Investment Markets » Banking and Finance
Who Will Pay For Northern Rock?
The Government's cunning finance plan for the Rock leaves the taxpayer dangerously exposed.
If finance were art, the slow-motion demise of Northern Rock would surely belong to the surrealist school. Magritte's enigmatic picture of a smoker's pipe, captioned with the statement: "This is not a pipe", deserves pride of place in Downing Street, as ministers persist with the surrealist tease: "This is not a publicly owned bank".
Nearly six months on from Northern Rock's collapse, a solution to the question of how the bank's private purchase will be funded has finally been found. Northern Rock will issue some £24bn in government-guaranteed bonds to be sold off in stages to investors, with the proceeds going to repay its debt to the Bank of England. Add in additional guarantees worth £30bn, and the total exposure to the taxpayer is £54bn.
In a desperate effort to avoid nationalisation, Gordon Brown has authorised the biggest and most bizarre public-private partnership in British history. Freed of its debts, and shored up by government-backed bonds, a two-week auction of Britain's most notorious bank can now begin.
If this doesn't stimulate a private-sector purchase – nothing will: it is a one-way bet – particularly as the fine print in the package suggests Northern Rock's new owners will cream off a larger slice of any future profit than the taxpayer.
The real winners of this gilt-edges scheme are the hedge fund bosses who swooped on the Rock after its collapse and bought shares at knockdown prices. Thus, while markets around the world collapsed, we were treated to the surreal spectacle of Northern Rock's shares soaring by a dizzying 40%. Meanwhile, with no promise of a clean return, the taxpayer has been sold short. The scheme, dreamed up by Goldman Sachs, is a very expensive fig leaf that smacks of nationalisation without the benefits. Although whether it will get the Government out of its political hole is another matter.
The Government's case hasn't been helped by the fact that Sir Richard Branson, whose Virgin Money group is still favourite to buy the Rock, was such a prominent figure on Gordon Brown's recent trip to China and India. If Northern Rock does fall to Branson, that will look like very poor judgement: it is clear the pair discussed Northern Rock, albeit not in detail, and the failed bidders will no doubt complain they are the victims of a prime-ministerial mile high club.
Branson's victory is by no means a foregone conclusion – Olivant, Cerberus and perhaps even Lloyds TSB are back in the running. Whatever clever deal is finally struck, one thing is clear: it will be many years before Northern Rock pays off its own mortgage to the nation.
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