How will Rock's nationalisation affect you?

18 February 2008

Despite two private sector takeover bids, the government has decided to nationalise Northern Rock.

Chancellor Alistair Darling says the aim is to protect taxpayers' money.

The news will unsettle savers and borrowers at the Rock, not to mention shareholders and employees. So how will nationalisation affect them?

If you are a shareholder…

On 15 February 2007 Northern Rock’s share price closed at £12.25. On 15 February 2008 it closed at 90p. Share trading has now been suspended.

Shareholders will probably be the biggest losers in the Northern Rock nationalisation as it is not yet clear whether or not they will receive any compensation for their loss.

The Northern Rock Shareholders Action Group, which represents the 180,000 people who hold shares in the bank, says it will pursue legal action to ensure shareholders are compensated.

Roger Lawson, a director at Northern Rock Shareholders Action Group, said: “[Shareholders] have seen their investment damaged by the actions and inactions of the government and the Bank of England, and now they are going to have their property confiscated by the government.”

Darling yesterday revealed that an independent valuation will take place to determine whether any compensation is due to shareholders. More details of this are likely to be unveiled in parliament on Tuesday 19 February.

But Lawson says shareholders are unlikely to receive compensation as the independent valuation will be on the basis that the government loans have been withdrawn.

He explained: “In that case Northern Rock would clearly not be a going concern and hence would have no value.”

The Shareholder Action Group says it will now investigate whether any legal options are available which will enable it to “thwart nationalisation” and ensure shareholders are compensated.

Jonathan Burridge, a mortgage broker at Quantum Mortgage Brokers, bought “thousands” of shares in Northern Rock shortly after the run on the bank in September when shares were worth around £3.00.

He said: “I am astounded that Northern Rock is to be nationalised as this has always been the worst possible solution for everybody.

“As a shareholder there is nothing I can do – I speculated and got it wrong, but this is a risk we all take.

“I am fortunate in that I am a small shareholder who bought when the share price was already down, but it’s those people who have held Northern Rock shares for years – who perhaps were relying on their investment to form a chunk of their retirement fund – that have really been hurt by the government’s decision.”

If you are a saver….

Ironically, Northern Rock saving accounts are probably the safest in the UK.

The Financial Services Compensation Scheme guarantees all savings in the UK up to £35,000. But following the run on Northern Rock last September, the government stepped in and offered Rock customers an 100% guarantee on their deposits.

This means that all money deposited in Northern Rock is protected by the government.

Northern Rock currently offers some competitive saving products across this market although it did pull some of its market leading deals following the government's announcement.

In a House of Commons session today, Darling came under attack from opposition MPs who raised concerns that by keeping the saver guarantee in place, the government was giving Northern Rock an unfair advantage over its competitors. It was also questioned whether this was within European Union rules on competition.

But Darling responded that it would be a mistake to remove the guarantee, which he claimed is currently ensuring stability at Northern Rock as well as protecting depositors’ money.

If you are a borrower…

The British Bankers’ Association says it is business as usual for Northern Rock mortgage and loan borrowers, and Alistair Darling has reminded mortgage customers that they must keep up with their repayments.

Effectively, the nationalisation of Northern Rock will have no immediate impact on borrowers, other than that their lender is no longer independent and is owned by the government.

One potential outcome for Northern Rock is that the government will wind down the company and sell on its assets to other financial institutions. If this happens then mortgage borrowers will find their repayments will be redirected to another bank or company.

Ray Boulger, from mortgage brokerage John Charcol, said: "The terms of mortgages can't be changed so this will have no impact on most customers. However, if the new owner of the loan book is not willing to make further advances then some customers looking to increase their mortgage may miss out."

If you are an employee…

Ron Sandler, the man appointed by the government to run Northern Rock, is today travelling to Newcastle to meet with the bank’s 6,500 employees.

So far no redundancies have been announced by the government, but it is uncertain how long that will remain the case. The senior management team at Northern Rock has already been culled and the expectation is that more will be shown the door over the next few days.

Takeover bids for Northern Rock proposed slimming down the bank’s operations, and if the government follows this strategy then many jobs across all operations could be at risk.

A spokesman for Northern Rock said: “It is not possible at this stage to give any guidance on the nature of such changes or on the impact of any changes, which may be made to the business, on employees of the company.”

However, for now Northern Rock will remain open for business during normal working hours.

Are you a Northern Rock shareholder, saver, borrower or employee? Have your say in our Forums.

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