Northern Rock nationalisation to cost taxpayers £50 billion

11 January 2008
Northern Rock could be nationalised by the end of the month at a cost of £50 billion to the taxpayer if a private sale agreement is not reached.

The Chancellor Alistair Darling has already admitted that a private sale might not be possible and that time is running out for the private sector to secure finance to cover the £26 billion lent to Northern Rock by the Government.

The nationalisation is likely to be a temporary arrangement, buying the government time to sell off the lender's assets. Reports claim that Ron Sandler, the former chief executive of Lloyd's and chief operating officer at Natwest, has been lined up to run the nationalised institution on behalf of the government.

Speaking to a Treasury Select Committee on 10 January, Darling admitted: “All options, including nationalisation, are on the table. All of us agree that a private sector solution would be highly desirable, but that might not be possible.”

Northern Rock shareholders will meet on Tuesday 15 January to discuss proposals to block the board's power to sell the lender privately, or auction off its assets.

If Northern Rock were to be nationalised, shareholders in particular would lose out.

Shareholders were not compensated when Rolls Royce was nationalised in 1971, suggesting Northern Rock shareholders may suffer the same fate. Darling has made it clear that taxpayers’ money takes precedence over the claims of shareholders, especially those that bought stock since the troubles began in September.

But Robin Ashby, founder of the Northern Rock Small Shareholders Group, believes that shareholders should be considered.

He says: “If the bank is nationalised we deserve a stake in any eventual outcome. If the Government were to nationalise the bank, then sell it on, it would be wrong for it to make a profit and overlook shareholders.”

The cost of nationalisation is also likely to cost taxpayers around £50 billion.

Currently the two leading bidders for Northern Rock are a consortium led by Richard Branson’s Virgin Money and investment fund Olivant.

But an alternative to a private sale tentatively being considered by investment bank Goldman Sachs, asked by the Treasury to investigate possible options, is the conversion of some, or all, of the £26 billion loan into bonds that could be sold to the market.

This option depends on insurers agreeing to underwrite the bonds but would allow Northern Rock to continue as an independent entity. However, experts say a significant barrier could lie in the present stodgy markets, with concerns over whether there is sufficient investment money and appetite to borrow the bonds.

And a further barrier to any rescue of the lender has emerged in the form of a £100 million hole in its pension fund. The shortfall adds to the capital any bidder would need if it were to succeed.

However, Northern Rock’s case has been improved by the sale of one of its mortgage books, worth just over £2 billion, to investment bank JP Morgan. The proceeds are to go towards reducing its debt to the Bank of England.

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