Northern Lights

Another day, another trip by Northern Rock’s treasurers down to the City by GNER (presumably first class), in order to load the briefcases up with cash from the Bank of England’s vault. All in an effort to keep the Northern Rock lights on. This time Northern Rock borrowed £4.7bn, and the running total is now over £20bn. Try putting £20,000,000,000 into a basic calculator – they were not designed to take that many noughts.

The Rock has circa 5,000 employees, so some simple maths says that £20bn works out at around £4m per employee. Never has so much been lent to so few. The market capitalization of Northern Rock is £803m (at a share price of £1.915), which means that the B of E is providing 25 times as much finance to the company as its existing market cap. Wow.

Northern Rock continues to write business, and the B of E continues to facilitate this. Is this what central banks are meant to do? Fortunately the independent central bank has the financial backing of the UK Treasury, so it in turn cannot go bust as a result of this huge exposure to one shaky institution.

In the B of E’s defence, the action is not just being taken to support Northern Rock employees or shareholders, but for the wider good of financial stability. But while this action is only a temporary solution, it is distorting the market adjustment processes as it enables a weak industry player to continue to produce products in a subsidised manner, which in turn damages the rest of the industry. This is an industry that the authorities have the mandate to protect.

The B of E isn’t alone in its actions – the ECB is also lending, but is doing it on an anonymous basis. If you thought the B of E has been generous, the ECB has provided €136 billion of extra liquidity to markets. To put this mind boggling figure into perspective, it is about the same as Portugal or Hong Kong’s GDP last year. This financial crisis is quickly transforming from ‘small and temporary’ to ‘large and permanent’.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Richard Woolnough

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