Sunday, February 17, 2008

Private Profit, Public Losses in Banks (UK Edition).

Northern Rock to be nationalised
By FT reporters
Published: February 17 2008 15:46 | Last updated: February 17 2008 15:46
The UK Treasury is to announce on Sunday that it is to nationalise Northern Rock, the troubled British bank, the Financial Times understands.

The decision ends months of efforts to find a private sector rescuer for the stricken mortgage lender, which ran into trouble as a result of the international credit squeeze.

It means that neither of the two bids for the bank, from Sir Richard Branson’s Virgin consortium and Northern Rock’s management team, have been successful.

Both bidders tendered revised offers on Friday after the government threatened that the bank would be nationalised unless their proposals were improved.

It is understood that the government believes nationalisation is now the best option, even though it is likely to spark a political storm, an angry reaction from some shareholders and big job losses in the north-east of England.

UPDATE: Part of Government Statement on the issue:

under public ownership the Government will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty.
We could have chosen to pursue either of the two private sector options. But I have always said that I was determined to protect the taxpayers' interest.
It is clear that the private sector alternatives do not meet this test, when compared with public ownership.
Accordingly, and taking all the wider considerations into account, I have concluded that this is the right approach.
Moreover, it is my clear assessment that under the approach we are taking the taxpayer will see its outstanding loans to Northern Rock repaid in full, with interest - and that the business can be returned to the private sector as financial markets stabilise.
Let me set out the next steps. Tomorrow, before the markets open, it is expected that the UK Listing Authorities will announce that the company's shares will be suspended from listing tomorrow prior to the opening of the London Stock Exchange.
Tomorrow, I am also publishing a Bill to bring the bank into a period of temporary public ownership. I will give full details of the legislation to the House of Commons.
The legislation will enable the Government to acquire the bank's shares and its assets. It will provide for compensation to be determined by an independent valuer.
It will allow for the running of the bank and for the eventual transfer back into the private sector as soon as it is right to do so. Because public ownership is a temporary arrangement.
The Bill gives the Government a general power to acquire the shares in, or assets and liabilities, of institutions.
But let me make it clear that this legislation is only being introduced now because there is a need to bring Northern Rock into temporary public ownership.
We have deliberately drafted the Bill to ensure that a bank can only be acquired in certain tightly defined circumstances. And that power will only last for twelve months.
I've already announced a consultation which will lead to permanent legislation to deal with situations like this in the future.
Further details of this arrangement are contained in the Bill which I will publish tomorrow morning when the House returns.
As you can see Ron has joined me today and is ready to answer any questions you may have.
He will want to consider carefully the options and will outline his proposals shortly including in relation to restructuring the business.
Ron expects to be in Newcastle tomorrow to discuss the business and meet staff and their representatives.
His proposals will also cover the Northern Rock Foundation, where he will commit to guaranteeing a minimum income of £15m per year in 2008, 2009 and 2010. This will be paid directly by Northern Rock, and would be a condition of any sale if it were sold in this time.
The new Board will be asked to identify a viable long-term future for the Foundation.
The new Board and the company will operate at arm's length from the Government, with complete commercial autonomy for their decisions.
As agreed in the memorandum of understanding all operational decisions will be made by the Board with no interference from the Government.
It is our expectation that the company can be moved into the private sector at the earliest and most prudent opportunity.
We are clear that this is the most effective way of continuing to support Northern Rock's business, its savers, the wider financial system and safeguard taxpayers' money.
At every stage the stability of the economy and the interests of depositors and taxpayers have been - and remain - our first concern.
This will continue to be the basis on which we will move forward in the coming months.
I will make a full statement to the House of Commons tomorrow afternoon.


Anonymous Topaza said...

Well written article.

5:19 AM  

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