Friday, 7 March 2008

Could Labour trigger a stock market crash next week?

Its an interesting question but quite a valid one to ask now that the terms of the Bill to compensate Northern Rock shareholders has been published.

The key problem is the terms that have been set in order to determine the valuation
In determining the amount of any compensation payable by the Treasury to any person in accordance with paragraphs 3 to 5, it must be assumed (in addition to the assumptions required to be made by section 5(4) of the Act (compensation etc. for securities transferred etc.)) that Northern Rock —
(a) is unable to continue as a going concern; and
(b) is in administration.

Obviously the company was not in administration at the time of nationalisation, and was, and still is, trading normally and as a going concern (as Government Ministers have repeatedly stated).

This means that in setting the criteria the Government is ignoring the facts and could be said to be acting in a way that is ethically and morally unjust in an attempt to contrive to fix the terms of compensation.

As a result of these terms any valuation process will not be objective and independent and as such liable to legal challenge. In essence the terms of reference in the Compensation Order will mean that the panel cannot value the Company in accordance with conventional standards and practices.

And that is the rub of the whole problem,if the Government are prepared to break standard accounting rules once what is to stop them again in the future.

Does this mean any use of the lender of last resort facility from the Bank of England could leave a bank and its shareholder vulnerable to nationalisation for a pittance?

.. and if it does given the state of the credit market at the moment is it wise to hold any substantial amount of assets in this sector?

Of course this need never happen all the Government has to do is remove these clauses from the bill. At a stroke they will ensure that any valuation is not prejudged by the very people who have most to gain from it.

In so doing and ensuring the valuation is on a normal commercial basis not only will they remove the main plank of any human rights based claim from shareholders but they will also go a long way to reassuring investors that it is still safe to invest their money in UK financial companies.

And of course with all those small northern investors it won't do them any political harm either