Britain nationalises Northern Rock bank
London, February 18, 2008
Britain has nationalised Northern Rock abandoning a five-month attempt to snare a private sector buyer for the ailing bank and piling more pressure on Prime Minister Gordon Brown.
Once Britain's fifth-largest mortgage lender, it has borrowed some 25 billion pounds ($49 billion) from the Bank of England since its funding model collapsed in the global credit crisis last year - sparking the first run on deposits at a British bank for around 140 years.
The Northern Rock debacle has become a major headache for Brown and his finance minister Alistair Darling, tarnishing the Labour government's popularity and denting the prime minister's reputation for being a guardian of financial stability.
Darling told a hastily arranged news conference on Sunday that nationalisation would be temporary and the bank would be returned to the private sector when markets stabilised.
But it was the best option for protecting taxpayers. 'Market conditions will improve. Northern Rock's mortgage book is good but I think it would be a mistake for us to abandon this asset and take a loss now,' he said.
'We had to intervene here, because if we let this bank fail there was every chance the problems would have spread into the wider British banking system,' he said.
The mortgage lender already owes taxpayers 25 billion pounds ($49 billion) and has been put on the government's books, classified as around 90 billion pounds of public debt.
The government will put forward legislation on Monday to take the bank into public hands - the first major nationalisation in Britain since the early 1970s.
The opposition Conservatives said they opposed the move. 'This is a day when Labour's reputation for economic competence died,' Conservative spokesman for economic affairs George Osborne said. 'We will not back nationalisation. We will not let Gordon Brown take this country back to the 1970s.'
Brown, who helped transform the Labour Party in the 1990s by ditching its previous attachment to state-ownership, has seen his popularity slump in opinion polls since the Northern Rock run and has been accused of dithering over key decisions.
He is now staking his reputation on markets returning to normal. The risk is that with the economy slowing, the housing market turning down and some banks still to reveal the full impact of the credit crunch on their balance sheets, Northern Rock's huge mortgage portfolio may struggle to find a buyer.
Day-to-day running of Northern Rock will now pass to Ron Sandler, a respected troubleshooter who rescued Lloyd's of London from the brink of collapse. Former Swiss Re executive Ann Godbehere will be chief financial officer.
Darling said the new management team would have autonomy to run the bank as a commercial concern but he and the prime minister would decide on the merits of a future private sale.
The move was condemned by Northern Rock's shareholders, who fear getting little for their investments. Darling said an independent auditor would see how much shareholders should get, but the bank would be valued as if it had not received any government support.
The UK Shareholders Association pledged legal action to try and halt the nationalisation, saying investors in Northern Rock were having their property 'confiscated'.
'We will not accept the transfer of this company to a third party after some temporary nationalisation from which that third party will subsequently make substantial profits,' it said.
The government's preference had been for a private sector buyer. A consortium led by billionaire Richard Branson's Virgin Group had been the front-runner, ahead of the bank's management team. Both delivered new offers this weekend.-Reuters