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Northern Rock tells bidders thanks but no thanks as the bank is nationalised

18 February 2008 / by Rachael Stiles
Despite there being a great deal of criticism about the Government's delayed decision to nationalise Northern Rock, and the fact that shareholders are threatening legal action, most seem in agreement that it was the only feasible outcome for the struggling bank.

The only other possibilities – proposals from Virgin and Northern Rock's own management team – were found to be severely lacking, and so both were notified yesterday by the Chancellor Alistair Darling that their applications had been unsuccessful.

The Chancellor said in a statement released today that Goldman Sachs, which has been advising the Government, concluded that "from a financial point of view", a "temporary period of public ownership better meets the Government's objective of protecting taxpayers."

However, the Government is now irrevocably chained to Northern Rock until it is sufficiently rejuvenated to be released back into the private sector, and it faces almost certain legal action from the shareholders, who stand to gain nothing from the decision to nationalise it. The shares have now been suspended, but were down to 90p on Friday, an impressive fall from £12.14 12 months ago.

Shareholders were backing an in-house takeover by the bank's management, and the Government was aware of the likelihood of them blocking any potential agreement with a private buyer that they did not agree with. Some are now calling for Alistair Darling's resignation after taking almost six months to resolve the crisis.

The Government is said to have had a nationalisation plan ready to put into action for months, but has been reluctant to use it for fear of provoking an onslaught of criticism for burdening the taxpayer with a £100 billion liability, and further damaging the reputation of London as a financial centre.

Many are saying that it’s a case of too little too late, as the Government should have nationalised the bank last summer, when it also refused an offer from Lloyds TSB to buy the bank, which could have solved its liquidity issues.

The taxpayer is expected to break even from the decision, as Northern Rock will still turn a profit when its mortgage book is sold off, jobs are cut and homeowners who are unable to repay their mortgages will find that their homes are repossessed and sold.

The Government stands by its claim that its decision was swayed by the taxpayer, because Virgin would only have started repaying the Bank of England £28 billion loan when the value of the business reached £2.7 billion. It is currently valued at £375 million, compared to £5.3 billion this time last year, so Mr Darling saw nationalisation as a way of benefiting the taxpayer, not Virgin, with any growth in business.

Richard Branson, who hoped to rename Northern Rock Virgin Bank as part of his proposal, is said to be disappointed about the Government's decision, especially in light of the fact that Virgin had been the favourite in the race for the bank.

Both Alistair Darling and Ron Sandler, Northern Rock's new executive chairman, are insisting that its business as usual for the bank, but are being vague about the changes which will have to be implemented in light of nationalisation, such as the number of Northern Rock staff that will lose their jobs when the business is halved in size.

© Fair Investment Company Ltd