Darling unveils Rock rescue plan

[Steve Gardner]

The BBC's political editor, Robert Preston has been writing about this issue for a while in his blog, called Preston's Picks. Here he offers a much more frank assessment than the rather sanitised version put out on the BBC's main web site. Note, for example, the contrast in tone between the main site's article below and Preston's commentary from 20th January, which is reproduced below that.

Source: BBC

Chancellor Alistair Darling has outlined plans to convert Northern Rock's £25bn Bank of England loan into bonds before selling them to investors.

The bonds would be guaranteed by the government to speed up a private sale of the troubled lender.

However, if a sale to a private buyer cannot be agreed, the bank will come under temporary public ownership.

Either way, savers' money will be protected by the government. Northern Rock shares gained 42% after the news.

Shares in Northern Rock soared by 26.5 pence, or 42%, at 91p.

Bidders have until 4 February to come forward with rescue proposals based on the plans.

The scheme was proposed by bankers Goldman Sachs and was given the green light by Prime Minister Gordon Brown over the weekend.

In effect, it turns Northern Rock debt into government bonds or gilt-edged stock.

That would mean the taxpayer would be exposed to Northern Rock for a much longer period than planned, analysts said.

The Treasury's plan still needs to be approved by the Financial Service Authority (FSA), and satisfy the European Commission's rules on state aid for companies.

'Unprecedented'

"The scale of the financial support the Chancellor has today promised to provide to Northern Rock is breathtakingly large and without precedent," said the BBC's Business Editor Robert Peston.

"No British government has ever provided financial help on that scale to a business."

The Treasury extended the Bank of England loan facility for the stricken bank until 17 March to allow time to explore the proposed financing structure with Northern Rock and interested parties.

At the moment there are three front-runners: Olivant, the consortium led by Virgin, and a standalone plan being developed by the Rock's current board.

Reports over the weekend said that Sir Richard Branson's Virgin Group was preparing to make an improved offer for the beleaguered lender.

According to the Sunday Times, Virgin is preparing to cut its proposed stake in Northern Rock from 54% to 45%. Such a move would allow existing shareholders more room to share in any recovery in the price of Northern Rock stock.

On Saturday, Sir Richard said he had a "winnable package" to ensure the success of his bid for Northern Rock.

Rock: Brown Blinks - Preston's Picks, 20th January

The Chancellor will imply on Monday that were Northern Rock to be nationalised, shareholders would receive nothing or next to nothing.

What Alistair Darling will say, in a Stock Exchange announcement and in a statement to the House of Commons, is that a valuation of the Rock’s shares, were to it be nationalised, would be based on what the business would be worth in the absence of the Government’s current financial support to the troubled bank.

In the absence of that £55bn of taxpayer loans and guarantees to Northern Rock, the bank would be in administration under insolvency procedures – and the Rock’s shareholders would have to wait in line, probably for years, to receive anything for their shares, pending the total dismantling of the business.

Mr Darling’s motives in making the threat to shareholders are transparent.

He wants to scare them into accepting any deal the company and Treasury were to reach with the private-sector groups still vying for control of the Rock – even if that deal gave little to shareholders.

Many in the City will see the Chancellor’s statement as giving a particular boost to the prospects of the Virgin consortium, since its takeover proposal was regarded as particularly hostile to the interests of the Rock’s shareholders.

This determination to scare shareholders into submission is also why both the Chancellor and the Prime Minister said last week that nationalisation remain a very live option for the bank.

And it’s why they have made detailed contingency plans for a nationalisation, which included appointing Ron Sandler – the former insurance executive – to chair a nationalised Rock, and preparing legislation as their preferred route to nationalisation.

The Chancellor and Prime Minister felt they won a victory at the bank’s extraordinary meeting on Tuesday, when two big hedge funds failed in their attempt to win shareholder support for their attempt to severely limit the ability of the bank’s board to sell the business without their approval.

There’s only one problem for Gordon Brown and Alistair Darling.

Their other actions this weekend tell a very different story.

They have signalled that they are deeply scared of the political ramifications of nationalising Northern Rock, and are prepared to accept almost any price to avoid nationalisation.

That’s apparent in the way that they have massively sweetened the terms on which they are prepared to support any private-sector group wishing to take control of the Rock.

By accepting the proposal from Goldman Sachs, the investment bank, to convert a taxpayer loan – which is currently around £24bn – into bonds for sale to international investors, they have decided to provide public-sector support on a greater scale and for much longer than they had initially said they would do.

Those bonds would be guaranteed by the Government. And the Bank of England will endeavour to sell as many of them to investors as it can, as quickly as market conditions permit.

But unless there is some miraculous improvement in conditions in money markets, it means that taxpayers will continue to prop up the Rock to the tune of tens of billions of pounds for years – because the loans will be guaranteed by the Government until such time that private-sector insurers are prepared to take over that guarantee at an acceptable price (no chance of that right now).

And because these bonds have a five-year term, the Government will be promising to provide taxpayer support to the Rock for at least five years.

That’s quite a change from what the Treasury was saying before Christmas, when it was demanding that any private-sector rescuer should repay between £10bn or £15bn of those taxpayer loans straight away.

The way to see all this is as a game of chicken between the Prime Minister, Gordon Brown, and the two hedge-fund shareholders, SRM and RAB.

The hedge funds want to make as much money as they can from their 18 per cent holding in the bank.

Mr Brown wants a private-sector deal that tilts the rewards away from shareholders and towards the taxpayer.

In this game of chicken, by signalling how reluctant he is to push the nationalisation button, it was the Prime Minister who blinked this weekend – and the hedge funds may well be feeling pretty chipper.

[Steve Gardner]

Source: BBC

Northern Rock is to be nationalised as a temporary measure, Chancellor Alistair Darling has said.

Neither of the two private proposals to take over the beleaguered bank offered "sufficient value for money to the taxpayer", Mr Darling said.

He said the public would gain if the government held on to Northern Rock until market conditions improved.

Ron Sandler, nominated by the government to run Northern Rock, said savers' deposits would be secure.

'Dither and delay'

But shadow chancellor George Osborne told the BBC that the Conservatives would oppose plans to nationalise Northern Rock.

"After months of dither and delay we have ended up with this catastrophic decision," said Mr Osborne.

"We now have the situation where the government will be making decisions on whether or not to foreclose on people's loans in a falling housing market," he added.

A consortium led by the Virgin group was leading bids to run the beleaguered bank, while a management buyout had also been considered.

But ministers have decided that nationalisation - the first such move since the 1970s - was the only option.

Virgin boss Sir Richard Branson criticised the government's decision: "We believe we had a very strong proposal, an experienced team and one of Britain's best brands.

"We believe nationalisation is not the right answer and that a commercial solution would have been the best way forward."

Ill-prepared

Explaining the government's decision, Mr Darling said: "It is better for the Government to hold on to Northern Rock for a temporary period and as and when market conditions improve the value of Northern Rock will grow and therefore the taxpayer will gain."

"The long-term ownership of this bank must lie in the private sector".

Northern Rock got itself into financial difficulties last year because its business model left it ill-prepared for the global credit crunch.

It was forced to ask the Bank of England for emergency funding, triggering the first run on a British bank in more than a century.

Nationalisation will be pushed though parliament with emergency legislation on Monday.

Shares in Northern Rock will be suspended on Monday morning.

Under nationalisation rules, shareholders will be offered compensation for their holding, at a level set by a Government-appointed panel.

Investors could begin legal action if they are unhappy with the amount offered, with BBC Business Editor Robert Peston saying that it was "inevitable" that the government would be sued by shareholders who felt they had been "fleeced".

Job threat

UK taxpayers are now subsidising the bank in loans and guarantees to other lenders to the tune of about £55bn.

The Treasury now feels that nationalisation offers the most certainty of securing these guarantees, Mr Peston said.

It is thought that the business model it proposes will be similar to those put forward by the Virgin Group and the in-house management consortium.

These were likely to see a downsizing of the bank, with job cuts likely, observers say.

The Treasury had already recruited Mr Sandler, the former boss of the Lloyd's of London insurance market, to lead Northern Rock, in case it were nationalised.

Mr Sandler is widely regarded as having restored confidence in Lloyd's after its years in financial disarray.

He said the changes would have no impact on the guarantees made to lenders, or the government-backed support for savers' deposits.

"It is business as usual," he said.

Mr Sandler is well known to Prime Minister Gordon Brown, and worked for the Treasury in developing the so-called stakeholder pension and investment products that were intended to help those on lower incomes save for retirement.

Chairman of the Commons Treasury Select Committee John McFall said that he welcomed the Government's decision to nationalise.

"They have explored every avenue. At the end of the day the biggest issue is the safeguarding of taxpayers' money. If nationalisation saves that money, that has to be the correct step in the long term."

Liberal Democrat treasury spokesman Vince Cable said that the right decision had been taken, though "belatedly", and that the government should have walked away from the prospect of a private takeover some time ago.

"The important thing now is to do the right thing and the government has got to immediately establish what the problems are with this bank."