Northern Rock - How A Problem Became a Disaster

Another unfavourable comparison is with the French banking crisis at Societe Generale. This crisis was occasioned by a rogue trader who caused losses of US$ 7.26 billion, rather than the global credit crunch.

However, as soon as news broke in January 2008, the French authorities stepped in. As well as providing funds, they also warned off foreign predators. This makes a mockery of EU rules, but the French always have a healthy disregard for EU regulations when their own national interest is threatened.

The bank has been rescued by a rights issue of US$ 8.4 billion. The one-for-four rights issue has been completely taken up by shareholders and the company share price has started recovering.

The Chairman of Societe Generale, Daniel Bouton, has personally invested US$2.2 million in the rights issue. He has also waived his bonus and six month's salary.

This episode further discredits the UK government's handing of Northern Rock. The French authorities reacted quickly and decisively to prevent a foreign takeover of the bank, and the funding shortfall was resolved within weeks by a fully subscribed rights issue.

The commitment of Messr Bouton should also be congratulated. This contrasts markedly with the UK, where the government has appointed Ron Sandler on a salary of GBP 1.1 million per annum to run Northern Rock. Mr Sandler is allegedly non domiciled in the UK for tax purposes.

Based on their failure to monitor and regulate the banking sector, the UK government has nationalised Northern Rock. For some inexplicable reason, they believe that while they were unable to regulate the bank, they will now be successful in managing the company.

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