Government contemplates long relationship with Northern Rock as unsatisfactory bids roll in

19 November 2007
There is suspicion that the Government faces years of supporting Northern Rock, as finding an adequate buyer for the stricken bank is looking unlikely and pressure is mounting to change the rules so that Government aid will not be cut off when the six month deadline comes around in February.

Friday saw the deadline for potential bidders come and go, with a reported eight to 10 buyers putting forward proposals which will be discussed by Northern Rock’s advisors today. Dutch bank ING and American private equity firm Apollo are understood to be among the most recent bidders; those which have been in the picture for a while include JC Flowers and the Virgin Group.

Friday also saw the resignation of the bank’s chief executive Adam Applegarth and four other non-executive directors. Mr Applegarth’s critics believe he took too many risks with sub prime mortgages and did not act accordingly to protect the bank from an unstable global market.

Of the bids made on Friday, it is thought that none are attractive to Northern Rock and its investors because they do not offer the bank’s current stock market value, which would mean losses for the struggling bank’s already dissatisfied shareholders.

Some bidders say that until the chancellor has clarified the conditions of the Bank of England’s loan – which one anonymous bidder has predicted could reach £45 billion by the time the saga reaches an end – they are reluctant to make an offer.

Shareholders have a large stake in the company and will therefore be influential in determining its fate; RAB Capital and SRM Global – two of its biggest shareholders – own 13 per cent of the bank’s equity and are advocating that it not be sold or broken up, but that the Bank of England should continue to offer it support.

Critics are concerned that continued Government aid will see taxpayers picking up the bill – which currently stands at £25 billion after an additional £2 billion loan in the last few days – because none of the potential new owners can afford to repay the massive loan to the Bank of England. The Government is seeking to change the emergency fund’s status to “restructuring aid”, and therefore avoid EU state rules which will see it cut off in February.

This poses problems for not only the tax payer, but also the Government, because Alistair Darling and Gordon Brown do not wish to incur the wrath of the European Commission for violating its rules about state aid, so are searching for a solution which will see them relieved of what The Observer’s Ruth Sunderland has deemed “the mother of all unwanted presents” this Christmas. It is thought that Northern Rock will be nationalised or put into administration if it cannot be sold in two months.

A satisfactory end to the bank’s troubles that will please account holders, mortgage borrowers, shareholders and the Government, will only come in the form of a “miracle” or a “get-out-of-jail-free” card, The Sunday Telegraph’s Sylvia Pfeifer commented.

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