Northern Rock back on the table as Government takes fate in its hands

21 January 2008 / by Rachael Stiles
The Government has outlined a "new financing structure" to bring an end to the Northern Rock crisis, which will include taking ultimate control over the struggling bank's fate, which is hoped to open up the deal to new bidders and draw back previous potential buyers who gave up when a sale was not immediately forthcoming.

In a release today, the Government has announced that the decision over which bidder ends up with Northern Rock is now in its hands, not those of its board or shareholders; the plans might include temporary nationalisation but will also see the bank's £24 billion debt to the Bank of England being converted into five-year, Treasury-guaranteed bonds to be released into the market.

The new structure would be available only "for proposals that would protect the taxpayer's interests", and if no suitable proposals are received by the deadline of February 4, then the Government will initiate "temporary public ownership of Northern Rock." – everyone's worst nightmare: nationalisation.

It is hoped that by dropping the insistence that the successful bidder repays up to £15 billion of the taxpayer's contingency loan, more bidders will be drawn back to the table, such as US private equity firm JC Flowers, and Cerberus who left the bidding war last year when a sale was looking less likely. Sir Richard Branson's Virgin Group and Luqman Arnold's Olivant have remained strong contenders throughout the fiasco.

The bonds are intended to replace the £15 billion minimum loan repayment with the capital they generate, and the Government has applied to the European Commission in Brussels for permission to continue its support to Northern Rock by underwriting the bonds. While critics, including Liberal Democrat leader Vince Cable, are accusing Prime Minister Gordon Brown of instigating a nationalisation plan shrouded by the bonds, the Government maintains that it offers a good solution for both the taxpayer and shareholders.

The new deal will mean that Northern Rock is indebted to the taxpayer for longer than the Government or the bidders would have liked, but it will provide aid to the potential buyers, which have been struggling to secure the necessary funding to pay off the initial £15 billion loan amid the current financial crisis in which financial institutions have become reluctant to lend to each other. It will also enable Gordon Brown to avoid the humiliation of officially nationalising the bank, which would also cause further damage to The City's reputation.

In response to the collapse of Northern Rock – a result of the credit crunch, which was sparked by the sub prime mortgage crisis in America – the Financial Services Authority has been considering new regulations which will prevent a similar scenario happening in the future. One of its proposals could require banks to hold more capital and therefore be less vulnerable to future liquidity shortages.

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