Bad Days At Northern Rock
After much criticism Northern Rock has decided to scrap the 14.2p dividend that was due to shareholders next month. Its share price sank to another all-time low.
The struggling bank also announced that it had received 'a number of approaches regarding a variety of potential transactions'. One was the possibility of an offer for the whole company. The bank is in early discussions with several parties.
Rock spent Tuesday afternoon in discussions with Moody's and Standard & Poor's to try and get them to revise their downgraded credit rating for the bank in light of the dividend retraction, as the downgrading would make charges for its finances even higher. The decision on the dividend was taken under pressure from the Treasury and the Financial Services Authority, and accusations from elsewhere that it was treating its shareholders better than its policy holders. It seemed a bit steep for the bank to ask the Bank of England for more money, just to finance its £60m dividend payout. Shares fell to 163.1p.
As the bank looks around for a suitor, talks have begun with controversial Spanish sherry tycoon Jose Maria Ruiz-Mateos, who wrote to Northern Rock last week asking for a meeting with the necessary authorities at the bank to examine the possibilities of acquisition. The sherry tycoon may not be quite the right sort of bidder that the UK government would be hoping for: during the 1980s Ruiz-Mateos was in prison for smuggling, fraud and tax embezzlement, although later he was cleared of all charges. The Spanish entrepreneur made his money by marketing sherry from Harveys of Bristol. The £2bn empire he built up during the 1980s included department stores, construction companies, and, crucially, 18 small banks. When charging him with fraud in 1983, the Spanish socialist government confiscated many of these assets.
The problems at Northern Rock have not been handled particularly well by any parties involved. The Treasury always seems to one step behind. Should the question of a dividend pay-out ever have become a question at all? Yet, when it came to getting the right answer, it seemed hurried and disorganised, was outside of business hours, and leaked to the BBC.
There is a view that says that the Treasury and the FSA should have marked the Northern Rock board out of the building, reclaimed their bonuses and sent in an approved banker to oversee some sort of recovery, nationalising the bank and realising the assets for tax-payers. To pay a dividend was incredible.
The Treasury has now appointed Goldman Sachs as adviser on the bank's sale, but even that is contentious. Goldman Sachs has itself been the subject of criticism over conflicts of interest in recent private equity deals.
The fallout from the crisis will continue for some time to come, especially after Alistair Darling announced guarantees up to £100,000 per saver, going against the rules already in place.
Difficult times call for clear heads: it hasn’t always been the case in the Northern Rock crisis.
Has the UK’s reputation in the banking world has taken a big hit?
Published on September 28, 2007
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