LONDON - British Prime Minister Gordon Brown yesterday strongly defended the government's decision to nationalize the troubled UK mortgage lender, Northern Rock. It has been badly affected by the global credit crunch as a result of the fallout from the US subprime mortgage crisis.
At the weekly Monday morning Prime Minister's Press Briefing at No 10 Downing Street, where he was flanked by his chancellor of the exchequer, Alistair Darling, Brown confirmed that the government had considered two offers from private sector buyers for Northern Rock, but had decided not to accept them. One offer was from the Virgin Group, headed by Sir Richard Branson, owner of Virgin Airlines and the other from the Northern Rock senior management.
"We will have and always will put the interests of taxpayers first. If we hadn't intervened in August it would have gone under, we ensured an existence for the company. It was the best decision to protect depositors, mortgages holders and employees of Northern Rock," he explained.
This comes after Sunday evening's announcement by Darling that the government had decided to "take Northern Rock into public ownership" because it is "the right move at the right time for the right reasons." The announcement resulted in an immediate suspension of the trading of Northern Rock shares on the London Stock Exchange yesterday morning.
Nationalization (unlike its flipside privatization) is a very emotive issue in British politics. It is usually associated with Labour governments of the past and rightly or wrongly with centralized and therefore inefficient management of companies and resources.
That is why Brown has been at pains to stress that as soon as market conditions change, the government will seek to return the bank into private ownership. As such the nationalization of Northern Rock is seen as one of necessity, although critics stress that it is one of political expediency, because the Labour government is faced with an election in two years time - a long enough period for the government to turn around the fortunes of Northern Rock.
Not surprisingly, the nationalization move has been attacked by the opposition Conservative Party Shadow Chancellor George Osborne as "catastrophic" for the reputation of the City of London as a financial center; and by spurned suitor, Sir Richard Branson, and existing shareholders of Northern Rock who face losing almost all of their investment. "We believe nationalization is not the right answer and that a commercial solution would have been the best way forward," said Branson in a statement.
Critics stress that Branson would say so, because his consortium would have been laughing all the way to the bank, had the government agreed to his bid. The consortium would have paid next to nothing to acquire Northern Rock; it would have all the government guarantees plus the Bank of England financing; plus it was seeking further subsidies from the taxpayer. As such, if there was any upside down the line, it would have been the consortium that would have benefited and not the taxpayer.
Darling stressed to the BBC Radio Today Program yesterday that the two private takeover offers did not offer the taxpayer "sufficient value for money. 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," he told the BBC.
UK government loans and guarantees amount to the about 55 billion pounds. Under the new nationalization strategy this will jump to 110 billion pounds, a cost of 3,500 pounds per taxpayer.
Perhaps as a master stroke, the chancellor has brought in a proven City troubleshooter, Ron Sandler, the former boss of the Lloyd's of London insurance market, to lead the nationalized Northern Rock, in his capacity as the Executive Chairman. Darling assured the public that Northern Rock will be run commercially at arms length from the government, which will refrain from interfering. As such Northern Rock will operate as a normal British bank which will be open for business as usual yesterday morning. Ron Sandler is widely respected for restoring confidence in Lloyd's after its years of financial crisis which dented confidence in the London insurance and financial market for almost a decade. However, Sandler's contention that Northern Rock must be reduced to a sustainable size, has caused concern amongst the bank's employees about huge job cuts under his stewardship.
Nationalization entails a series of measures which have to be taken over the next few weeks for it to be enacted. The government is in the process of introducing emergency enabling legislation which has to go through the usual parliamentary debate and scrutiny. The Conservatives have stressed that they will oppose the legislation. But the Labour government because of its majority should clear these hurdles in due course.
Under nationalization rules, existing Northern Rock's shareholders have to be offered compensation for their equity stakes at a level set by a government-appointed but independent valuation panel. The calculation of the value of shares will be based on the bank's value without government guarantees. Under these conditions, the Northern Rock shares are of little value. Not surprisingly, shareholder groups are threatening to take legal action over the government's move.
