The shambolic sale of Northern Rock, the UK bank that had to be rescued from a run this year, drags on. The sale process has been poorly run, even allowing for bad luck and the UK’s lack of a special insolvency law for banks, which means that shareholders can hold Northern Rock hostage. Although the difficulties are great, the government should prepare either to nationalise the bank or to put it into administration, even if only to make those options credible threats.
Tuesday’s extension of a Treasury guarantee to more of Northern Rock’s obligations is a natural consequence of the government’s existing loans: to protect its own money, the Treasury must ensure others keep doing business with the Rock. The warning by Mervyn King, Bank of England governor, that market conditions are making a sale difficult highlights the limbo and increasing risk to public funds.
From a taxpayer’s point of view, the best outcome seems obvious. Northern Rock needs: one, an experienced new private sector management team; two, a credible business plan to run down or sell off parts of the bank, leaving behind small and balanced deposit and loan books; and three, the largest injection of new equity and debt possible on acceptable commercial terms, to minimise the risk to public funds.
The financing package, especially the debt finance, was always going to be hard to arrange in today’s markets. Goldman Sachs has now been appointed to arrange what it can but financing should have been the priority from the start. Instead the process has turned into an auction aimed at maximising the value of the shares.
For shareholders, especially those who bought in after the bank’s troubles became apparent, to benefit from public money in this way would be a disgrace. Nationalisation – which the FT called for a month ago – or administration would make the public interest paramount.
A forced buy-out of shareholders would mean setting an arbitrary price and would no doubt provoke legal action. A voluntary offer to shareholders would not work unless the government could make a credible threat to bankrupt Northern Rock if it were rejected.
Success therefore rests on making administration a viable option. There is a thicket of legal and practical difficulties – what happens to securitised assets, how to pay off depositors, how long the process might last – but the difficulties of a sale now look almost as great. Years of legal battles hold little appeal – but they are preferable to a complete surrender of taxpayers’ interests in Northern Rock.
Get alerts on Financials when a new story is published