Why Rescue Some Savers But Not Others?

Northern Rock savers can relax, as the government has guaranteed their cash. So why were Equitable Life, Farepak and company pensions allowed to fail?

It appears that the immediate crisis at mortgage lender and savings bank Northern Rock is over. The long lines of savers seen withdrawing money on Friday and Monday fell sharply yesterday. Today, it was almost business as usual at Northern Rock branches.However, now that savers have been reassured that their deposits at Northern Rock are safe for the present, the `blame storming' exercise can begin. Naturally, pundits are queuing up to criticise Adam Applegarth, Northern Rock's chief executive, and the bank's board of directors.Other commentators point the finger at the Bank of England and the Financial Services Authority (FSA) for failing to rein in Northern Rock's aggressive expansion in the mortgage market. Others are blaming Prime Minister Gordon Brown for presiding over a decade of cheap credit and soaring personal debt while he was Tony Blair's Chancellor.Regardless of where the blame lies, the fact remains that -- uniquely in my twenty years in financial services -- the government has given an exceptional guarantee to support customers of a struggling financial institution. Although that promise provides welcome relief to Northern Rock savers, it places the cost of support firmly on British taxpayers.So, my big question is: why offer to bail out Northern Rock savers when `New Labour' allowed life insurance and pensions provider Equitable Life to fail? As has been well documented, the spectacular near-collapse of Equitable Life in 2000 left over three million prudent savers and pensioners out of pocket to the tune of billions of pounds.Furthermore, 150,000 low-income families lost their hard-earned Christmas savings in October 2006, following the collapse of disgraced hamper/voucher firm Farepak. This left some of the country's poorest people nursing a loss of £45 million just two months before Xmas.Come to think of it, why give guarantees to the UK's fifth-largest mortgage lender, but not support insolvent company pension schemes which were allowed to fail? In total, around 125,000 workers and pensioners lost some or all of their company pensions when their employers went bust or abandoned insolvent occupational pension schemes.All in all, I'm sure you'll agree that this government has seen more than its fair share of financial scandals! Indeed, by offering help to Northern Rock savers, it stands accused of applying breathtaking double standards. However, I can imagine three simple reasons why the Chancellor, Alistair Darling, stepped up to offer a lifeboat to Northern Rock customers. I label them the three "Rs": Revenue, Reputation and Rewards:1. Revenue (supporting the tax take)British banks generate around a third of all corporation tax paid to HM Treasury, or over £10 billion a year. If the lack of public confidence in Northern Rock spread to other financial institutions, it could cause a run on the banks. However, by stopping the rot (at least for now), the Chancellor immediately relieved anxieties about the state of British banks' balance sheets. In doing so, he's done his bit to hold onto the huge tax revenues generated by the banks, their employees and their investors. So, in one sense, the Chancellor's move was purely self-interest on the part of the Treasury.2. Reputation (hanging onto the reins of power)Just eleven weeks after becoming Prime Minister, Gordon "Prudence" Brown found his nickname under threat as worldwide banking turmoil led to the events at Northern Rock. With his reputation for fiscal good sense at risk of a mauling, Gordon did what any wily politician would do. He took whatever action was necessary to make the threat to his strong leadership go away. Gordon wants a decent shot at winning an election without Tony Blair, and you can't blame him for that!3. Rewards (winning votes)Northern Rock had amassed a large number of affluent, older savers by promoting special savings accounts aimed at the over-fifties. What's more, the Golden Generation of over-55s own around three-quarters (75%) of all UK wealth and, crucially, are the group most likely to vote in elections. By appearing to save their savings, Gordon Brown wins their goodwill and, with any luck, their future votes.So, in the words of pensions guru and former government adviser Dr Ros Altmann, "The government has consistently said that taxpayers cannot be expected to compensate the victims of this scandal [failed final-salary pension schemes], but Northern Rock savers have had their savings fully underwritten by the taxpayer."In short, I think it is largely thanks to a fluke of timing that Northern Rock savers found the government coming to their aid. If this crisis had happened last year or next, I doubt that Gordon Brown would have been so keen to help out!More: Find a better savings account today | A Supersafe Home For Your Savings | Good And Bad News For Rock Savers