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Darling nationalises Northern Rock

Sunday, 17 February 2008

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The Government concluded that the private sector alternatives do not meet the test of protecting the taxpayer's interest, when compared with the alternative.

"Accordingly, and taking all the wider considerations into account, the Government has concluded that the right approach is to take the company into a period of temporary public ownership," it said.

The Government added that it was still convinced that, under the approach it is taking, the taxpayer would see its outstanding loans to Northern Rock repaid in full, with interest - and that the business could and would be returned to the private sector as financial markets stabilise.

Shares suspended

Before the markets open on Monday, it is expected that the UK Listing Authority will announce that Northern Rock's shares will be suspended from listing prior to the opening of the London Stock Exchange.

The Government will also introduce a Bill on Monday that will enable the bank to be brought into temporary public ownership. Full details will be provided to Parliament.

The legislation will enable the Government to acquire the bank's shares. It will provide for compensation to be determined by an independent valuer. It will allow for the running of the bank and for the eventual transfer back into the private sector as soon as it is right to do so.

The Bill gives the Government a general power to acquire the shares in, or assets and liabilities, of institutions. But the Government is clear that this legislation is only being introduced now because there is a need to bring Northern Rock into temporary public ownership.

The Government said that the Bill had deliberately been drafted to ensure that a bank could only be acquired in certain tightly defined circumstances, and that that power would only last for twelve months.

The Chancellor has previously announced a consultation, which will lead to permanent legislation to deal with situations like this in the future.

Arms' length terms

Northern Rock will be managed on arms' length terms, as a commercial entity, by a newly appointed experienced and professional management team.

The Government has appointed Ron Sandler CBE, former chief operating officer of NatWest Group and chief executive of Lloyd's of London, who will be executive chairman of the company immediately upon the legislation coming into force.

Sandler will in due course recruit a new chief executive, at which point he will become non-executive chairman.

Ann Godbehere, former chief financial officer of Swiss Re, will be appointed as chief financial officer of the company for the initial phase of public ownership.

Sandler has over two decades of experience in the financial services industry. He was chief executive of Lloyd's of London from 1995-1999. In 1999 he became chief operating officer of NatWest Group up to its takeover by Royal Bank of Scotland. He currently chairs a number of companies.

In 2002 he led a Government-sponsored review of the UK Long Term Savings Industry, which led to the creation of a new suite of simplified, lower cost savings and pension products for consumers. He has an MA from Queens' College, Cambridge and an MBA from Stanford University.

Godbehere has extensive experience of the financial services sector having moved to London as chief financial officer of Swiss Re Life & Health Division in 1998 and joined the Property & Casualty Business Group, based out of Zurich, as chief financial officer on its establishment in 2001.

In 2003 she was appointed chief financial officer of the Swiss Re Group. Godbehere has also been an independent non-executive director of Prudential since 2 August 2007.

Compensation

The proposed legislation provides for the assessment by an independent valuer of compensation which may be payable to any holder of shares transferred to HM Treasury.

The principles for assessing compensation, set out in the legislation, reflect that Government should not be required to compensate shareholders for value which is dependent on taxpayers' support.

A compensation order will be made under the legislation setting out some further details of the arrangements for compensating shareholders and others whose rights may have been affected by the transfer into public ownership. The independent valuer will set their own, more detailed, procedures.

Business as usual

The British Bankers' Association (BBA) said that it was important for the confidence of customers and in the UK's financial services sector that the Northern Rock episode was finally brought to a close.

"For the bank's savers and borrowers it is business as usual. We now need to work together to put in place a considered framework to prevent such a situation happening again and to ensure the regulation system spots trouble in time and has the skills and powers to take fast effectice action in the interests of customers and the UK economy alike," according to the BBA.

Shadow Chancellor George Osborne said, however, that this was the day when Labour's reputation for economic competence died.

"Gordon Brown has dithered his way to the disaster of nationalisation. Now the taxpayer will bear the full risk of lending £100 billion of mortgages in an uncertain housing market. We will not back nationalisation. We will not help Gordon Brown take this country back to the 1970s," Osborne concluded.

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