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C O N F I D E N T I A L SECTION 01 OF 03 LONDON 000634 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
E.O. 12958: DECL: 02/28/2018 
TAGS: PGOV PREL ECON EFIN EU UK
SUBJECT: UK NATIONALIZATION OF NORTHERN ROCK:  ANOTHER BLOW 
TO GORDON BROWN, BUT NOT A KNOCK-OUT PUNCH 
 
REF: A. LONDON 476 
 
     ¶B. LONDON 432 
 
Classified By: Ambassador Robert H. Tuttle, reasons 1.4 b, d 
 
¶1.  (C/NF) Summary.  The nationalization of British bank 
Northern Rock adds to the list of woes besetting Gordon 
Brown's government, but it is not the political catastrophe 
that the opposition Conservative Party has painted -- and 
hoped -- it to be.  Sixty percent of respondents in a recent 
poll blame the bank's management for the current 
difficulties, while only five percent blame the Brown 
government.  The Tories gained little political traction from 
the issue because they failed to offer an alternative to 
nationalization and instead could only attack Brown for 
"dithering" in reaching a decision.  Our financial sector 
contacts tell us nationalization was not a surprise and that, 
provided Brown's government fixes the regulatory problems 
that allowed the crisis to occur in the first place, London 
will emerge unscathed as an international financial center. 
The Northern Rock issue plays out against the back drop of an 
uncertain economic forecast, combined with a steady stream of 
other bad-news stories that have kept Brown on the defensive, 
while striking at the heart of his reputation:  his capable 
management of the economy.  The next test of the Brown 
government's economic leadership comes March 12 with the 
Government's announcement of its budget.  End summary. 
 
Not "Black Wednesday"... 
------------------------ 
 
¶2.  (SBU) HMG's decision to nationalize Northern Rock, which 
Chancellor of the Exchequer Alistair Darling announced 
February 17, and which Parliament enacted on February 22 (Ref 
A), ended a six-month saga during which the Brown government 
tried, and failed, to find a private sector buyer for the 
bank, after Northern Rock's aggressive mortgage-lending 
tactics provoked an unprecedented bank run in August 2007 
that ended with a GBP 55 billion (USD 110 billion) government 
bail-out.  If Northern Rock fails to repay, this bail-out 
could cost each individual taxpayer in Britain GBP 3,500 (USD 
7,000), according to some estimates, but that is highly 
unlikely. 
 
¶3.  (SBU) The Conservative Party's immediate response to the 
nationalization announcement was to dub it "Labour's Black 
Wednesday," a reference to the day in September 1992 when 
sterling crashed out of the European exchange-rate mechanism, 
humiliating then-PM John Major and ruining the Tories' 
reputation for economic competence.  At a bruising session of 
Prime Minister's Questions February 20, Tory leader David 
Cameron accused Brown of having "something to hide" by 
exempting Northern Rock from Freedom of Information requests, 
refusing to reveal the total cost to the taxpayer, and 
separating out the more profitable mortgages.  For his part, 
Liberal Democrat leader Nick Clegg accused Brown of 
"frittering away" tens of millions of tax payer pounds in 
consultants' fees during the time it took to determine the 
bank's fate, and causing "untold damage" to the UK's 
reputation as a world financial center.  Political and 
business opponents have also tried with varying success to 
link Northern Rock's problems to other financial headaches 
largely of the government's own doing, such as their 
much-criticized tax proposals on capital gains and 
non-domiciled expatriates (Ref A). 
 
¶4.  (SBU) The "Black Wednesday" moniker hasn't caught on.  An 
Economist/YouGov poll conducted February 18-20 found that 60 
percent of respondents believe the management of Northern 
Rock is most responsible for the bank's difficulties, while 
only five percent blame the government.  Fifty-nine percent 
said the Tories are "playing politics" and would probably do 
much the same as the government is doing now if they were in 
office, and 63 percent said the Tories would have handled the 
crisis the same as or worse than the government. 
Interestingly, in the same poll 40 percent of respondents 
said they would vote Tory, as opposed to 34 percent for 
Labour. 
 
¶5.  (C/NF) Part of the reason for the lack of public anger at 
Brown is the failure of the Tory opposition to outline a 
convincing alternative to nationalization.  Their narrative 
has been to accuse the process and delay in reaching a 
decision - a critique that, while relevant, does not resonate 
with the public.  The real political winner appears to be the 
LibDem Party, which from the start of the crisis had called 
for nationalization as the only viable solution. 
 
...But Still, Yet Another Problem To Add To Brown's List 
--------------------------------------------- ----------- 
 
LONDON 00000634  002 OF 003 
 
 
 
¶6.  (C/NF) In the short term, the Brown government has taken 
two hits from the announcement.  According to the 
Economist/YouGov poll, 58 percent of respondents agree with 
the statement that "government ministers have taken far too 
much time to make up their minds and dithered over Northern 
Rock."  The "dithering" description resonates with the 
stammering, uncomfortable image Brown often portrays in 
public.  Brown justified the six-month lag time to the 
Commons by saying that that the government needed to examine 
all possible options before coming to a decision, and claimed 
that HMG would have been subject to legal claims if it had 
not done so.  Pundits have argued that although Brown took 
his time, he systematically examined every possible option 
before deciding on nationalization - a testament to the 
diligence and fortitude that are arguably his strongest 
assets. 
 
¶7.  (C/NF) Second, Chancellor Alistair Darling has been 
severely weakened during the process, with 52 percent of 
those polled believing that he is doing a bad job as 
Chancellor.  Tory Shadow Chancellor George Osborne described 
Darling to the Commons February 18 as a "dead man walking," 
and media speculation of his possible resignation has been 
rampant.  For now, there is no apparent successor to Darling 
at Treasury with his reputation or clout, but the move 
earlier this year of Yvette Cooper to Treasury does line her 
up to succeed him if Brown goes that route.  We assess 
Darling will survive this crisis, but the deterioration in 
the reputation of one of Brown's most trusted advisors will 
impair the government's overall ability to manage the economy 
in the face of an uncertain economic outlook and a growing 
budget deficit. 
 
Financial Market Reaction -- Yesterday's News 
--------------------------------------------- 
 
¶8.  (SBU) As the Northern Rock crisis unfolded and conditions 
in the financial markets deteriorated last fall, it became 
clear to the financial community that nationalization was 
inevitable.  Our contacts in the banking sector tell us they 
soon realized that no private-sector "white knight" was going 
to emerge, and that when nationalization finally happened, 
the City viewed it as "yesterday's news," a non-event. 
 
¶9.  (SBU) The crisis did expose gaps and vulnerabilities in 
the Tri-partite System of financial market regulation of 
which Gordon Brown was the architect when he was Chancellor. 
Our financial services contacts all agree, however, that the 
crisis does suggest that the UK system of principles-based 
regulation has short comings but is not fatally flawed. 
Accordingly, if the government is able to fix the problems 
highlighted by the bank's nationalization, London's 
reputation as a financial center may emerge unscathed. 
 
¶10.  (SBU) HMTreasury issued a consultation document with 
proposals to enhance financial stability and depositor 
protection.  The Financial Services Authority (FSA) will 
release its review of the Northern Rock crisis in March, and 
the FSA's CEO, Hector Sants, has already acknowledged that 
Northern Rock highlighted FSA shortcomings.  Much will depend 
on the government's ability to implement the changes 
recommended by these reviews and on its ability to improve 
the effectiveness of the Tri-partite Authority in crisis 
situations.  Northern Rock was a stress test on the UK system 
of financial regulation that could ultimately strengthen it. 
 
Comment 
------- 
 
¶11.  (C/NF) In the broader perspective, the Northern Rock 
crisis has undermined Brown's reputation for economic acumen. 
 Although he was initially praised for taking swift action to 
stop the bank's hemorrhage in August, after the dust settled 
the UK public began to question the efficacy of the financial 
services regulatory system -- put in place during Brown's 
tenure as Chancellor -- that had allowed the bank run to 
occur in the first place.  And Northern Rock is one more item 
on the ever-increasing list of bad-news stories that have 
kept Brown on the defensive since his short-lived honeymoon 
period ended in September 2007 (Ref B).  With economists 
predicting that the bank won't be back on its feet until at 
least 2010 - in other words, not until the next election - 
Northern Rock will continue to provide fodder to the 
opposition, especially if the government ends up paying out 
on its loan guarantees. 
 
¶12.  (C/NF) Brown has asked to be judged based on Britain's 
economic performance, and while the public hasn't given him a 
failing grade on Northern Rock, the process leading up to 
 
LONDON 00000634  003 OF 003 
 
 
nationalization has left the impression that he needs to 
improve his score.  Much will depend on the government's 
ability to implement the recommended regulatory changes and 
on its ability to improve the effectiveness of the 
Tri-partite Financial Authority in crisis situations. 
Northern Rock was a "stress test" of the UK system of 
financial regulation, and could, ultimately, strengthen it. 
The next indication of public views of Labour economic 
management will be reaction to Chancellor Darling's March 12 
budget presentation to Parliament. 
 
 
Visit London's Classified Website: 
http://www.state.sgov.gov/p/eur/london/index. cfm 
TUTTLE