Having your cake and eating it

The news that bids for Northern Rock are considerably below the current share price is hardly surprising but it does remind us that equity is a residual interest. It only has value if the firm can pay its debt in a timely fashion. Every so often shareholders forget that. Then when a firm fails, they clamour for restitution, as with Metronet or Railtrack: doubtless it will be the same with Northern Rock. These claims undermine the financial system: the logic is totally spurious. If equity holders want the returns that come from owning a residual interest, then they should take the risk, and bear any losses in silence. If they don't want that risk, they should not buy equity.

The priority now, as James Harding puts it in the Times, is first to depositors and the financial system, and last to shareholders. The best option may well be nationalisation. It certainly won't be something that leaves tax payers with exposure and grants a return to shareholders.