It may still be too early to depict the Northern Rock debacle as Labour's "ERM moment", as Vince Cable, the acting leader of the Liberal Democrats, attempted to yesterday by asking the Chancellor whether he had been singing in his bath. We are not in fiddling- while-Rome-burns territory quite yet.
Even so, it is not looking good for the Treasury, where there is growing concern over the potentially calamitous losses ministers have exposed the taxpayer to in defence of this miserable little company. An entirely painless outcome is looking ever more improbable.
Mr Cable's bath reference was to Norman Lamont who as chancellor was said to have been singing in his bath with happiness at Britain's ignominious exit from the ERM. Though the ejection may ironically have been the right thing for the British economy, it shattered the Tory party's reputation for economic competence and contributed to its crushing defeat at the next election.
The Government insisted no taxpayers' money was at risk when it embarked on the Northern Rock rescue, yet the Chancellor, Alistair Darling, was able to give no such assurance in his Commons statement yesterday or in subsequent exchanges. Nor even was he able to reassure the House that the 20bn to 24bn Treasury guaranteed loan would be repaid by the end of this parliament.
He also quite plainly needs a crash course in banking, for it is obviously incorrect to insist as he did that the separate Treasury guarantee of 14.5bn of deposits is essentially risk-free because it relates to money in the bank. Would that this were true. In fact the great bulk of deposits would have been lent out and cannot easily or quickly be got back. That's what bankers do.
It may be technically correct for the Chancellor to say that he had no option given the need to maintain financial stability but to extend the loans and the guarantee to Northern Rock. But this is politics, where perceptions are everything, and, whether or not the course of actions taken were unavoidable, he's going to get the blame for them if they go wrong.
What's more, it is faintly disingenuous to claim they were unavoidable. In fact, the reason the taxpayer was forced to come to Northern Rock's rescue was because of the Government's failure to put an adequate deposit insurance scheme in place.
If this had been in existence, Northern Rock could have been allowed to go to the wall without loss to all but a small number of very large depositors. The absence of this safety net, and the hugely embarrassing and costly rescue operation the Chancellor has consequently been forced to engage in, has undermined the Government's record on economic and financial stability. Unavoidable? Only because the system which the Government is responsible for was found wanting.
What's occurred is utterly shambolic, the very antithesis of the well-regulated financial markets the Government aspires to.
So how serious is it for the Chancellor? Serious enough, it might be said, but not yet irretrievable. The back-of-the-envelope calculation of the taxpayer's exposure I engaged in last week still broadly holds true, but here's a more detailed analysis.
Northern Rock's last published balance sheets showed total assets of about 113bn, yet it is only really the loans of 97bn which are available to help defray the cost to the taxpayer. Of these, about a half have already been securitised and are therefore out of the equation. The balance is made up of 37.5bn of residential mortgages, 8.5bn of unsecured loans and a little bit of commercial lending.
Of the 20bn to 24bn of public money lent to Northern Rock, some 13bn is fully collateralised against good-quality mortgage assets. The Bank of England claims already to have taken a hair cut on these assets in accepting them as collateral, so, even if they were sold tomorrow, it would get the entire 13bn back. …