Savers are urged to give backing to bank

6:02am Monday 18th February 2008

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The Government gave Northern Rock time to find a white knight but, in the end, it had no choice but to take the beleaguered bank into public ownership. Chancellor Alistair Darling explained the reasons behind the decision and what the future now holds to The Northern Echo Assistant Editor Nigel Burton

CHANCELLOR Alistair Darling last night urged savers to stand behind Northern Rock after his dramatic announcement that the bank is to be nationalised.

Ministers are hoping the decision will not spark another run on savings as it did in September when investors queued outside branches to withdraw their money after the Northern Rock sought emergency financial assistance from the Bank of England.

Speaking to The Northern Echo last night, the Chancellor said: "I'm very concerned that we don't see a repetition of what we saw last September.

"I want to emphasis that the Government's guarantees for savers remain in place. Their money is absolutely safe.

"If we are going to restructure and rebuild the bank - we've really got to avoid that problem arising again."

The spectre of people queuing round the block to reclaim their savings haunts the Government.

Last September's run on the Rock damaged Britain's reputation as a world financial centre and a good place to do business. As CBI director general Richard Lambert said when the crisis broke, Britain's financial regulators "made all the right decisions, but they made them all at the wrong time". The run on Northern Rock had damaged the reputation of the UK and, as a result, "people have suffered, and the country has suffered."

No doubt mindful of the criticism he received for not intervening early enough to end the crisis by agreeing to guarantee all deposits, last night the Chancellor went out of his way to reassure savers.

"The bank is owned by the Government and it's guaranteed by the Government," he said. "It's difficult to see what more one could do (to build public confidence)."

However, he offered no such reassurance for shareholders, who have seen their shares - which were valued at over £12.50 this time last year - slump to 90p at the close of business on Friday.

Shareholders will be compensated, with the amount of money they are to receive set by a Government-appointed panel.

But crucially the business will be valued on how much it would be worth without Government support - and that figure is likely to be very small indeed.

Mr Darling offered sympathy but said he could not throw more public money at the problem just to help shareholders.

"Of course, I am extremely sympathetic to the position many people have found themselves in, seeing their shares decline so much, but I'm afraid the basic problem was that the responsibility to the shareholders is one that is owed by the board of directors.

"Their business plan was such that it was totally exposed when the money markets dried up in the summer."

If shareholders are unhappy with the Government's offer, they may take legal action. But the precedents do not offer much hope.

When the Government withdrew funding from Railtrack in October 2001, plunging the group into administration, shareholders sought compensation via the courts - and lost.

Institutional shareholders accepted the Government's eventual compensation offer of about 250p a share, but private shareholders wanted much more.

The defeat left 48,000 small shareholders with no more money and, to rub salt into their wounds, they had to pay the Government's £2m legal costs.

Undeterred, city analysts believe it is inevitable that the Government will be sued by some of the Northern Rock's largest stakeholders.

The most belligerent of these is likely to be the two hedge funds, SRM and RAB Capital. These funds, which have a fiduciary duty to protect their own investors, invested about £150m in the bank which gives them a 20 per cent stake. They would hope to recoup as much of that as possible and will not go quietly.

However, Mr Darling said he was determined to hold firm: "We are appointing an independent valuer to carry out a valuation (of the worth of the shares), but the Government has also got a duty to everyone in the North-East who is a taxpayer. The only place any extra money can come from apart from the value of the business - is the taxpayer.

"It's hard - but you can't ignore that."

Former Lloyd's of London chief executive Ron Sandler, who has been lined up to take over as executive chairman, will be travelling to Newcastle later this morning to start work on restructuring the bank.

The Chancellor agreed the Northern Rock had grown too quickly for its own good and that its future would be as a smaller, leaner and more cost-efficient organisation.

He would not be drawn on how many jobs may be lost in any restructuring plan.

Mr Darling added: "If you looked at the board's proposals and the Virgin proposal they were both anticipating a tighter bank. Ron Sandler has been at pains today to say that he doesn't know at this stage what the bank's future size and shape will be.

"But he is confident that with re-focusing and restructuring he can do something with it.

"If we had just let it go bust then everybody would have been out (of a job)."

The nationalisation plan does, however, guarantee £15m for the Northern Rock Foundation - the independent charitable giving arm of the bank that has done great things for worthy causes in the North-East.

Mr Darling revealed that the foundation would have received far less had a private sector solution been given the go-ahead.

"Frankly, the private sector proposals were to give it very, very little indeed. At one stage I think it was just a sum of £1m. That would have put it in severe difficulties."

This afternoon an emergency bill will be rushed through Parliament to nationalise the bank as the Government's turn-around team gets to work.

Mr Darling said he hoped the bank would not be in public ownership for long, but admitted it wouldn't be privatised until the financial markets find their feet again - something that could take years.

"The Northern Rock was basically a mortgage bank. Other institutions tend to have investment banking and other things so if one side wasn't doing so well they could prop themselves up with something else. The business model of the Northern Rock was fine so long as people were lending each other money. It's when they stopped lending each other money it ran into difficulties.

"If we hadn't bailed it out it would have gone bust."

Chaos on the financial markets got the Northern Rock into this position - now they hold the key to the time when it can become a private bank once more.

And no one, not even the Chancellor of the Exchequer, knows exactly when that will be.