Northern Rock Taken Into Temporary Public Ownership

by Amanda Banks, for LawAndTax-News.com, London

18 February 2008

The Government has this week announced a decision to bring forward legislation that will enable Northern Rock plc to be taken into a period of temporary public ownership.

The Government explained that it has taken the decision after full consultation with the Bank of England and the Financial Services Authority. The Government's financial adviser, Goldman Sachs, has concluded from a financial point of view that a temporary period of public ownership is the best way to meet the Government's objective of protecting taxpayers.

Northern Rock will be open for business as usual. Branches will be open; internet and call centre services will operate as normal. All Northern Rock employees remain employed by the company, and depositors' money remains absolutely safe and secure, according to the authorities.

The Government's guarantee arrangements remain in place and will continue to do so. Borrowers will continue to make their payments in the normal way. The Financial Services Authority have advised that Northern Rock remains solvent.

The Government set out objectives last year to guide its actions in relation to Northern Rock: the protection of depositors' money; protection of the taxpayer; and maintaining wider financial stability.

The Government has consistently and successfully taken action to meet these objectives, it argued. Last year the Government agreed to provide support to Northern Rock because, in the prevailing market conditions, there was a serious risk that other parts of the banking system in Britain could have been destabilised. That support was successful and prevented further contagion.

The Government was also determined to safeguard depositors' money and took action to put in place arrangements, which have been successful in doing so. None of the guarantees have been called and therefore there has been no cost to the taxpayer, the UK authorities stated.

While in September and October, uncertainty in the market made it difficult to attract potential buyers for Northern Rock, in November and December the board of Northern Rock received a number of expressions of interest. The Government decided to test these proposals.

However, it became clear that no institution was prepared to make an offer for Northern Rock without some form of public support, because of prevailing market conditions.

The Government was, therefore, prepared to consider a backstop guarantee arrangement to allow the Board and shareholders to explore a private sector solution, provided the terms and conditions were acceptable, and met the principles set out by the Government. In the meantime, the Chancellor made clear that a temporary period of public ownership remained an option, and that any solution would need to represent good value for money for the taxpayer.

Two detailed private sector proposals were received: one from the Virgin Consortium and the other, a Northern Rock led restructuring plan. These were considered alongside temporary public ownership.

The Government is very grateful to the bidders for their work to establish whether a private sector-led solution on acceptable terms could be found.

Both proposals involve a degree of risk for taxpayers and very significant implicit subsidy from the Treasury, involving a payment below the market rate to the Government for continuation of its guarantee arrangements and for the financing the Government would be putting in place.

The Treasury observed in a statement that: "Each proposal has pros and cons. The Virgin proposal would have brought a new brand and management."

"However, the taxpayer would only have seen any share of the private sector's return if the value of the business to its investors had reached at least GBP2.7bn."

"The Board's proposal would have involved a similar level of subsidy. But it had other disadvantages, compared with Virgin, including: it would bring in less new capital, providing less "buffer" protecting the taxpayer from risk; and the business would have been dependent on Government guarantees for new retail deposits for longer."

It continued: "A subsidy on the scale required would not, in the Government's judgement, provide value for money for the taxpayer, in circumstances where the private sector rather than the taxpayer would secure the vast majority of the value created over the period ahead. This would be a poor reflection of the balance of risk borne by the two sides."

"By contrast, under public ownership the Government will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty."

"The Government has concluded that the private sector alternatives do not meet the test of protecting the taxpayer's interest, when compared with the alternative. Accordingly, and taking all the wider considerations into account, the Government has concluded that the right approach is to take the company into a period of temporary public ownership."

"It is also the Government's clear assessment that, under the approach the Government is taking, the taxpayer will see its outstanding loans to Northern Rock repaid in full, with interest - and that the business can and will be returned to the private sector as financial markets stabilise."

"This week, before the markets open, it is expected that the UK Listing Authority will announce that Northern Rock's shares will be suspended from listing prior to the opening of the London Stock Exchange."

The Treasury statement went on to explain that: "The Government will tomorrow also introduce a Bill that will enable the bank to be brought into temporary public ownership. Full details will be provided to Parliament."

"The legislation will enable the Government to acquire the bank's shares. It will provide for compensation to be determined by an independent valuer. It will allow for the running of the bank and for the eventual transfer back into the private sector as soon as it is right to do so."

"The Bill gives the Government a general power to acquire the shares in, or assets and liabilities, of institutions. But the Government is clear that this legislation is only being introduced now because there is a need to bring Northern Rock into temporary public ownership."

"The Bill has deliberately been drafted to ensure that a bank can only be acquired in certain tightly defined circumstances. And that power will only last for twelve months. The Chancellor has previously announced a consultation, which will lead to permanent legislation to deal with situations like this in the future."

"Northern Rock will be managed on arms' length terms, as a commercial entity, by a newly appointed experienced and professional management team."

It concluded: "The Government has appointed Ron Sandler CBE, former Chief Operating Officer of NatWest Group and Chief Executive of Lloyd's of London, who will be Executive Chairman of the company immediately upon the legislation coming into force. Mr Sandler will in due course recruit a new Chief Executive, at which point he will become Non-Executive Chairman."

"Ann Godbehere, former Chief Financial Officer of Swiss Re, will be appointed as Chief Financial Officer of the company for the initial phase of public ownership."

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