Northern Rock likely to face nationalisation, says Darling

11 January 2008 / by None
Northern Rock may be forced to accept its fate and be nationalised, Alistair Darling told the Commons' Treasury Committee yesterday, because its other options are becoming increasingly less viable in the current financial climate.

The two potential buyers – Olivant and Virgin – are struggling to secure the funding they need in order to carry out a successful takeover of the bank because the same credit is not easily accessible in today's markets. As Mr Darling said, "There's plenty of capital around, it’s just frozen."

While a sale for the bank remains the most preferable outcome, said the Chancellor, it "may not be possible" at this time, especially by his self-imposed deadline of February 29. The Government's primary concerns, he said, are the bank's depositors, and the taxpayers, who have footed the £26 billion loan from the Bank of England.

Northern Rock's shareholders pose one of the main obstacles to nationalisation; if the bank is nationalised they stand to be left empty handed, and could potentially block any plans drawn up by the company's board and the Government which they do not consider to be in their best interests. Mr Darling expressed little sympathy for the shareholders, and said that "They should always accept that the shares can go up or down."

Goldman Sachs – the investment bank appointed by the Government to look for potential financing structures to save Northern Rock with a viable sale – has proposed turning some of the £26 billion Bank of England loan into sellable bonds which could then be sold to investors and allow Northern Rock to remain an independent entity. However, the current turbulence in the markets means that there could be a shortage of investors eager to buy the bonds.

The Financial Services Authority is undergoing a shake-up of management after criticism that its lack of affirmative action contributed to Northern Rock's difficulties. New management is hoped to prevent further crises such as that which befell Northern Rock last summer when its heavy investment in the American sub prime mortgage market led to the first run on a British bank in 140 years.

Commenting on the moves, Hector Sants, FSA chief executive officer, said that "This reorganisation underpins and supports the FSA's determination to enhance its delivery", in addition to "improving organisational clarity, efficiency and flexibility."

This follows a Governmental revision of the regulatory system which some say sat back and watched as Northern Rock went down the pan; changes to the tripartite system are hoped to respond to and amend the failures of how the Northern Rock issue was handled. The new system will give more power to the FSA so that it can better monitor troubled banks and step in before they hit severe difficulties.

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