Nice try, hedgie

This weekend the Sunday Times biz section gave space to Jon Wood, head of one of the hedge funds that bought into Northern Rock after the crisis hit, to air his views on how unnecessary the whole mess was.

Wood argues that Northern Rock was and is solvent, with assets in excess of its liabilities; that its much-criticised wholesale funding model complied with FSA guidelines; and that the whole mess could have been avoided if the Government and the Bank of England had made their liquidity injection available last August, rather than just this month. He starts and ends with expressions of regret over the imminent loss of jobs at the company, and over the losses sustained by 200,000 small shareholders, manfully refraining from bemoaning the likely loss of his own company's opportunistic investment in the ailing company.

On first reading I found this fairly convincing, but as I started to pick it apart a bit, I was less sure. In the first place, if the company was as sound as Mr Snow claims it was last August, it's surprising that no real private sector solution to the problem was found at that stage. Sure, Lloyds TSB was sniffing around, but its interest in buying the company depended on massive amounts of state aid. Second, the Rock's stock price had been falling throughout the first half of last year, a period during which it was the largest single mortgage lender in the UK. If the company had no problems with either its asset quality or its funding model, why had the market taken fright? Third, even if the Government had put its liquidity deal in place last August, the Rock would probably have had to scoop the whole pot itself, given the scale of its problems. It's hard to see how this would have helped the rest of the financial system.

The main reason to be sceptical about Mr Snow's views, of course, is that his company never really wanted to be a shareholder in the Rock for the long term. Although he asserts that SRM was willing to inject more money into the Rock to provide "comfort" to the Government, it only built up its shareholding in the hope of profiting from a bailout, either by another bank or by the Government. Its only chance of seeing much of its money back is probably going to come in the courts, so this weekend's piece in the Times probably gives us a pretty good insight into what SRM's opening arguments are going to look like.