24 November 2007

Buying at Rock Bottom, Darling?

In the industrial era the slogan was 'Where there's muck there's brass'. For the post-modernist entrepreneur this slogan has been replaced by 'Where there's risk there's brass'. For such a person Northern Rock is seeming increasingly interesting. This was the appeal for Philip Richards, who bought shares in the ailing bank at the bottom, sensing that the value of the stock would be determined by politics and not by the market.

Richards is Chief Executive of Hedge Fund RAB capital. This has a hugely profitable Special Situations Fund which Richards manages. The fund almost doubled in size during 2005 and by the spring of 2006 controlled more than $1bn. Richards identified a very special situation at Northern Rock and moved in for the kill.

He has now emerged into the media to exert political muscle. Unlike most of us he has the power to be able to produce a comment piece in the Observer and to have a chat with the BBC's business editor on the Today programme. His view that shareholders should have their investments underwritten by the government to allow the bank to continue as a going concern is in reality a request that we should pay him for an opportunistic business investment.

He argues that if shareholders are abandoned then 'the most important role of banking' which he defines as 'to take short-term deposits and lending and turn it into long-term capital and finance' would no longer be attractive because it would not yield sufficient secure returns. In other words, the government should use our money to prop up a financial system that works against our interests and those of the planet; if it does not, the credit/debt that is the lifeblood of a capitalist economy will drain away.

The affair of Northern Rock is becoming an object lesson in how financial value is fought over in a capitalist economy, a process that is usually concealed behind scenic drapery. As with most companies, the citizens of the UK are 'stakeholders' in Northern Rock, some of us as depositors and mortgage-holders. Unusually in this case many more of us (all those who pay taxes) because we have each loaned an average of nearly £1000 to the Bank. Without handy media contacts we have to rely on our elected representatives to ensure that we receive a fair share of the value we have invested.

The affair also makes clear that, in spite of all the rhetoric privileging the market above all institutions, in a democracy power still lies with politicians. When the shit hits the fan it is the job of politicians to make choices and, no matter how large the tent, somebody will be disappointed by those decisions. That is what politics means: either/or not and. Vince Cable for the Lib Dems has suggested nationalisation; in another blog I propose a mutual solution, but it is the Chancellor's job to decide which side his political bread is buttered.

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