In This Article
30-Second Summary
Headline Link: ‘British Government to Nationalize Northern Rock’
Background: ‘Crisis Deepens for Northern Rock’
Reactions: Parliament speaks out
Historical Context: Prior state bailout of banks and nationalization
Key Players: Ron Sandler
Opinion & Analysis: Observers take stock
Reference: Northern Rock
Related Topics: ‘Sub-prime Casualties who Should Have Known Better’
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Britain to Nationalize Northern Rock Bank
by
findingDulcinea Staff
In its first nationalization of a company in three decades, the British government will take over a financially troubled mortgage lender.
30-Second Summary
On Feb. 17, U.K. Finance Minister Alastair Darling announced plans to nationalize Northern Rock, Britain’s fifth-largest mortgage lender, and to authorize the takeover of any other banks failing within the next year.
“The government has decided to bring forward legislation to bring Northern Rock into a temporary period of public ownership,” until adverse market conditions change and its finances are healthier, Darling said at a press conference.
The move is the first nationalization in Britain since the 1970s.
Northern Rock suffered heavy losses following the sub-prime mortgage crisis in the United States. Last September, the bank saw Britain’s first run on deposits in over a century.
Depositors flocked to withdraw savings after the Bank of England announced an emergency line of credit to keep Northern Rock afloat. Northern Rock CEO Adam Applegarth then predicted in The Sunday Telegraph “it would be a ‘long slog’ for the bank to remain independent.”
Both Northern Rock’s management and Sir Richard Branson’s Virgin Group had developed bids to take control of the troubled bank. The government rejected these as too costly and risky.
Critics say the nationalization is an embarrassing policy reversal for Labour Prime Minister Gordon Brown’s administration.
Anatoly Kaletsky wrote in the Times of London that the nationalization makes “a mockery of all the arguments Brown has vociferously advanced in Brussels against state subsidies and protectionism elsewhere in Europe.”
“The government has decided to bring forward legislation to bring Northern Rock into a temporary period of public ownership,” until adverse market conditions change and its finances are healthier, Darling said at a press conference.
The move is the first nationalization in Britain since the 1970s.
Northern Rock suffered heavy losses following the sub-prime mortgage crisis in the United States. Last September, the bank saw Britain’s first run on deposits in over a century.
Depositors flocked to withdraw savings after the Bank of England announced an emergency line of credit to keep Northern Rock afloat. Northern Rock CEO Adam Applegarth then predicted in The Sunday Telegraph “it would be a ‘long slog’ for the bank to remain independent.”
Both Northern Rock’s management and Sir Richard Branson’s Virgin Group had developed bids to take control of the troubled bank. The government rejected these as too costly and risky.
Critics say the nationalization is an embarrassing policy reversal for Labour Prime Minister Gordon Brown’s administration.
Anatoly Kaletsky wrote in the Times of London that the nationalization makes “a mockery of all the arguments Brown has vociferously advanced in Brussels against state subsidies and protectionism elsewhere in Europe.”
Headline Link: ‘British Government to Nationalize Northern Rock’
Alastair Darling, the United Kingdom’s chancellor of the exchequer (Britain’s finance minister), announced plans on Feb. 17 to nationalize the financially stricken Northern Rock bank. The law also authorizes the government to take over any other bank that fails over the next year, but Darling said the only takeover planned was for Northern Rock. Ron Sandler, an investor credited by the Times of London with keeping insurer Lloyd’s of London from going bust, was appointed by the U.K. Treasury to head the bank.
Source: The Times of London
On Feb. 18, parliament officials began considering draft legislation to nationalize Northern Rock. The move is the first nationalization in Britain since the 1970s. The law would also give the government power to take over other troubled banks for one year. Under nationalization rules, shareholders will be compensated at a level set by a government-appointed panel. The U.K. Shareholders Association, which represents thousands of National Rock shareholders, said it "will pursue any legal options available to it to thwart the nationalization process and to ensure that fair and reasonable compensation is paid."
Source: Time Magazine
Background: ‘Crisis Deepens for Northern Rock’
The Bank of England provided emergency financing for bank Northern Rock on Sept. 14, prompting thousands of customers to pull their savings. A unnamed source close to the bank told the International Herald Tribune that some £1 billion (more than $2 billion) had been withdrawn that day, and the informant “declined to confirm reports that another £500 million (over $ 1 million) was pulled out” the next day. The total amount in withdrawals would equal about 6 percent of Northern Rock’s deposit base prior to the emergency financing. Northern Rock CEO Adam Applegarth told The Sunday Telegraph that “it would be a ‘long slog’ for the bank to remain independent.”
Source: International Herald Tribune
Reactions: Parliament speaks out
U.K. Finance Minister Alastair Darling said in his official statement announcing the nationalization of Northern Rock that the state treasury will transfer [the bank] back into the public sector when it is right to do so." The speech is available in streaming video from the BBC.
Source: The BBC
After the government said it would temporarily take over the bank, Conservative Party member and shadow Chancellor of the Exchequer George Osborne said of Darling, “Politically he is a dead man walking.” David Cameron, head of the Conservative Party, said to Prime Minister Gordon Brown that he should fire Darling, saying “he had no credibility left.”
Source: The Guardian
Historical Context: Prior state bailout of banks and nationalization
The U. S. Federal Reserve and four other Canadian and European central banks said on Dec. 12 they would inject close to $64 billion in emergency short-term loans to banks in an attempt to alleviate the global credit squeeze. The Fed’s liquidity plan will establish a Term Auction Facility to dole out the cash and encourage close coordination with several foreign central banks. According to MarketWatch’s Greg Robb, it is an admission by the Fed that its prior strategy of cutting interest rates did not buoy credit markets.
Source: MarketWatch
In 1971, the British government under Conservative Party Prime Minister Edward Heath nationalized engine and car maker Rolls Royce after it filed for bankruptcy. The development of the RB-211 was proving too lengthy and costly for the company. Questions remained as to the viability of its longstanding contract with Lockheed. The car production unit would be spun off into its own company in 1973. Both companies were privatized in 1986 during the tenure of Conservative Prime Minister Margaret Thatcher.
Source: Time
Key Players: Ron Sandler
The U.K. Treasury appointed Ron Sandler to lead the nationalized Northern Rock bank. Born in Zimbabwe, Sandler earned his bachelor’s degree at Cambridge and his MBA at Stanford. He received praise for his turn-around of the financially struggling Lloyd’s of London in the 1990s, while serving as CEO of the insurance market. In 1999, his leadership at British bank NatWest was tested when he nearly managed to fend off a hostile takeover bid from National Bank of Scotland. Said Justin Urquhart Stewart of Seven Asset Management, “At Northern Rock, he will have to fight battles like Napoleon—on several fronts at the same time. And like Napoleon, he will probably win.”
Source: The BBC
Opinion & Analysis: Observers take stock
A Feb. 14 article running in U.K paper The Daily Telegraph mentions that “EU officials have given tentative approval to some of the options under consideration, but are concerned about setting precedents for state aid that could subsequently be copied by struggling banks around Europe.”
Source: The Daily Telegraph
Anatole Kaletsky, economics editor for the London newspaper The Times, writes that the nationalization of Northern Rock goes against the policies that the New Labour movement publicly supported. “It would represent a grossly unfair distortion of Britain's banking business and would make a mockery of all the arguments [Prime Minister Gordon] Brown has vociferously advanced in Brussels against state subsidies and protectionism elsewhere in Europe.”
Source: The Times of London
Traders and shareholders were stunned at Northern Rock’s nationalization and the announcement that those holding stock in the bank would get nearly no return on their equity. Robin Ashby, the founder of the bank’s small shareholders organization, said those holding stock “were having the bank stolen away from them.” Jon Wood, Northern Rock’s largest shareholder, hedge fund SRM said, “This is a very sad day for the stock market, banking industry and the reputation of the UK as a financial centre.”
Source: Financial Times (free registration may be required)
Larry Elliott and Martin Wainwright, editors for U.K paper The Guardian, went on location to Newcastle, where Northern Rock’s headquarters are located. In the sound clip, the mention there’s a “strong local feeling” about the bank. On Feb. 19 they interviewed a local woman who was at the bank’s flagship branch taking out the maximum allowed withdrawal of £500—a little over $1,000. She expressed trepidation at the nationalization of Northern Rock, saying, “I’d rather have a private company coming in—like Richard Branson.”
Source: The Guardian
The BBC spoke to a number of Northern Rock customers about their reactions to the nationalization of the bank. Ian Riley was upbeat on the nationalization, saying, “The money should stay in the hands of the government and the people, rather than go to the shareholders.” Sylvia Murphy plans to move her retirement fund from Northern Rock to another bank, and said, “Alistair Darling and Gordon Brown have made a real mess of everything. It’s a Whitehall farce.”
Source: The BBC
Reference: Northern Rock
The U.K. Treasury’s official statement on the nationalization of Northern Rock is available on its Web site.
Source: The United Kingdom’s Treasury
Related Topics: ‘Sub-prime Casualties who Should Have Known Better’
FindingDulcinea compiled a wrap-up of the profiles of banks and financial service providers that have fallen prey to the global credit crunch, including Northern Rock.
Source: findingDulcinea
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