Northern Rock To Be Nationalised
Sunday 17th February Chancellor Alistair Darling announced the government's decision to temporarily nationalise Northern Rock bank.
Darling explained his decision by saying that the two private takeover offers did not offer the taxpayer "sufficient value for money". He said that the taxpayers had always been the most important element in the rescue of Northern Rock. Any trading in the bank's shares has been currently suspended.
But the Chancellor's decision soon came under criticism from the Conservatives, who claimed they would be fully opposed to the government's nationalisation plans. George Osborne, shadow chancellor, said he thought the decision was "catastrophic".
He said, "The trouble with nationalisation, as we're about to discover, is that getting into nationalisation is a lot easier than getting out, as those of us who have read about the 1970s can remember."
Despite the negative reception, Darling continues to defend his decision and has expressed the intention to eventually move Northern Rock bank back into the private sector.
In a statement to the BBC he said, "We had independent advisers look at this, and they all pointed in one direction: the best thing to do was to take the bank into a period of temporary public ownership before ultimately trying to return it to the private sector."
So what happens now to the shareholders?
As Northern Rock bank becomes nationalised, its shareholders will be offered compensation for their holding. How much and at what level will be established by a panel, due to be appointed by the government. But compensation levels will be based on the value of the bank and not have any government guarantees.
It is thought that as a result, shareholders will receive a lot less in compensation that they anticipated, leaving them no option but to take legal action. Chairman of the Northern Rock Shareholders' Action Group backed up any plans to take legal action, stating that they had perfectly good grounds on which to do so. Mr Lawson said, "We've already considered it and obviously SRM - who are one of the major institutional shareholders - have effectively promised legal action already if nationalisation went ahead."
Rescue plans from Branson's Virgin Group and inside management at the Northern Rock were both dismissed in favour of nationalisation. The government was adamant that its decision that it was the right option, at least until market conditions improve and the bank's value increases. However Mr Darling emphasised that "the long-term ownership of this bank must lie in the private sector."
New boss to run the nationalised bank is Mr Ron Sandler, former boss of the Lloyd's of London insurance market. It is believed he had already been recruited by the Treasury in case the government's plans to go ahead with nationalisation came about. Sandler is responsible for rebuilding Lloyd's when it too experienced a rough patch of financial difficulties.
Although Sandler insisted that saver's deposits would be secure he did state that the bank would need to undergo a reduction in size. It is therefore possible that Northern Rock will see some 1,000 jobs being cut in the takeover process.
Mr Sandler said "It is business as usual", insisting that any changes would have no direct impact on the guarantee made to lenders or the government-backed support for saver's deposits.
Under nationalisation Northern Rock will be subsidised by loans and guarantees from UK taxpayers. It is estimated that this will amount to some £55bn in the first instance, rising to £110bn as the process unfolds. This would work out at around £3,500 per taxpayer.
The Northern Rock crisis came about last year as a result of its ill prepared business model which brought about drastic results during the global credit crunch. The Bank of England was forced to bail out the troubled bank with emergency funding marking the first run on a British bank in over a century.
Published on February 19, 2008
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