Northern Rock To Be Nationalised

Chancellor Alistair Darling has made the decision to nationalise Northern Rock, putting an end to a five month search for a rescue from the private sector.

The search ended when he said that proposals from interested parties – Sir Richard Branson’s Virgin consortium and the Northern Rock management team – were not able to offer the government enough, as it had lent the stricken bank £25bn.

Darling said: “In the current market conditions we do not believe the two proposals deliver sufficient value for money for the taxpayer.”

This is the first full nationalisation of a company since the 1970s, though the government may hope it’s only temporary public ownership. The move will not do a lot to enhance the government’s long self-proclaimed prudence for the nation’s finances, as the Rock balance sheet deficit of £90bn will now become a public deficit.

Small shareholders of Northern Rock shares will find this a bitter blow. The 180,000 may not get much for their shares as an independent committee will determine the value of the shares. If not held up by the government’s £25bn, experts say the bank would have gone bust anyway, and shareholders may have got even less.

Two hedge funds – SRM Global and RAB Capital – have built up almost a 20% stake in Rock in the past few months, and they are unlikely to take this decision lying down. SRM boss Jon Wood is said to be willing to take his case to the European courts if necessary.

The new people in charge at Northern Rock will be former Lloyd’s of London boss Ron Sandler, and Ann Godbehere, formerly at reinsurer Swiss Re, as finance director.

HSBC chairman and head of the British Bankers Association Steven Green believed that nationalising the Rock would create ‘a perfectly viable institution’.

However, another senior banking industry source said it would only be successful if the government winds the bank down over time. He commented: “Nationalisation is fine as long as it is being run off. But if we see a government-owned bank jousting for new business, then it is not a good option.”