Strategy & Operations » Governance » Editor’s letter: This isn’t Labour’s Black Wednesday…

Andrew Sawers

Wednesday 16 September 1992 was a very special day in British economic
history. It was the day that John Major’s government conceded defeat and
withdrew from the European exchange rate mechanism that Major, as Chancellor,
had taken us into.

The Bank of England blew billions that day, pointlessly defending the
indefensible – ie, a DM2.78 pound – and the Tories lost any remaining shred of
credibility as the party of sound economic management. Which was a shame,
really, because Black Wednesday – or, as some of us still like to refer to it,
White Wednesday – was the day the government decided to stop throwing good money
after bad.

By contrast, Darling-Brown’s Black Wednesday (which took place on a Sunday),
seems to be the moment at which the Chancellor of the Exchequer and the First
Lord of the Treasury went into denial, prepared to write almost any cheque to
prevent the collapse of a FTSE-100 company – one that happens to be a bank.

The terminology they used is interesting. The word “nationalisation” does not
feature in HM Treasury’s press release, nor in Darling’s Sunday statement; it’s
“a period of temporary public ownership”, if you please. Northern Rock executive
chairman Ron Sandler has already made it clear that temporary means “years”, not

As for the money, Darling noted in his Sunday statement that $100bn had been
written off by banks around the world since last summer. If it all goes
massively wrong, Northern Rock alone could cost us all the thick end of £100bn.
That is a hell of a price to pay to save 6,000 jobs. (You’ll already have worked
out that it’s about £15m per job.)

Against this, Darling rejected the Virgin approach because, as he said, “The
taxpayer would only have seen any share of the private sector’s return if the
value of the business to its investors had reached at least £2.7bn.” In other
words, Darling-Brown are determined to play for even bigger stakes because the
offer on the table wasn’t big enough.

Quite simply, the government has no business underwriting Northern Rock’s
steroid-fuelled business plan. Bank of England Governor Mervyn King was
absolutely right about the issue of “moral hazard”, which encourages businesses
to take huge risks as long as someone else pays for any loss. The government
shouldn’t be trying to run Northern Rock as a going concern; they should be
running it down.

But we all know what the real agenda is, here. We thought it was ridiculous
when it transpired that Peter Hain had spent £100,000 he didn’t have in a futile
attempt to win the Labour Party deputy leadership (he came fifth). Darling-Brown
are prepared to risk billions of pounds they don’t have. Be sure that they have
loftier ambitions than Peter Hain had, but it doesn’t look like such good value
for money.