Breaking finance and business news, tax information, jobs and more for finance directors and senior finance professionals.

The Government decided on Sunday to bring forward legislation that will enable Northern Rock plc to be taken into a period of temporary public ownership.

The Government said it had taken the decision after full consultation with the Bank of England and the Financial Services Authority.

Protecting taxpayers 

The Government's financial adviser, Goldman Sachs, has concluded from a financial point of view that a temporary period of public ownership better meets the Government's objective of protecting taxpayers.

HM Treasury said in a statement that Northern Rock would be open for business as usual on Monday morning and thereafter.

"Branches will be open; internet and call centre services will operate as normal. All Northern Rock employees remain employed by the company. Depositors' money remains absolutely safe and secure," the Treasury added.

The Treasury emphasised that the Government's guarantee arrangements remained in place and would continue to do so.

"Borrowers will continue to make their payments in the normal way. The Financial Services Authority have advised that Northern Rock remains solvent," it said.

Prevailing market conditions 

The Government set out its objectives last year that would guide its actions in relation to Northern Rock: the protection of depositors' money; protection of the taxpayer; and maintaining wider financial stability.

The Government claimed it had "consistently and successfully" taken action to meet these objectives.

Last year the Government agreed to provide support to Northern Rock because, in the prevailing market conditions, there was a serious risk that other parts of the banking system in Britain could have been destabilised.

"That support was successful and prevented further contagion. The Government was also determined to safeguard depositors' money and took action to put in place arrangements, which have been successful in doing so. None of the guarantees have been called and therefore there has been no cost to the taxpayer," Chancellor Darling said. 

While in September and October uncertainty in the market place made it difficult to attract potential buyers for Northern Rock, in November and December the board of Northern Rock received a number of expressions of interest.

Backstop guarantee arrangement 

The Government said it decided to test these proposals. It became clear, however, that no institution was prepared to make an offer for Northern Rock without some form of public support because of prevailing market conditions.

The Government was, therefore, prepared to consider a backstop guarantee arrangement to allow the board and shareholders to explore a private sector solution, provided the terms and conditions were acceptable and met the principles set out by the Government.

In the meantime, the Chancellor made clear that a temporary period of public ownership remained an option, and that any solution would need to represent good value for money for the taxpayer.

Two detailed private sector proposals were received: one from the Virgin Consortium and the other, a Northern Rock led restructuring plan. These were considered alongside temporary public ownership.

The Government said it was "very grateful" to the bidders for their work to establish whether a private sector-led solution on acceptable terms could be found.

"Both proposals involve a degree of risk for taxpayers and very significant implicit subsidy from the Treasury, involving a payment below the market rate to the Government for continuation of its guarantee arrangements and for the financing the Government would be putting in place," according to the Treasury.

Balance of risk 

It added that each proposal had pros and cons. The Virgin proposal would have brought a new brand and management. The taxpayer, however, would only have seen any share of the private sector's return if the value of the business to its investors had reached at least £2.7 billion.

The board's proposal would have involved a similar level of subsidy. It had other disadvantages, however, compared with Virgin, including: it would bring in less new capital, providing less "buffer" protecting the taxpayer from risk; and the business would have been dependent on Government guarantees for new retail deposits for longer.

A subsidy on the scale required would not, in the Government's judgement, provide value for money for the taxpayer, in circumstances where the private sector rather than the taxpayer would secure the vast majority of the value created over the period ahead. This would be a poor reflection of the balance of risk borne by the two sides. 

"By contrast, under public ownership the Government will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty," according to the Chancellor.