In Northern Rock, A Template For US Bail-Outs?

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The US government bailed out Chrysler all the way back in 1979. Nothing quite like it as been seen since then, but the financial sector has not been in as much trouble for decades as it is now.

Over the weekend, the UK government decided to take ownership of troubled mortgage company Northern Rock. The financial firm will eventually be sold or taken public again, but the government acted to save it short-term because it was in the public interest for the company not to fail.

The move may be a template for the US government as its struggles with possible collapses at bond insurers and mortgage lenders. It may even be a way for common shareholders to keep some of their investments.

The state government in NY and several regulators are concerned that Ambac (ABK) and MBIA (MBI) could go under because of their investments in subprime mortgages. They might, at least, loss their high credit ratings which would increase the cost of borrowing for municipalities and increase losses at banks which hold paper from the mono-line insurance firms.

Right now, the government would like money center banks to make loans to Ambac, MBIA, and their peers. But, the banks are tight on capital themselves. The other solution being floated is that the bond-insurers be broken in two. One part of the firms would hold the valuable insurance policies for cities and states, the other part would hold the near-worthless mortgaged-back paper.

The Northern Rock move by the UK government is a full nationalization. There is not reason a more measure approach could not work in the US. The Treasury would take a piece of the insurers to give them financial support in the form of capital. Current shareholder would keep a piece of the equity.

The Brits may have come up with an elegant solution to  problem which also exists in the US.

Douglas A. McIntyre