National disgrace?

AFTER months of prevarication, the Government believes it has finally hit on a way to dispose of the Northern Rock without taking the stricken bank into public ownership.The plan has been hatched by Goldman Sachs, the Treasury's advisor, as the only viable alternative to nationalisation.

Although the Government continues to insist all options are open, behind the scenes, ministers are desperate to avoid a state takeover. Why else would they back a bonds issue that ties the taxpayer to the bank's fortunes for years ahead? Gordon Brown, it seems, has an intense dislike of state ownership - and he isn't alone. Nationalisation has become a euphemism for defeat.

It wasn't always that way. Once upon a time nationalisation was the "cure-all" for Britain's fragmented industry and the only way our industries could compete on the global stage.

So what went wrong and what do the lessons mean for the Northern Rock?

WAS nationalisation responsible for the decline of Britain's post-war manufacturing industry?

SOME historians believe the Attlee government should have done more to modernise and improve Britain's manufacturing industry. The failure to act in any meaningful way, despite the best efforts of Stafford Cripps, president of the Board of Trade, and other ministers, to promote productivity, allowed France and Germany to establish a lead that was impossible to close.

But having won the war, people in Britain expected to enjoy the spoils of victory. They looked to the government not for tough policies on industrial modernisation but for improvements in living standards and healthcare.

The government's room for manoeuvre was hindered by the economic situation the country found itself in after 1945, but nationalisations did take place after the war, including British Coal (1946), central electricity generating board (1947), national rail (1948) and British gas (1949).

The larger industrial nationalisations took place in the 1950s and 1960s.

WHAT was the idea behind the nationalisation bandwagon?

THE fashion for mergers was in full flow during the 60s when the government held the view that only massive companies (so-called "national champions") could exploit economies of scale needed to compete on the international markets.

This was the reason for taking over the steel industry in 1967. It was also the central argument behind the Geddes report on shipbuilding, which led to the creation of large regional shipbuilders in Scotland and the North-East.

SO why did it all go wrong?

SUCCESSIVE governments failed to appreciate that big isn't necessarily better. Nationalised industry were giant businesses riddled with inefficiency and hobbled by meddling politicians.

Where re-organisation was backed by taxpayers' money, the effect was to lessen the financial pressures on companies, allowing them to pursue risky strategies which could not otherwise be justified on commercial grounds.

Far from becoming national champions, consortiums like British Leyland (nationalised in 1976 to avoid bankruptcy) became an international joke.

In the 70s state ownership was used to rescue failing companies like BL and Rolls Royce Ltd in order to avoid job losses but state ownership usually meant just a stay of execution.

SO what happened?

MARGARET Thatcher happened. When Britain's first woman Prime Minister swept into Downing Street in 1979 she rejected many of the assumptions that had guided post-war economic management. Her government was determined to conquer inflation at all costs. This required strict spending limits, tight control of the money supply and a move to a free market economy. The old monopolies were dismantled and sold off. The new term for this was privatisation.

The Conservatives did such a good job convincing people privatisation was good and nationalisation bad that they created a stigma about state ownership that continues to this day.

IF nationalisation is the last choice, what does the Government propose for Northern Rock?

THE Government has approved plans drawn up by investment bank Goldman Sachs for the mortgage lender's £24bn debt to be parcelled up into bonds and sold to investors. The Government itself will guarantee the bonds.

WHAT is a bond?

KIND of an IOU - a bond is a debt security, in which the issuer owes the holder a debt and is obliged to repay the money plus interest at a later date, termed maturity. Bonds are generally issued for a fixed term longer than ten years.

HOW will the plan work?

NORTHERN Rock is selling a pool of loans - such as mortgages and consumer debt - to a financing vehicle which will fund the purchase by selling the bonds in money markets. The bonds, which will have a fixed life span, will pay interest to investors and be guaranteed by the Treasury in the case of a default.

WHY is it doing this?

THE original plan was for potential private sector rescuers to raise funding to pay off between £10- £15bn of Northern Rock's debts up-front. But the interested parties - Virgin's consortium, the Olivant investment group, and Northern Rock's own management - have struggled to raise the cash.

WILL the taxpayer get their money back?

THE Treasury is hopeful that the sale of the bonds will be able to repay the Bank of England debt quickly. As they are guaranteed by the Government, the bonds are likely to be AAArated - the highest investment grade.

IS there a catch?

YES. Although the debt will be repaid, the Government's guarantee for the bonds means it will be underwriting Northern Rock for longer than it had intended, possibly five or ten years.

AND if this doesn't work?

THEN the Government's nightmare comes true.

The Treasury has said it will step in to nationalise the lender. Shareholders are likely to lose everything, the move would be a huge blow to the Government and to London's reputation as a centre for financial services.

WHAT happens if the Government is forced to nationalise Northern Rock?

EMERGENCY legislation will be rushed through Parliament. A Government-appointed arbitration panel will decide on a fair level of compensation for Northern Rock's shareholders, although this is likely to pave the way for a legal fight if investors are unhappy.

HOW long would the bank be nationalised for?

NATIONALISATION is a drastic and embarrassing move for the Government and it would want to get the bank off its hands as quickly as possible.

I'M a saver. Will anything happen to my money?

THE Government has already stepped in to guarantee savers' deposits. For other banks, the Financial Services Compensation Scheme (FSCS) guarantees only the first £35,000 of savings so the money is actually safer with Northern Rock.

WOULD I be able to get my money straightaway?

YES. The running of the business would continue as normal. This is why nationalisation would be the preferred option to administration, where savers' deposits would be frozen while a sell-off of the bank's mortgage assets is carried out.

WHAT happens if I have a mortgage with Northern Rock?

YOU would continue to pay the mortgage in the normal way, although if you fell behind on your payments and were repossessed, your house would now be owned by the Government.