The Future Banking of the Rock
Gordon Brown’s decision on the Rock’s future could be an historic one, reports Katherine Griffiths
Weighing on Gordon Brown’s mind over Christmas will be a financial decision which could make him as famous as his dramatic move to make the Bank of England independent in 1997. Should he nationalise one of Britain’s biggest banks?
Some believe by January Mr Brown will have no choice but to enact historic legislation to take Northern Rock into public ownership. Indeed, the Treasury has already drafted a nationalisation bill which would be pushed through in a single day.
Advisers to the Treasury hope the draft legislation will be no more than a handy bargaining tool to drive a hard bargain with bidders for the Newcastle-based lender.
The Government is still pinning its hopes on a sale to Sir Richard Branson’s Virgin, which is trying to structure a deal that gives something to Northern Rock’s shareholders - to satisfy in particular hedge funds run by Jon Wood and RAB Capital - while also repaying the Bank of England’s £25bn loan and making a return for investors.
Ex-Abbey boss Luqman Arnold’s firm, Olivant, is also working on a deal, which would see a new management team parachuted in to run it in return for taking a cut of any future upside.
However, there is a growing feeling in Westminster and the City that a sale might fail, due to adverse stock market conditions which could make it impossible for a bidder to raise a loan from banks to repay the Bank’s cash.
Robert Pitcher, a partner at law firm Eversheds, said: “Anyone who wants to acquire the shares in Northern Rock - which in reality are worthless - will have to pay a premium over the true value of the bank’s assets, particularly due to the involvement of the activist shareholders. In these markets, and in light of the apparent position of the shareholders, it is hard to see how anyone will make that work.”
A source close to the Northern Rock bidding process, said of the Government’s current thinking: “It is 60:40 in favour of nationalisation, because the numbers in the deal with Virgin are a joke and Olivant is failing to ignite any fires.”
Bankers believe the Government could either warehouse the lender for a period of time and then float or sell it, or it could break it up and sell the assets. Either scenario could see a string of new bidders - or ones that have walked away - enter the fray.
The process would not be straightforward and nationalisation would throw up several problems. It would require the Government to stand behind Northern Rock’s entire £113bn balance sheet. However, it would not guarantee the money lent by the Bank to Northern Rock could be fully recovered. At the same time, it could lead to a head-on clash with shareholders.
But some believe it might be the most sensible option. It could protect the Government against a sale falling through in January or February, by which time Northern Rock may have become more sickly.
It would also avoid the risk of the Government recommending a bid, only for that party to try to renegotiate the terms of the deal later. Worse still, it would also avoid the possibility of the new owner running into difficulties and having itself to be rescued.
Nationalisation could also be less controversial than administration, which would be very likely to lead to a fire sale of assets and heavy job losses in the north east.
The biggest headache might be lawsuits from shareholders, but some corporate lawyers believe investors - especially those who bought into the lender after its financial crisis was revealed - would have no case, on the grounds that owning shares is risky.
Vincent Cable, acting leader of the Liberal Democrats, said: “Nationalisation is a pragmatic solution. Conditions for a private sale are absolutely awful at the moment. Shareholders are fighting like cats and dogs and markets are bad. A temporary public solution could mean Northern Rock is refloated some time down the line when markets are less bad.”
Nationalising Northern Rock, one the UK’s most recognised mortgage banks which wrote almost 20pc of all new home loans in the first half of the year, would be highly embarrassing for the Government.
One analyst said: “It would send a very bad sign that British banking regulation has failed”.
In fact, there have been several public bail outs of more minor banks in the past which Mr Brown could point to. The small lender, National Mortgage Bank, was nationalised in 1994 by the Conservatives, though by that point it was little more than a shell. On a larger scale, the bailout of Continental Illinois in the US in 1984 could provide a template.
The possibility that the Government could let Northern Rock collapse, just as it stood back while the Bank of Credit and Commerce International (BCCI) went under, is thought to be inconceivable because the Government has got to try to safeguard the billions of public money loaned to Northern Rock.
According to Mr Pitcher, there are several routes towards taking control of Northern Rock. “The Government could pass primary legislation to compulsorily acquire the shares. Alternatively, as Northern Rock’s £25bn debt to the Government is secured by charges on the bank’s assets, the Government could appoint administrators with a view to a quick, ‘pre-packaged’ sale of the bank’s business and assets, with the proceeds being applied to meet the debt to the taxpayer,” he said.
The Government would have to find new management for Northern Rock. A team led by a retired building society or banking chief executive would be suitable, Mr Cable said.
Conservative leader David Cameron yesterday said nationalising Northern Rock it would be a “monumental failure” by the Government. In a few weeks’ time, he may come to the view it is the least bad option.
[tags] bank charges, mortgage[/tags]