21 January 2008
The Treasury has announced plans to convert Northern Rock's £25bn Bank of England loans into bonds before selling them to investors.
The bonds will be underwritten by the government, (effectively with taxpayers’ money) in order to assist the sale of Northern Rock to one of the suitors currently circling it, including Richard Branson’s consortium and Arnold Luqman’s Olivant.
If a sale to a private buyer cannot be agreed, the bank will come under temporary public ownership. Either way, depositors’ money will be 100 per cent protected by the government.
Northern Rock shares jumped 26.5p to 91p, or 42 per cent, on the news in early morning trading. Bidders have until 4 February to come forward with rescue proposals based on the plans.
The scheme was proposed by bankers, Goldman Sachs, and was agreed by Prime Minister Gordon Brown over the weekend.
It effectively turns Northern Rock debt into government bonds or gilt-edged stock and commits UK taxpayers to Northern Rock for many years to come. Commentators described the level of Government support for the bank as ‘unprecedented.’
The Treasury's plan still needs to be approved by the Financial Service Authority (FSA), and satisfy the European Commission's rules on state aid for companies.
The Treasury has also extended the Bank of England loan facility for the stricken bank until 17 March to allow time to explore the proposed financing structure with Northern Rock and interested parties.
Reports in the weekend press said that Sir Richard Branson's Virgin Group was preparing to make an improved offer for the beleaguered lender.
Whichever group ends up running Northern Rock, there was anger in the City this morning when the bond scheme was announced because of the perceived mishandling of the Northern Rock crisis.
Lloyds TSB, which had been in rescue talks with Northern Rock last September, shortly before the run on the bank, was refused £30bn in Government guarantees and negotiations foundered.
The Government is now supporting Northern Rock to the tune of an estimated £55bn-£6obn, consisting of loans and a 100 per cent guarantee on savers’ deposits.