Two major financial institutions, two countries and there are two different solutions. The difference in solutions really reflects the different mentalities of the governments in power and those who are in charge of financial oversight.

One case spreads the risk of the failing bank to every single member of society, that pays tax, while the other solution fobs it off on another bank to see if it can sort out the mess that occurred. That is, of course, not to say that this solution was not considered in the former example, it was just not considered seriously.

Now it could be a case that the person involved in the commercial solution to the Northern Bank problem had more to do with its rejection that the idea. Richard Branson, creator of the Virgin Group of companies, master of the PR and bete noir of British Airways, is universally hated by the establishment in the UK. No more so than by the left who truly loathe the man.

The failure and government nationalisation of Northern Rock also drew out the political cynic. It was suggested by many that if the word “Northern” were instead that of a Southern England county the bank would have been allowed to wither on the tree and die. The Labour Party currently in power in the UK is heavily indebted to voters in the North of  England. Watching it go under, with the loss of jobs is something MPs from that part of the country probably would not be able to bear.

Of course when one reads about what exactly NR was up to with its loans it is not the slightest bit surprising that the company came into problems. Their borrowing practices would make even the least astute financial analyst blanche. In an interesting piece on this very subject In <a href=”http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3602042.ece”>the Sunday Times</a>, by Paul Omerod, the extent of their folly can be truly grasped.

“Northern Rock’s notorious loans of five or more times the borrower’s income on more than 100% of the value of the property were almost tailor-made to end in tears.” He continues on their attempts to cover themselves from loss. “And it is this that led the board to create Granite, the trust in the Channel Islands that has proved such a complication in the rescue of the company.”

One could argue the name of the company created to cover the risky loans might have been called “sandcastle” or something less permanent sounding.

These are worrying times for those in the financial markets because of the failure of the bank. Mervyn King, head of the Bank of England, has been said to be “close consultation” with banking institutions after the nationalization of the bank. Labour’s allies in the press and other circles are doing a fine job at attempting to blame greed for the problems.

There are calls for <a href=http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/03/23/do2308.xml&posted=true&_requestid=263881>more regulation</a> and the Church of England, via the Archbishop of Canterbury, is getting involved with blasting the City of London.

Meanwhile in the US, which observers in the UK continue to claim is in recession even though there has not been two quarters of negative growth yet, the Bear Sterns failure has quietly been handled by a buyout to J. P. Morgan Chase. Well quiet in the sense that there was not weeks and weeks of discussion and fretting about the matter in public. Described most amusingly by some in the press <a href=http://www.timesonline.co.uk/tol/comment/columnists/camilla_cavendish/article3586712.ece>as dithering.</a>

As with Northern Rock, Bear Sterns shareholders are suffering badly getting $2 a share instead of $30 (although there are rumours of a new deal which will see it rise to $10 a share); but unlike in the UK taxpayers will not suffer as well. Shareholders, while deserving some sympathy, know full well the risks of investing; while the taxpayer has no such choice in “investing” their hard taxed money in a failing enterprise. 

It will be interesting for all to watch and decide which solution comes out best. However those long suffering taxpayers in the UK, who have just suffered another round of tax hikes on everything from their car tax to the pint of ale they hold down the pub, will be praying that Gordon Brown has not made a colossal gamble with the British economy. There have been a few panicky pieces in the press referring to <a href=http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/19/ncredit919.xml>a potential depression</a> should this all go wrong.

As Americans choose whom they are voting for in the next Presidential election they can, if they wish, use these two debacles to compare the different methods of handling such cricises on the left and the right. Should it be the left solution via government meddling or the more subtle approach of allowing the market to sort itself. And Americans need not worry that their taxes are going to pay for it.

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