‘Return the Rock’: Re-mutualise or privatise?

Joe Cox and William Cass make the case for re-mutualising Northern Rock - rather than privatising the rescued bank.

By Joe Cox and William Cass

Northern Rock has now been in public ownership since February 2008 when it was nationalised in an attempt to safeguard the deposits and 6,500 jobs in the north east; since then, debate has raged about what the government should do with it.

In March 2011 UKFI appointed Deutsche Bank to undertake a feasibility study on the:

“…strategic options for returning the company to private ownership.”

The two main options are privatisation and re-mutualisation. In practical terms, re-mutualisation involves converting Northern Rock into a financial institution owned by its members, those people who hold bank accounts and/or mortgages with it.

Up until now the central argument against re-mutualisation from both the right and the left (including Kitty Usher, director of Demos) has been that privatisation would offer a better deal for the taxpayer. This argument has been rebuffed this week by a report from Landman Economics. The report makes the economic case for re-mutualisation of Northern Rock.

The central argument is that re-mutualisation of Northern Rock would reduce the chances of another financial meltdown by:

• Increasing the size of the mutual sector relative to the plc sector;

• Broadening the diversity and competition in the sector.

Re-mutualisation would also have numerous other benefits including:

• Increased lending to businesses;

• Improving the customer experience;

• Providing stable regional employment.

Money could also be recouped for the taxpayer in the medium to long term through profit participating deferred shares.

With Barclays’s Bob Diamond signalling this week that Barclays must increase its risk appetite, the government needs to think twice about the long term implications of selling Northern Rock to the private banking sector.

If the private banking sector encourages high risk investment strategies, re-mutualisation offers the opposite. Mutually owned building societies did not cause the financial crisis and on the whole have weathered it more successfully. It is in the interests of all taxpayers to see them play a greater role in our financial system.

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11 Responses to “‘Return the Rock’: Re-mutualise or privatise?”

  1. neilrfoster

    RT @leftfootfwd: ‘Return the Rock’: Re-mutualise or privatise? http://bit.ly/eXQ9SI by Joe Cox and William Cass

  2. Mark Stevo

    I’m sorry, but to describe the piece by Landman as a report is nonsense. The document is nothing more than a ideological piece that makes claim after claim without any supporting evidence.

    There is, in my view, likely to be merits and demerits associated with both privatization and remutualization. There is almost certainly a price for which NR can be sold above which it makes sense to sell to a private body, and below which it makes sense to remutualize. I don’t claim to know the answer, but I’ve yet to see a single argument from Chuka, Landman or anyone else, as to what the quantifiable benefit from mutualization would be. Their argument has been entirely ideological.

    LFF professes to be “evidence-based” and I’m afraid the so-called report from Landman does not satisfy that criteria.

  3. Stephen W

    The supposed benefits of mutualisation are entirely possible conjecture without any real basis in evidence or actual established facts. It’s all if-we’re-lucky many years down the road.

    The downside is very real and immediate though. Mutualisation means giving Northern Rock away to its customers, since they’re unlikely to be able to raise the money between them to buy it on mutual terms. This means never recovering the billions spent nationalising it. Basically ever other taxpayer suffers to benefit customers of Northern Rock. I can’t see how that’s fair.

    If I’m wrong and there’s actually a practical scheme for selling Northern Rock to its current customers then I’m all for it. But if it means just giving away tens of billions of pounds of public money then I’m against it.

  4. Mark Stevo

    While I don’t disagree that in all likelihood remutualization is unlikely to benefit the taxpayer net, NR is worth a long way short of tens of billions.

  5. Compass

    RT @leftfootfwd: ‘Return the Rock’: Re-mutualise or privatise? http://bit.ly/ggRj8T

  6. Howard Reed

    As the author of the Landman Economics report I’d like, if I may, to address the points made by Mark and Stephen here.

    I’m a bit puzzled by the claim that the report lacks any supporting evidence as evidence from the Centre for European Studies, the IMF, the National Audit Office, the House of Commons Treasury Select Committee, Platform, Mutuo, and Kellogg College, Oxford, is made use of and fully referenced throughout. Clearly there are some areas where I would have liked more concrete evidence but I think the report uses as much as is currently available.

    As for the idea that “mutualisation means giving Northern Rock away to its customers” that is incorrect, as the report points out. By using Profit Participating Deferred Shares (PPDSs) the government can recoup a share of Northern Rock’s profits over a number of years. There is a more technical discussion of PPDSs in a report for the Building Societies Association by Jonathan Michie et al, “Converting Failed Financial Organisations into Mutual Organisations” (URL given in the Landman report). Mutualisation does NOT have to be a giveaway.

  7. Mark Stevo


    Thanks for the response, I’ve found it very difficult to get any engagement from the pro-mutualization side on this.

    On the matter of evidence, I accept that there are a number of references in the document, but: I don’t accept that any of them make a compelling case for a mutualization of Northern Rock. Your references all effectively make the case that financial stability is a Good Thing. What’s not remotely clear, well argued or evidenced is that mutualising Northern Rock achieves any meaningful improvement (particularly when you advocate that it should be lending at sub market rates. It’s also not remotely clear why the stability improvements could not simply be achieved through the regulatory regime (which would of course apply to all institutions).

    On the matter of repayment, this is effectively a sub market rate loan that has limited prospect of being repaid if mutual customers are to offered attractive pricing in both deposits and loans. One would have though that capital might have been more appropriately deployed funding a green investment bank (rather than having retail depositors take venture capital risk).

  8. syzygy

    To call Kitty Usher and Demos left-wing is positively Orwellian!

  9. Stephen W

    I accept that mutualisation does not necessarily mean giving Northern Rock away. But your PPDSs scheme still sounds quite dubious. Possible returns and revenues would only come back very slowly over some years, during which time we would continue to pay interest on the debt we entered into to purchase northern rock, thus meaning it takes even longer before we actually recoup the money.

    Like I said. If there was a way of solidly stating that there was a way of mutualising Northern Rock whereby the taxpayer almost certainly got their money back in a reasonable time frame then I would be all for it. But these proposals seem some way off from that.

    To be honest the most promising route would seem to be selling Northern Rock to another mutual. There must be some way of helping another mutual with the cost that provides for mutualisation while being less risky than your PPDSs scheme.

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