Britain nationalises ailing Northern Rock
Britain decided to nationalise Northern Rock on Sunday, abandoning a five-month attempt to snare a private sector buyer for the ailing bank and piling more pressure on Prime Minister Gordon Brown.
Britain's fifth-largest mortgage lender has borrowed $49 billion (Dh180bn) from the Bank of England since its funding model collapsed in the credit crisis last year, sparking the first run on deposits at a British bank for some 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 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 $49 billion and has been put on the government's books, classified as around £90 billion (Dh648bn) of public debt.
The government will put forward legislation on Monday to take the bank into public hands - the first major nationalization in Britain since the 1970s - and trading in Northern Rock shares was suspended.
The opposition Conservatives said they opposed the move.
Brown will hold a news conference on Monday.
RESPECTED TROUBLESHOOTER HIRED
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.
While the government has criticised the bank's business model, it has blamed a credit crisis that started with risky mortgage lending in the United States and has spread throughout the world for sparking Northern Rock's woes.
Germany is rescuing corporate lender IKB, while financial behemoths Citigroup Inc, Merrill Lynch, Swiss bank UBS and Bank of America have all taken multi-billion dollar hits in the mortgage lending fallout.
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.
SHAREHOLDERS LEGAL CHALLENGE
The UK Shareholders Association pledged legal action to try and halt the nationalisation, saying investors in Northern Rock were having their property "confiscated".
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.
"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.
"We do not believe the two proposals deliver sufficient value for money for the taxpayer," Darling said.
Sitting next to Darling at the news conference, Sandler would not be drawn on what his plans were for Northern Rock when challenged on whether he would break it up, or cut jobs.
Many are also wondering whether Darling's position is secure, but Brown would be loathe to sack his long-standing ally and suffer the ignominy of losing the man he trusted with the number two job in government less than a year after taking office.
"[Darling's] political future doesn't look good. But I think ultimately it's the prime minister who takes the rap for this," said Vincent Cable, economic affairs spokesman for the opposition Liberal Democrats. (Reuters)
Follow Emirates 24|7 on Google News.