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Arguments for socialism :: Banking crisis
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WHEN THE Northern Rock bank went into crisis in September, the socialist unequivocally called for its nationalisation. Now, as the bank's problems continue, there is a chorus for nationalisation from a number of staunch defenders of the capitalist system, but for temporary nationalisation, after which the bank would be handed back to the private sector. The socialist demands permanent nationalisation, to safeguard the 6,000 jobs of Northern Rock's staff, the public money loaned and savers' deposits.
Former treasury minister Geoffrey Robinson said Northern Rock should be brought into public ownership if a sale cannot be agreed; leading Liberal Democrats called for its nationalisation, as did journalist Will Hutton. A Financial Times editorial said that nationalisation would be better than "lending to a rump Northern Rock against bad collateral, financing a rescue without charging a penalty interest rate, or subsidising a bidder".
These reactions stem from shock at the bank's recent actions and fear of what is to come and the outrage it will create. Northern Rock borrowed £22 billion of public money in the last two months only to now attempt to sell off the profitable parts of the company and leave its debts to the public purse in an unprofitable "zombie fund". The directors' sales memorandum was so blatant in raising this strategy that the directors went to the courts to have it kept secret.
£24 billion of public money will have been loaned by the end of this year – equivalent to around £900 for every UK tax payer, or double the annual primary school budget, or 30 millennium domes. But the total risk to public money is around £40 billion – more than the UK annual defence budget, because the government guaranteed savers' deposits as well as making massive loans.
Now that Northern Rock has asked for bids from prospective buyers, private equity firms have been weighing up what rich pickings they can take. However, none of them want to buy without a commitment from the government to continue to loan public money beyond next February, and at non-penal interest rates. They have also been waiting to see if the government will even waive the £2 billion interest now owed to the government treasury by the bank! Disgracefully, Gordon Brown refused to comment in parliament on whether some of this debt would be waived, citing "commercial confidentiality".
New Labour ministers are doing all they can to resist nationalisation. On TV programme Newsnight, chairman of the treasury select committee, Labour's John McFall, argued: "London is a financial centre … that rivals New York. I don't think it would be good if we nationalised a bank. It would send out the wrong signals".
THE AIM of the hovering fat-cat vultures is to get most of the debts and potential losses written off by public money or hived off into a "zombie fund", and then make massive profits out of the remainder of the bank in coming years. Some private equity chiefs even started buying Rock shares soon after the crisis first hit, in order to milk the situation later.
As understated by Will Hutton in the Observer when he called for nationalisation: "The right deal for one of the ragbag of private equity companies and opportunistic second-rate banks which have lined up for Northern Rock will be the wrong one for the government and taxpayer" and: "No private deal can safeguard taxpayers' interests".
A layer of super-rich individuals have already benefited massively from Northern Rock. For example, although the resignation of chief executive Adam Applegarth has finally been announced (along with seven other directors), he will leave with a £2 million pension, which will give him over £300,000 a year from the age of 55. He also may get a pay-off of £800,000 – after receiving a salary-plus-bonus package of £1.3 million over the last year.
It has recently been revealed that he made £2.6 million more for himself over the last two years through selling his own shares in Northern Rock when the price was high, while at the same time telling employees and small investors to put their money into the company.
Other directors have enriched themselves too; accountancy firm PricewaterhouseCoopers is said to have 'earned' up to £1 million in fees from Northern Rock just since August, and the list goes on. The company (or part of it) could now eventually be sold to the likes of Richard Branson's Virgin Money, or Goldman Sachs executive Christopher Flowers, to be fleeced further. The latter has a reputation in the financial world for "cleaning up" Long Term Credit Bank of Japan – making himself an estimated $2.3 billion in the process.
The government claims that the public money ploughed into Northern Rock is safe, because the bank has £50 billion of mortgage assets. But these 'assets' depend on the mortgage holders being able to repay their mortgages and on the value of their properties holding up. They will not turn out to be worth the balance sheet figure. Why else is it that present purchase bids are only around £5 billion, and with strings attached?
Nationalisation is the only way to safeguard the public money put in and to guarantee the jobs of Northern Rock's employees.
As the capitalist economy heads towards a deeper general crisis, the particular crisis of Northern Rock could hit any of the other major financial institutions, or indeed any of the major companies that ordinary people rely on for goods, services and jobs. The socialist not only calls for permanent nationalisation of Northern Rock, but of all the major banks and other major companies, and for them to be run under workers' control and management.
Compensation should only be paid on the basis of proven need. Why compensate super-rich directors and shareholders for their greed, exploitation and failure? Only workers' pension funds should be safeguarded and small investors who depend on their share income. In fact without nationalisation, small investors could end up with nothing.
A nationalised banking system could not only guarantee savers' deposits and bank workers' jobs, but could also offer very low interest rates to mortgage holders and small businesses, especially in the context of a socialist planned economy.
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Article dated 22 November 2007
The Socialist, weekly newspaper of the Socialist Party
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