Humiliated chancellor takes Rock public

Only a month after declaring his preference for keeping the ailing bank in the private sector, Mr Darling said it would be temporarily brought under public control, triggering anger from politicians and private investors.

George Osborne, the shadow chancellor, said that "the government's reputation for economic competence has died".

At a surprise press conference yesterday, Mr Darling said two private-sector bids for the bank – including one led by Virgin boss Sir Richard Branson – did not offer the taxpayer sufficient value for money. He claimed that by taking Northern Rock, once the UK's fifth largest mortgage lender, into short-term public ownership, the taxpayer's burden would be protected.

However, this claim was cast into doubt by experts who questioned whether a publicly run Northern Rock would be able to recover amid the global credit crunch that is threatening to trigger recession.

The move was seen by critics as a humiliating climbdown by Mr Darling, who had spent months trying to secure a private sector solution for the crisis-hit bank.

Sir Richard Branson, whose Virgin Money Group consortium was the front-runner to buy the bank ahead of Northern Rock's own management, said the move was "not the right solution".

But, at a meeting yesterday morning with officials from the Bank of England and the Financial Services Authority, Mr Darling and Gordon Brown, the Prime Minister, decided nationalisation – the first such move since the 1970s and the biggest since the 1940s – was the only option.

Mr Darling, who will bring in emergency legislation to allow the move to go ahead quickly, said he was confident Northern Rock could be sold swiftly, despite analysts' scepticism, and denied it was a government failure for which he should resign.

He has appointed Ron Sandler, the former Lloyd's of London boss, to be executive chairman of the bank during its period in public ownership, and said the government would not interfere in its day-to-day management.

Mr Darling said: "It is better for the government to hold on to Northern Rock for a temporary period and, as and when market conditions improve, the value of Northern Rock will grow and therefore the taxpayer will gain.

"The long-term ownership of this bank must lie in the private sector.

"Northern Rock will continue operating on a commercial basis. It will be open for business as usual (this] morning. Savers' and depositors' money remains safe. Borrowers will continue to make payments in the normal way."

Shares in Northern Rock will be suspended before the London Stock Exchange opens today.

Under nationalisation rules, shareholders will be offered compensation for their holding, at a level set by a government-appointed independent panel, Mr Darling said.

John McFall, chairman of the Treasury Select Committee, said: "The biggest issue is the safeguarding of taxpayers' money. If nationalisation saves that money, that has to be the correct step in the long term."

However, Sir Richard said: "We have tried our best to save Northern Rock and the jobs of the staff. We put all the resources of Virgin's senior management team on this for five months.

"We believe nationalisation is not the right answer and a commercial solution would have been the best way forward."

Commenting on the timing of the announcement, Philip Hammond, shadow chief secretary to the Treasury, said: "It does seem odd to make it on a Sunday afternoon when parliament is sitting (the next day]."

Mr Darling said UK taxpayers, now subsidising the bank in loans and guarantees to other lenders to the tune of about 55 billion, would not lose out as the money would be recovered on its sale.

But Mr Sandler said the bank would have to be cut back to a sustainable size. However, union officials, who he will meet today during a visit to Newcastle to meet the bank's management and staff, fear this will mean job cuts.

Northern Rock's new boss said the changes would have no impact on the guarantees made to lenders, or the government-backed support for savers' deposits, adding: "It is business as usual."

But Matthew Sinclair, policy analyst for the Taxpayers' Alliance, said:

"The government has left the taxpayer saddled with billions of risky debt that no-one else would touch. Taxpayers could now end up paying a very high price for the government's incompetence."

He said while a complete collapse was highly unlikely, billions of pounds of public money may have to be spent propping up the ailing business. "The problems making it difficult for Northern Rock are not likely to go away soon. The credit crunch isn't going away anytime soon.

"I think we're looking at years rather than months before the bank can be put back into the private sector."

He also questioned how well the bank would be run, adding: "How much political interference (will] there be when it comes to making big decisions?"

Vince Cable, the Liberal Democrats' Treasury spokesman, said the right decision had been taken "belatedly". He added: "The important thing now is the government has to immediately establish what the problems are with this bank."

However, Mr Osborne said: "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."

Robin Ashby, of the Northern Rock Small Shareholders Group, said he was "shocked and appalled" by the decision. He added: "I thought that there was a good offer made by the management of Northern Rock as recently as Friday and that seems to have been brushed to one side with this rush into macho politics, which is going to do irreparable damage to Britain's reputation as a financial-services sector."

The failed bids

THE new boss of a Virgin-run Northern Rock (NR) would have been Jayne-Anne Gadhia, 46, the chief executive of Virgin Money, who is based in Edinburgh.

The Virgin brand was seen to be a major benefit of the bid – the Northern Rock brand was set to be ditched in favour of Virgin Money, as the NR brand would have been damaged by the fiasco.

Supporters of Virgin's bid also pointed to the fact that Virgin had vowed to pay back 11 billion of NR's 26 billion loans from the Bank of England immediately.

But critics, including the two leading hedge funds which in total hold a stake of about 20 per cent in NR, said Branson's bid was "cheeky", trying to get NR on the cheap.

NR's in-house team had sweetened its bid terms to try to pip Virgin at the 11th hour.

The team's final proposal was understood to have effectively offered the government a stake of more than 10 per cent in the bank. The aim was to ensure the taxpayer could "share in the upside" of any successful turnaround, and thereby deflect criticism that Branson or another outsider could make a killing at the public's expense.

But it is felt one major weakness of the in-house solution was that it was understood to be proposing a smaller capital injection into Northern Rock.

Firm reverses trend of sell-offs across all sectors of industry

Northern Rock stands out as a rare reversal in a steady stream of public sell-offs since the 1980s.

It breaks a trend of privatisations ranging from British Gas to air traffic control begun under the Conservatives and continued under Labour since 1997.

In 1977, James Callaghan, the then prime minister, used the Aircraft and Shipbuilding Industries Act to merge several businesses into British Aerospace and British Shipbuilders.

British Aircraft Corporation, Hawker Siddeley Aviation, Hawker Siddeley Dynamics and Prestwick-based Scottish Aviation joined together to become British Aerospace.

In 1980, the British Aerospace Act made British Aerospace a plc, the government selling more than half of its shares in 1981. Most of British Aerospace later became BAE Systems.

Scottish shipbuilders were particularly affected by the 1977 nationalisation. They included Ailsa Shipbuilding Company in Troon, John Brown & Company in Clydebank, Ferguson Shipbuilders in Port Glasgow, Govan Shipbuilders, Hall Russell & Company in Aberdeen, Scott Lithgow in Greenock, Robb Caledon Shipbuilders in Leith and Dundee, and Yarrow Shipbuilders in Scotstoun.

British Shipbuilders was privatised in 1983 under the terms of the British Shipbuilders Act.

Since then there has been a steady stream of public sell-offs, from British Gas to air traffic control. The most recent near-nationalisation took form in 2001 when Labour put Railtrack into administration, eventually selling it to Network Rail. It is technically a private-sector company, but has no shareholders.

Tristan Stewart-Robertson

Rock saga is set to run and run as legal challenges loom

POLITICAL and legal rows are now set to erupt in the wake of the government's decision to nationalise stricken Northern Rock.

The move, which will effectively wipe out recovery hopes for the bank's shareholders, will draw down intense political fire, both on Gordon Brown and Alistair Darling, the Prime Minister's hapless successor as Chancellor. And it opens the door to a battle in the courts similar to that over the nationalisation of Railtrack.

With less than a month to the Budget – scheduled for 12 March – the government's borrowing targets have already been blasted apart. Taking all of the bank's business on to its books at a time when the economy is slowing and repossessions rising leaves the government in the direct line of fire for every redundancy and every foreclosure that Northern Rock – or "National Rock" as it could now be known – makes to get its house back in order.

And the move is set to provoke a furore across the financial-services sector.

The rejection is wider than just of Richard Branson's Virgin Group and the in-house management team, and also includes Royal Bank of Scotland, Barclays and other banks that were standing by with plans to convert some 25 billion of Northern Rock's loans into bonds.

Nationalisation has been hanging over the bank since news leaked in September of its borrowing of emergency funds from the Bank of England. The news sparked a dramatic run, with queues of depositors forming outside the bank to withdraw their savings. It was the first run on a British bank for more than a century.

The bank has since been propped up with a series of government guarantees running to 55 billion and shares in Northern Rock have collapsed by more than 90 per cent. They closed on Friday at just 63p, pricing the company at only 446 million.

There is wide respect for the new man at the helm of the bank, Ron Sandler. But the immediate worry for the government is the prospect of a legal challenge questioning its intervention.

THAT challenge is set to come from Northern Rock's two biggest shareholders, SRM Global and RAB Capital.

Together, they invested a total of 150 million for a 20 per cent stake. The paper value of their stake has now slumped to just 80 million and the funds have a fiduciary duty to protect their own investors.

SRM, which controls 12 per cent of the company, had thrown its support behind the in-house management rescue and its chief executive John Wood has made clear their position.

"We are prepared to reject nationalisation," he said ahead of yesterday's announcement. "We are prepared to go to court and to Europe if necessary. We are prepared to pursue this to the bitter end."

MR WOOD has already written to Mr Darling saying that the government's decision to treat the bail-out of the bank as state aid is "misconceived".

SRM has commissioned law firm White Case to examine the state-aid ruling. The firm, with analyst Tim Congdon, a former Treasury adviser, argues that assistance by the government to Northern Rock should not fall under the European Union's state-aid rules, but instead should be treated as a normal central-bank intervention in the financial markets.

They contrast the actions of the government and Bank of England with those of the European Central Bank (ECB), arguing: "Spanish banks are borrowing up to 33 billion from the ECB … At no time has it been suggested such measures would amount to state aid."

Mr Darling had a deadline of 17 March to choose between the bids for Northern Rock and nationalisation. That was the date by which he had to submit a restructuring plan to the EU for state-aid approval.

Other legal action by shareholders could centre on compensation terms – hardly the priority of Mr Brown or Mr Sandler at the moment.

Bill Jamieson

STANDING UP TO INDUSTRY

RON Sandler is best known as the man who led the rescue of Lloyd's of London in the 1990s.

Born in Rhodesia, he was also appointed by Gordon Brown to review the savings industry in 2001.

The resulting report called for sweeping changes in medium and long-term pension schemes.

Mr Sandler, 55, criticised the financial services industry for complicated products that had high charges and relatively poor returns. His findings put him at odds with some in the life and pensions field, but gained him respect elsewhere as a man prepared to stand up to the industry.

Cambridge-educated with an MBA from Stanford University in California, he was a management consultant and then a money-broker.

He joined Lloyd's in 1995, becoming chief executive a few months later.

He was brought in to NatWest on a 450,000 salary to repel a takeover in 1999.

However, Royal Bank of Scotland won.

SPURNED SUITOR

FAMOUS for his flamboyant and competitive style, Sir Richard Branson has long been the face of the Virgin brand. He started in business at just 15, publishing a magazine called Student. His retail chain, Virgin Records, was sold last year. The 57-year-old father-of-two has an estimated net worth of 4 billion.

'BULLET-PROOF PLAN'

PAUL Thompson, 45, is behind the rejected management rescue bid for Northern Rock. Born and raised in Yorkshire, he was drafted in to the bank in January as a non-executive director and would have become chief executive if his rescue bid, supported by major shareholders in the bank, had gained Treasury backing.

"We have a bullet-proof plan", he said earlier this month.

AT CENTRE OF CRISIS

Alistair Darling MP was appointed as Chancellor of the Exchequer on 28 June, 2007, succeeding Gordon Brown when he became Prime Minister.

He attended Loretto School, Musselburgh, and studied law at Aberdeen University before working as a solicitor in Edinburgh.

He has been at the centre of the Northern Rock crisis since he guaranteed all deposits held by the bank.

Q & A: ROCK CRISIS

How did Northern Rock get into this trouble?

The company fuelled its growth by borrowing most of its cash for mortgage lending in money markets – relying relatively little on savers' deposits. In the summer credit crunch, markets were gripped by fears over potential losses on bonds based on high-risk US mortgages. Banks keen to hoard cash would only lend to each other at higher rates – and Northern Rock's borrowing costs rocketed. Northern Rock also raised funds by parcelling up its mortgage debts and selling them on in a process called securitisation.

But in the panic over the US situation, investors were turning away from what were now considered risky investments. With the funding taps turned off, the firm was forced to turn to the Bank of England for an emergency bail-out in September, triggering the UK's first bank run for nearly 150 years.

What is nationalisation?

Nationalisation means the government taking a business from its current shareholders into public ownership. Over the past 20 years, it has been more usual for businesses to move the other way, from public to private hands.

What happens now?

Emergency legislation will be published today and then rushed through parliament.

Do civil servants know how to run a bank?

The Treasury won't be bussing coach-loads of officials up to Northern Rock's headquarters in Newcastle upon Tyne to take over the running of the mortgage lender. The Chancellor said yesterday that Northern Rock would be run on an "arm's length commercial basis". This means the business would be publicly owned, but run by a new management team. Former Lloyd's of London chief executive Ron Sandler will take over as executive chairman.

How long would the bank be nationalised for?

Alistair Darling insisted yesterday that nationalisation would be "temporary", stressing that the bank would be "moved back into the private sector at the earliest and most prudent opportunity". The government does want to get the bank off its hands as quickly as possible. But most of Rolls-Royce was in public ownership for 16 years after the bank carried out an emergency nationalisation in 1971.

What will happen to people's savings?

The government has already stepped in to guarantee savers' deposits. For other banks, the Financial Services Compensation Scheme guarantees only the first 35,000 of savings – so technically the money is actually safer with Northern Rock.

Would savers be able to get their money straightaway?

Yes. The day-to-day running of the business will continue as normal. This is why – if a private sector solution falls through – nationalisation would be the preferred option to administration, where savers' deposits would be frozen while a sell-off of the bank's mortgage assets to get the best deal for creditors is carried out.

What happens for people with mortgages with Northern Rock?

They would continue to pay their mortgages in the normal way, although if they fell behind on your payments and were repossessed, their house would now be ultimately owned by the government.

What happens to shareholders?

Investors will be offered compensation for their shares set by a government-appointed arbitration panel which decides on a fair price.

Shareholders, including two hedge funds, could launch legal action if they are unhappy with the amount offered.

How much have shareholders lost?

In February last year, shares in Northern Rock peaked at 12.51 – giving it a stock market value of nearly 5.3 billion. Since the crisis, shares have plummeted to stand at 90p on Friday – valuing the firm at 375 million.

How much does Northern Rock owe?

Since September, the lender has borrowed an estimated 25 billion from the Bank of England.

What is the potential liability to the taxpayer?

So far the taxpayer has guaranteed 55 billion to cover Northern Rock, but some commentators have suggested the real total of all liabilities could end up being as high as 100 billion. That will only have to be paid if there is a complete run on the bank, there is no private buyer and the whole edifice collapses.

Will there be any job losses?

This is unclear at the moment. Financial experts were expecting Northern Rock to be slimmed down if it was taken over by another company. Job losses are unlikely to be as severe under nationalisation but some will probably go over time.

Why couldn't the government find a private buyer?

Sir Richard Branson came forward with an offer through his company, Virgin Money. It looked a possibility for a while, but it was very unattractive for shareholders, offering a deeply discounted rights issue which would have cost them 500 million. As most of the shares are owned by big, institutional corporate shareholders, the pressure from other financial institutions was intense for a rejection of this offer.

There were two other possible options, one from Olivant, vehicle of banker Luqman Arnold, the man who turned around Abbey National, but this avenue closed when Olivant pulled out earlier this month. The other alternative came from an "in house" bid from Northern Rock managers but in the end, ministers decided that neither the Virgin bid nor the Northern proposal was good enough to protect the interests of taxpayers and this was why Northern Rock was nationalised.

Could this have been avoided?

Yes, but only if Northern Rock had adopted a safer strategy.