Northern Rock Looks Set To Be Nationalised

Shareholders of Northern Rock are due to meet this week to try and prevent nationalisation which is looking increasingly like the likely solution. The Government has appointed a senior trouble-shooter from the City to act as chief executive and he will be looking to lead a rescue for the bank which will funded by the UK taxpayer.

Last week investors were warned by Chancellor Alistair Darling that they could lose their invested money if the bank is sold. The proposed takeover was labelled a 'humiliation' for ministers by Conservative leader David Cameron.

An extraordinary general meeting of Northern Rock shareholders has been arranged and they will vote on whether they should try and restrict the ability of management to sell off assets of the bank without their approval.

There are 180,000 small shareholders of the bank, with most of them in the northeast - the heartland of Labour support - where the bank is based, and ministers will be concerned about angry investors.

In 2001 the collapse of Railtrack left thousands of investors clutching at thin air. The company was forced into administration, and the Government was left with egg on its face as investors lost money.

David Cameron said that nationalisation of the bank would give a final blow to Gordon Brown's economic credibility. The Conservative leader promised to give the Bank of England greater powers in dealing with any similar financial crisis in the future. "It will," he said, "be the most complete humiliation and failure for the Government."

At the end of last week Northern Rock shares were trading for just over 80p, which makes the company worth around £370m. That's about 10% of what it was worth last summer.

By using emergency one-day legislation the Treasury is hoping to authorise the bank being taken into public ownership, with Government then deciding how much to pay shareholders. To make a sale go smoothly, it has been suggested that the price would have to be more than the current share value.

It would appear that the Government would be paying less than £1bn for a bank with assets of around £100bn. However, although those figures look to be heavily in the Government's favour, it would be holding the bank's liabilities as it struggles to raise money from the difficult current markets.

Former boss of Lloyd's of London, Ron Sandler, has agreed to serve as executive chairman at Northern Rock if a private buyer cannot be found. He said: "In the event of nationalisation, I have agreed I will go in as executive chairman." Sandler is the former insurance market boss at Lloyd's and wrote a report in 2002 on the savings industry. When chief executive of Lloyd's of London, he was given credit for bringing the insurance market back from the brink of collapse in the Nineties. At Rock he would have the role of stabilising things, and making sure the bank has proper plans in place.

Seven Investment Management's Justin Urquhart Stewart predicted that the fate of Northern Rock would be known by Tuesday. He said: "It will be nationalised by Tuesday. The current structure is unworkable."

Published on January 16, 2008