Remember Northern Rock? You know, the financial institution which suffered a bank run last summer and took a huge bailout from the Bank of England? Well, they've been nationalized. Likely the first of many bank failures & government takeovers.Fury over Rock nationalisation
By Jane Croft and Chris Giles
Published: February 17 2008 15:46 | Last updated: February 17 2008 23:38
Alistair Darling on Sunday announced the first nationalisation of a sizeable British bank in a quarter of a century as he put Northern Rock into public ownership, infuriating shareholders and shocking the two private bidders hoping to take over the stricken mortgage lender.
Visibly concerned to avoid queues forming outside branches on Monday, the chancellor and Ron Sandler, Northern Rock’s new executive chairman, insisted it would be “business as usual”.
Mr Sandler, who is to be paid £90,000 a month in his new role, insisted branches would open on time, customers would be able to withdraw and deposit money, and the government guarantees to depositors remained in place.
News of an emergency loan to Northern Rock from the Bank of England last September triggered the first run on a British bank in more than a century. The government has been trying since then to find a buyer for the bank that would enable the £25bn in Bank of England loans to be repaid.
Shares in the bank, which closed at 90p on Friday, will be suspended on Monday morning and shareholders can expect virtually no compensation for their equity.
Mr Darling said the legislation to be brought to parliament on Monday would appoint independent arbiters to determine what the shares were worth, but the legislation would propose that the government should not be required to compensate shareholders for any value that is dependent on taxpayers’ support.
The government’s move stunned shareholders, who were last night considering action. Jon Wood of the SRM hedge fund, the bank’s biggest shareholder, said: “This is a very sad day for the stock market, banking industry and the reputation of the UK as a financial centre.”
Noting that the chancellor insisted the bank was solvent, he added: “We will pursue all avenues to protect that value for shareholders.”
Robin Ashby, founder of the Northern Rock small shareholders group, said he was “shocked and appalled” that shareholders “were having the bank stolen away from them”.
Mr Darling said that, although he had always preferred a private sector solution, “the numbers did not stack up” in either of two private sector proposals offered – one from Sir Richard Branson’s Virgin Group and another from the bank’s management.
“I have a duty to the taxpayers of this country to make sure that I do the right thing by them and that is what I have done,” he said.
Sir Richard, whose group only found out about the government’s decision just before it was announced, said he was “very disappointed” in the decision and believed he had “a very strong proposal”. Virgin had been asked to pay £200m for a government guarantee and £100m-£200m for equity warrants but it is believed that it found this too difficult.
If Northern Rock had been worth £5bn it is understood that the government would only have received £500m in warrants, whereas the Virgin consortium could have made between £1bn and £1.5bn, causing huge embarrassment for the government.
Mr Sandler, who will run the bank at arm’s length from the government, said the new strategy for Northern Rock “will require returning the bank to a more sustainable size”.
He refused to be drawn on what that meant for jobs in Newcastle upon Tyne, although one person close to the situation suggested that Northern Rock could be reduced to half of its size with up to 3,000 job losses.
George Osborne, the shadow chancellor, said: “We will not back nationalisation. We will not help Gordon Brown take this country back to the 1970s.”
Additional reporting by Lina Saigol and Peter Thal Larsen
Copyright The Financial Times Limited 2008
I hear it's a good time to invest in banking related stocks.
