Investment Markets » Banking and Finance
Is Nationalisation Inevitable For Northern Rock?
Time is running out for a private-sector solution, but nationalisation could be just the start of the Government's problems.
The more hardy of Northern Rock's battered shareholders have traveled to Newcastle for an extraordinary general meeting billed, optimistically, as a showdown to prevent the Rock being sold off on the cheap or nationalised, but they needn't have bothered. Not only did the rebels, led by hedge funds SRM and RAB Capital, fail to push through the resolutions they wanted, but it was blindingly clear that the whole exercise was a red herring.
The future of the Rock is being decided in Whitehall, and the signs are that the Treasury is ready to embrace the last-ditch measure of nationalism. Not only has it lined up Ron Sandler, the saviour of Lloyd's of London, as chairman of a nationalised Rock; but it has now revealed the nuts and bolts of how nationalism might work. The Government, it seems, is no longer bluffing.
What hope there remains for a private buyout is largely dependent on whether Goldman Sachs can secure the funding needed by the Rock's putative buyers, Virgin Group and Olivant. But so far, the City's finest brains have been unable to persuade the markets to lend, and Goldman is keeping mum about other options – such as finding a friendly foreign sovereign wealth fund, or converting the bank's debt into tradable government bonds.
Yet allowing Northern Rock to fall under the dead hand of public ownership would be a disaster and, quite possibly, the final nail in the New Labour project. It would mean adding up to £100bn of liabilities to the Treasury books, thus driving a coach and horses through the PM's so-called fiscal rules; and it would likely lead to a clash with the European Commission over rules banning state subsidies.
Perhaps most seriously, it could weaken the Rock's ultimate power over borrowers who can no longer afford their payments. How would it look if Government-controlled bailiffs started repossessing homes? It's time that Alistair Darling and Mervyn King showed real determination and serious leadership.
For the sake of the British taxpayer and the City's reputation, they must force Britain's leading commercial banks to cough up the capital. In the current climate, good luck to them. It's dog-eat-dog out there and most in the Square Mile have written off the chances of a private-sector deal.
David Cameron was right to claim that nationalisation would be the most staggering failure for the Government, but he'd be mad to stand in the way of it. As Opposition leader, you couldn't hope for a more wounded animal... than a Prime Minister whose flank will be a constantly open sore. Thanks to Northern Rock, his wish may be about to come true.
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