Brown, Darling dithering on Northern Rock

When the mortgage lender Northern Rock Plc collapsed in September, and caused the first run on a bank in a developed country in living memory, it seemed possible to exonerate the British financial and political system.

After all, the crisis could be blamed on the credit crunch. Or on reckless management. Or, just possibly, on a failure of communication between the two main regulators, the Bank of England and Financial Services Authority.

And now? The unfolding fiasco that is Northern Rock has become inexcusable. This crisis is now in its third month. And yet, we are no closer to a solution than back in September.

We have no idea what will happen to Northern Rock, or even who is in charge of deciding its fate. As each day goes by, the reputation of the Bank of England, the London Stock Exchange Group Plc, and all the banks and financial institutions on which the prosperity of the U.K. depends, sinks ever lower.

Responsibility for that must lie with Chancellor Alistair Darling and Prime Minister Gordon Brown. Both have been dithering, while what was needed was decisiveness and action. Ultimately, there will be a price to pay for that.

Step back for a moment, and look at how the crisis has played out.

The debacle started when it became impossible for Northern Rock to raise funds in the money markets, and the bank was forced to turn to the Bank of England for emergency backing. Savers started to withdraw money en masse, making Northern Rock ever more dependent on support from the Bank of England. On Nov. 16, Chief Executive Officer Adam Applegarth, along with some of the other senior directors, resigned. The chairman had already quit.

Government Backing
As of Nov. 19, Northern Rock had received 25 billion pounds ($51 billion) in loans from the Bank of England, a huge potential liability for British taxpayers.

Even so, by the start of this week, there was no clear direction on what would happen next.

The government put out a statement saying that the loan to Northern Rock was not indefinite. Possible buyers of the bank ''should not assume at this stage that the current Bank of England loan facilities will be available'' beyond February.

How was this meant to help? The government can't withdraw the loan. Northern Rock won't be able to raise the money from anyone else, and it has been abandoned by depositors. The only way it could get the money would be to demand that its mortgage borrowers repay immediately. That would cause chaos in the housing market.

Idle Threat
The threat isn't credible. If some other solution can't be found, the government will have no option but to continue the loan. So why threaten to withdraw it? The only possible result can be to make potential bidders more nervous.

In reality, there are four possible ways out of this mess.

Northern Rock could be nationalized. The government would take control, appoint a hard-headed chief executive, and slowly nurse it back to health. The chances are most of its mortgage loans are solid enough. As credit markets return to normal, the mortgage loans could be sold at decent prices, and the bank gradually wound down.

Next, it could promise that the loan remains in place, spell out its terms, and sell Northern Rock to the highest bidder. J.C. Flowers & Co. and Richard Branson's Virgin Group Ltd., among others, have expressed interest. So long as they know the loan will be maintained, there will be bidders for the business.

Thirdly, the government could choose a takeover candidate from among the big British banks "" Lloyds TSB Group Plc might be the best choice "" and promise the loan would stay in place until the crisis had passed. Northern Rock would be sold for, say, one pound, and experienced bankers would be put in charge.

Sinking Feeling
Lastly, the government could just let it sink to serve as a warning to other banks that lending money you don't have is a risky way to run a business.

There is a decent case to be made for any of those options. Nationalization is at least honest: since the bank now depends on the government loan, it may as well own it. An immediate auction would wrap the issue up quickly. Shifting it into the hands of a commercial bank would make sure it was in safe hands, and that it remained in British control. Letting it sink would encourage the other banks to behave more responsibly.

In truth, it doesn't matter which course is chosen. What isn't acceptable is inaction by Darling and Brown.

It defies credulity that Northern Rock's shares are still listed on the London market. It also is deeply unfair that mortgage borrowers still don't know the fate of the organization to which they owe money.

More than two months have gone by now. Surely that was enough time for the government to come up with a plan. Instead, Darling and Brown have made a bad situation worse. For that, they can expect no sympathy at all.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)