The British government has finally done what it should have done months ago — they nationalised Northern Rock.
Yeah it sucks for the shareholders, but had the government not propped up the bank with £55B in loans and guarantees, the bank would have gone under months ago. Their business plan of relying on cheap loans from other financial institutions left then overly exposed when the global credit crunch hit! These loans simply became too expensive. Thus the shareholders have no one to blame but the reckless executives and the Financial Services Authority who failed to provide appropriate oversight.
So long term, while the bank needs to return to the private sector, nationalisation is currently the most appropriate action to protect the taxpayers investment.
Chancellor to nationalise Northern Rock
Dominic Walsh, From Times Online, February 17, 2008
The Chancellor Alistair Darling announced today that Northern Rock is to be nationalised after deciding it was the best way to safeguard the £55 billion of taxpayers’ money pledged in loans and guarantees.
Mr Darling decided that neither of the two remaining private sector bids to buy the troubled bank delivered “sufficient value for money to the taxpayer”.
Shares of Northern Rock will be suspended on the London Stock Exchange tomorrow morning and legislation will be passed to allow the Govenment to take it into temporary public ownership.
Mr Darling said that the level of compensation to Northern Rock shareholders, which analysts expect to be minimal, would be determined by an “independent valuer” who had yet to be appointed.
The news was announced at a hastily convened press conference at the Treasury this afternoon.
“The government has decided to bring forward legislation to bring Northern Rock into a temporary period of public ownership,” said the Chancellor.
He refused to be drawn on what ‘temporary’ meant, insisting only: “We will transfer it back into the public sector when it is right to do so.”
He excused the Sunday afternoon announcement, saying: “It is necessary to make a formal announcement before the markets open tomorrow morning.”
Ron Sandler, the City grandee who led the rescue of Lloyd’s of London from the threat of collapse, will become chairman of Northern Rock. At the press conference, he said that he would travel to the bank’s headquarters in Newcastle tomorrow afternoon to see how the fortunes of the bank could be turned round.
He added that he was looking forward to the “exciting new role”, but reiterated that he saw his job as a “transitional” one. He said he saw his main task as being to return the Rock to being a “profitable and vibrant” bank.
Branches of Northern Rock will be open for business as usual tomorrow, the Chancellor stressed, and borrowers and savers will not be affected by the move. He said he was confident that every penny of taxpayers’ money sunk into the troubled bank would be recouped.
Today’s decision has come as a disappointment to Sir Richard Branson’s Virgin Group and the Northern Rock management team, who had both been working on bids up until the Chancellor’s decision today.
Both remaining bidders had been warned by the Treasury last week that they needed to improve their offers, because neither offered taxpayers a good enough deal.
Mr Darling said he was “grateful to the bidders for their work over many months” in formulating offers, but, after consulting with the government’s financial advisers, Goldman Sachs, he had concluded that neither was in the best interests of taxpayers.
“I’ve always said I wanted to protect taxpayers’ interest,” he said, adding that under nationalisation the subsidy provided by the Treasury would be repaid in full.
He said that Northern Rock’s problems stemmed from “a board that had a particular financial model which, when the markets became difficult, could not carry on”.
The decision to nationalise Britain’s fifth-largest mortgage lender, which conjures up the nationalisations of the 1970s, follows the near collapse of the bank in the wake of the credit crunch.
The company’s financial difficulties forced it go to the Bank of England to ask for emergency funding, triggering the first significant run on a British bank for more than a century.
British taxpayers have been forced to subsidise the Rock through loans and guarantees to other lenders worth about £55 billion.
The timing of this afternoon’s announcement has come as a surprise, with most experts expecting the decision to be made via a Stock Market or Common’s statement.
The move is likely to be seen by many as a failure on behalf of the Treasury. Mr Darling has repeatedly said that a private sector solution was the preferred option.
Gordon Brown, the Prime Minister, said recently: “My first concern has always been the stability of the economy. Why we acted to help Northern Rock in the first place was to prevent contagion to other banks and other building societies and the British economy.
“And because stability is the issue, we will look at every option, and that includes taking the company into public ownership and then moving it later back into the private sector.”
George Osborne, the Shadow Chancellor, condemned the move. “I think nationalisation does enormous reputational damage to the UK as a place for financial services,” he said. “And it also means now that the government is responsible every time Northern Rock forecloses on someone’s mortgage.”
Shareholders had been hoping to have a say in the outcome of talks between the Treasury and the bidders. However, the bank’s two largest investors failed to win support for a number of proposals that would have given investors the right to approve the sale of the bank’s assets.
Until today, Virgin Group – who planned to rebrand the stricken bank as “Virgin Bank” – had been seen to be in pole position when it came to a likely suitor. Even so, as late as Friday reports suggested that the Government was pushing for a better deal for taxpayers than currently on the table.
Mr Darling said that he had spoken today by phone to Sir Richard, who was “disappointed” at the Treasury’s decision. Sir Richard said that he felt that a commercial solution would have been the best way forward.
Some job losses are predicted at Northern Rock.