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Darling defends his handling of the Northern Rock crisis

28 November 2007
Alistair Darling has defended his decision to bail out Northern Rock, saying that if he had not, the knock-on consequences for Britain would have been 'extremely damaging'.

Speaking at the CBI's annual conference yesterday, the Chancellor, who has been heavily criticised for authorising the Bank of England to provide a £25 billion loan to the fledging bank, said: "I believe it was right to intervene; that it was right to put in place guarantees arrangements to savers. And it is right to see it through."

"Far worse would have been to have done nothing, to have allowed that bank to have gone under," he said, "I believe this would have had very serious consequences for the banking system and for the British economy."

Since the Northern Rock crisis began, a number of takeover bids have been proposed, including those from JC Flowers, Luqman Arnold, Cerebus Capital and Lloyds TSB, who reportedly offered to rescue the bank before things spiralled out of control, in return for a £30 billion loan from the Bank of England.

But it is Sir Richard Branson's British based Virgin Group, who registered interest in a takeover in early October, that has emerged as the frontrunner. On Monday, Northern Rock announced that the Virgin bid, which would see £11 billion of the £25 billion loan paid back immediately in return for a 50 to 60 per cent stake in the company – to be renamed Virgin – was its preferred contender.

But yesterday, hedge fund SRM Global controlled by former trader Jon Wood, became the biggest shareholder in Northern Rock after raising its stake to 8.5 per cent. It is thought that Wood is determined to play a key role in deciding the Newcastle-based bank's fate, and may look to try and halt the Virgin deal.

Branson's offer has already faced criticism, with politicians saying that the taxpayer could be burdened with Northern Rock's troubles for years, and fund manager RAB Capital calling it 'cheeky', due to the fact that his deal would require existing shareholders to pay £650 million in a rights issue at 25p, while the bank would also have to pay a license fee for the use of the Virgin name.

Nevertheless, the Chancellor says he supports the Virgin bid. "I welcome Northern Rock's decision to work with Virgin to turn its proposal into a hard agreement with Northern Rock and the authorities," he said, adding "discussions are now proceeding urgently."

Northern Rock's troubles began as a result of the US sub prime crisis; the bank bundles its mortgages and resells them to other banks, making a profit from the difference between what it charges to customers and the interest it pays to the other banks.

As the credit crunch hit harder, the turbulence on the worldwide economy effectively put a freeze on banks lending to each other and Northern Rock was hit hard.

And reports today suggest that Alliance and Leicester may be facing similar trouble; A&L operates in the same way as Northern Rock, and yesterday, ratings agency Standard and Poor's predicted that the bank may be unable to finance some of its mortgage lending and could be forced to seek emergency funds from the Bank of England.

© Fair Investment Company Ltd