Investment Markets » Banking and Finance
Will Northern Rock Ever Fly?
The bailout bill already exceeds Britain's entire transport budget. Is there any hope of recouping it?
We've become used to describing the Northern Rock affair in terms of a disaster, debacle or fiasco, but now it has descended into outright farce. In the run-up to the deadline for bid proposals for the stricken bank, the Financial Time's Alphaville website obtained a prospectus – compiled by the team of investment banks charged with finding a buyer – and contrived to publish most of it before Northern Rock slapped down a court injunction.
Someone involved looks to be a Beatles fan. The codename for the Newcastle-based bank is Blackbird and its planned sale is dubbed Project Wing. Here's the relevant lyric: "Blackbird singing in the dead of night. Take these broken wings and learn to fly." If nothing else, it's apt.
It's no wonder an injunction was sought, because the news is very bad indeed – at least from the perspective of the British taxpayer. What is embarrassingly clear is that there is no contemplated disposal, which would get the taxpayer off the hook for the £24bn of public money that has been lent so far.
There seems to be no prospect of a sale that would offer the Treasury a clean exit. Yet the Government still washes its hands of the sale's process, preferring to leave the fate of all that public money in the discredited hands of Northern Rock's chief executive, Adam Applegarth.
Those close to the sale doubt whether any bidder would be able to raise the necessary financing to repay the bank in the near future. But, if the auction fails, it will not be through a lack of effort on the part of the Rock's investment bankers.
The 36-page document attempts to present a picture of a sound institution poised for a profitable revival. It suggests dramatic recovery in normal credit markets, and rapid profit growth, even under more difficult conditions. Yet even if that rosy scenario holds good, Northern Rock will still owe £6bn in 2010.
None of the known bid proposals sits well with the Treasury: all assume continued state of lending at a rate lower than the penal one the Bank currently charges. But if the present impasse continues, it has the potential to cause the Government real harm.
State support for Northern Rock already exceeds Britain's transport budget and could soon surpass the £32bn allocated to defence. Meanwhile, the bank's business continues to decline: depositors are still bailing out, and new lending has slumped to less than a quarter of the volume of the first half of the year.
The longer it takes to reach a deal, the less there will be left to buy. Broken wings, indeed.
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