Britain tackles its own mortgage woes
LONDON (AP) - February 18, 2008 Trading in Northern Rock shares was suspended on the London
Stock Exchange as the government made preparations to take the bank
into state control after deeming that two private takeover offers
did not offer the taxpayer "sufficient value for money."
Prime Minister Gordon Brown said that nationalization was the
best option for British taxpayers.
"We will, and always have, put the interests of taxpayers
first," Brown said during his monthly press conference.
Brown added that Northern Rock will be run "at arms length from
the government under professional management until adverse market
conditions change and then the bank can be returned to the private
sector."
The government said that two private proposals from Richard
Brandon's Virgin Group and an in-house bid from the bank's
management team involved too many risks for taxpayers and a very
significant government subsidy.
Both also involved bidders paying below market value while the
government continued to provide guarantees and financing, the
government said.
The government is already subsidizing Northern Rock by around 55
billion pounds ($107 billion) via loans from the Bank of England
and deposit guarantees.
George Osborne, the opposition Conservative Party's Treasury
spokesman, said that nationalization plans were "catastrophic"
and would be opposed by his party.
"The trouble with nationalization, as we're about to discover,
(is that) getting into nationalization is a lot easier than getting
out - as those of us who have read about the 1970s can remember,"
Osborne told the British Broadcasting Corp.
A British company has not been nationalized since the 1970s and
state control of private companies now has broadly negative
connotations.
Treasury Chief Alistair Darling will outline the nationalization
procedure when he introduces legislation to Parliament later
Monday.
Ron Sandler, who brought back Lloyd's of London from the edge of
bankruptcy in the late 1990s and has been appointed by the
government to run Northern Rock, said public ownership "isn't
about running down this bank."
Sandler, who was meeting with management and employees at the
bank's headquarters in Newcastle, northern England, said the plan
was to "stabilize the bank, and then revitalize it and return it
to the private sector - and return it as a vibrant, thriving
enterprise."
"Temporary nationalization is at last a period where the bank
can move forward and away from turbulent waters where it's been
sailing in recent months," he said.
Sandler declined to comment on job losses, amid suggestions from
analysts that as many as half the company's 6,250 positions could
be cut.
Sandler said it was a "very feasible prospect" that Northern
Rock could pay back the government loans, but added that was likely
to take years rather than months.
He noted that the bank will have to operate within European
Union constraints because of the government funding it has already
received, but said it intended to compete vigorously within those
limitations.
Rival mortgage lenders have expressed concern that Northern Rock
will have an unfair advantage.
Brown and Darling disputed claims that Britain's reputation had
been damaged by its handling of the global credit crisis and the
collapse of Northern Rock.
"What we don't accept is that London or Britain has been
uniquely affected by world events," Brown said. Darling added that
London would remain the world's "pre-eminent financial center."
Compounding the government's troubles, however, many
shareholders in Northern Rock are expected to take legal action
over the decision. Under British rules on nationalization,
shareholders will be offered compensation for their holdings at a
level set by a government-appointed panel.
The panel will calculate a figure based on the bank's value
without government guarantees - a figure most analysts expect to be
very little or nothing at all.
The stock closed at 90 pence ($1.75) on Friday, valuing the
company at 379 million pounds ($738 million).
The stock has plummeted more than 80 percent since Sept. 13, the
day before the bank revealed it had sought emergency funding from
the Bank of England after failing to raise funds in the short-term
money markets.
A subsequent profit warning and appeal to the Bank of England
for emergency funds led to long lines at branches nationwide in the
first run on a British bank in around 150 years.
The U.K. Shareholders Association, which represents thousands of
shareholders in the lender, said it "will pursue any legal options
available to it to thwart the nationalization process and to ensure
that fair and reasonable compensation is paid."
Darling had a deadline of March 17 to choose between the bids
and nationalization. That is the date when he must submit a
restructuring plan to the European Union for state aid approval.