No compensation for Northern Rock shareholders

8 December 2009

Thousands of Northern Rock shareholders have been told they are not entitled to receive compensation for their heavy losses following the nationalisation of the troubled lender two years ago.
Independent valuer Andrew Caldwell, who was appointed by the government 14 months ago, has concluded that there was "no value in the share or rights as at the valuation date and therefore no compensation is payable".
His 'provisional view' - contained within a consultation document - is based upon how much money could have been distributed among shareholders after Northern Rock repaid the £25 billion loan it received from the bank of England in September 2007.
However, Caldwell concludes that the lender would have actually gone into administration with a total deficit of £5.7 billion.
"When assessing the value of the shares or rights to receive shares as at the valuation date, it is necessary to consider the outcome of the assumed administration, in particular whether there is any surplus. My provisional view is that there would be no surplus," he said in a letter to shareholders.
Caldwell also insisted that his calculations were based on "optimistic assumptions".

The new comes alongside the Treasury revealing that Northern Rock will be split into two separate entities on 1 January. Back in October, the EU Commission approved plans to split Rock into a good bank and a bad bank.

The restructure will allow £50 billion of mortgages and £30 billion of unsecured loans and Treasury assets to be held in AssetCo while Rock's £20 billion retail deposits and branch network would become known as BankCo.

This good bank could ultimately be sold off for as much as £1.5 billion while the bad bank remains in state hands.
Balance sheet blues

At the time of its nationalisation, Northern Rock had around £106 billion of assets on its balance sheet - largely mortgages, government bonds and cash.
Around £50 billion of these assets were immediately available to repay the Bank of England loan - but once discounts had been applied in a quickfire sale scenario, they would have actually yielded a deficit of £2.4 billion. This would have risen further to £5.7 billion once an administrator had been appointed, Caldwell calculates.

John Mulligan, founder and director of The Investors Association, says he's not surprised by the report.

"Given the extreme fragility of the public sector finances there must have been considerable pressure to make sure that no residual value attached to the previous owners of Northern Rock," he adds. "To my mind, the whole saga reflects the opacity of the banking system and the inability and unwillingness of its overpaid directors to grasp what was actually happening in their own business.

"These problems were compounded by the fact that the regulators in the form of the Financial Services Authority, the Bank of England and the Treasury seem to have been equally in the dark until it was too late. It seems that the only possible recourse for shareholders is for a final appeal to the European Court of Human Rights."

Caldwell has invited further consultation and is expected to give a final ruling next year.

Back in July, Northern Rock shareholders lost their second challenge against the government's "zero return" plans.
Private shareholders and hedge funds SRM Global and RAB Capital were seeking to reverse the High Court's decision that the proposals, which leave Northern Rock shares virtually worthless, were lawful.
But the Court of Appeal has now dismissed the suggestion that the scheme was "only a charade, the product of a settled intention by government to set a formula which would yield a zero figure for compensation".
Lord Justice Laws, sitting with Master of the Rolls, Lord Clarke, and Lord Justice Waller, said the scheme would put shareholders in the same financial position if the Bank of England and the Treasury had not stepped in to support the now nationalised bank.

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