Britain tackles its own mortgage woes

February 18, 2008 8:07:51 AM PST
The British government was to introduce emergency legislation Monday to temporarily nationalize Northern Rock PLC amid strident criticism of the move from opposition lawmakers and shareholders in the stricken mortgage lender. 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.