to save the share value of a minority?

There is one inescapable truth evident here; investing directly in single company shares is an inherently risky business. If you choose invest in this manner you have to accept you have a much higher chance of losing the lot. Investing in funds that spread your money accross a wider range of companies and sectors is much safer and allows you to tailor risk to what you can afford.

You can feel some pity for those who received shares when Northern Rock demutualised a decade ago. They gained a windfall, and many customers counted this stock as "rainy day money". However, if they knew they may have to count on this money someday the wiser course would have been to sell the shares and realise the value when they were first gifted.

The Northern Rock saga has left no one it has touched covered in glory; not the bank's original management who left the Rock overexposed, the media who whipped up panic when the bank's weakness became public knowledge or the government whose indecisiveness made the bank even weaker.

The bank's customers and confidence in the British banking system have survived battered but still in one piece.

The UK taxpayer must wait and hope that the government can eventually sell Northern Rock in the future for more than it has paid to bail out the bank.

That leaves the shareholders the losers, giving added meaning to the phrase "don't bet the bank".

Click here to see Moneywise tv's take on the Northern rock nationalisation.