UK nationalizes Northern Rock PLC
LONDON (AP) – Prime Minister Gordon Brown’s government faced accusations of mismanagement Monday as it began nationalizing stricken mortgage lender Northern Rock PLC – the first time in 20 years that a private company has been taken into public ownership. The government repeatedly insisted a private sale was its preferred option. But after five months of intense speculation about the future of Britain’s most public casualty of the global credit crunch, Brown said that nationalization was the best choice until market conditions improve.
The opposition Conservative Party said Britain’s reputation as a major financial services center had been dealt a serious blow. “The nationalization of Northern Rock is a disaster for the British taxpayer, a disaster for this government and a disaster for our country,” said Conservative Party leader David Cameron.
The government’s troubles were compounded by the threat of a drawn-out legal battle with unhappy shareholders and the potential of hundreds, or thousands, of workers losing their jobs. Brown’s reputation as a guardian of financial stability in Britain has been dented, eroding some of the plaudits he received for presiding over an unprecedented stretch of economic growth as treasury chief before becoming prime minister. On the defensive Monday, Brown and his successor in the treasury office, Alistair Darling, disputed that Britain’s international reputation has been tarnished.
“What we don’t accept is that London or Britain has been uniquely affected by world events,” Brown said, referring to the credit troubles that swept global markets in the late summer and led Northern Rock to seek emergency funding from the Bank of England, triggering Britain’s first bank run in 150 years.
London would remain the world’s “pre-eminent financial center,” Darling added.
The government had rejected two private proposals from Richard Branson’s Virgin Group and an in-house bid from the bank’s management team because they involved too many risks for taxpayers and a very significant government subsidy.
Brown said Northern Rock will be run “at arm’s length from the government under professional management until adverse market conditions change and then the bank can be returned to the private sector.”
However, critics said that the temporary nationalization proposed by the government could last years as Northern Rock’s new management seeks to pay back around 55 billion pounds ($107 billion) via loans from the Bank of England and deposit guarantees.
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, declined to comment on job losses, amid suggestions from analysts that as many as half the company’s 6,250 positions could be cut.
“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,” Sandler said.
Darling did not provide details on the restructure of the bank as he announced emergency legislation to allow the nationalization, saying he would provide more information when the bill begins its passage through Parliament on Tuesday.
The new laws would give the government sweeping powers to seize any other bank that runs into trouble, but Darling stressed they have a sunset clause of one year and that the government plans to use them only in relation to Northern Rock.
The Conservative Party said it plans to oppose the legislation, but the government’s numbers are expected to push the bill through Parliament.
Meanwhile, trading in the stock was suspended to make way for nationalization, leaving shareholders unable to sell their holdings after the government first announced its plan Sunday.
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) Friday, valuing the company at 379 million pounds ($738 million). The price has fallen more than 80 percent since Sept. 13, one day before Northern Rock revealed it had sought the emergency funding.