In 2008 the British government decided to nationalize struggling lender Northern Rock, dashing Sir Richard Branson’s plans to buy the bank, and drawing fire from politicians and shareholders.
This decision was made after considering two private-sector bids to bail out the bank–one from Northern Rock’s management team, the other from Sir Richard Branson’s Virgin consortium. Changes in top management of NRB were planned in the way that former Lloyd’s of London head Ron Sandler would be Northern Rock’s new chief executive, while Ann Godbehere–formerly with Swiss Re –has been appointed chief financial officer.
Britain’s finance minister Alistair Darling talking about these changes named it a “temporary period” of nationalization. He didn’t believe that the two proposals deliver sufficient value-for-money for the taxpayer. He explained that under Virgin’s ownership, Northern Rock would only offer a return on taxpayers’ investments if the company’s value reached at least 2.7 billion pounds ($5.3 billion).
There was also opinion that main disadvantage of this management bit was that it did not inject enough new capital into the business.
Reaction was swift and fierce. George Osborne, the Conservative party shadow finance minister, said the Labour party’s reputation for economic competence was now dead, and that a better solution would have been to take the bank into receivership, with the Bank of England as creditor.
The reaction from shareholders was equally critical; they face seeing their company delisted from the London Stock Exchange next day morning after official news that NRB is going to be nationalised.
The British Treasury had hoped to find a better solution to the Northern Rock crisis, which erupted September 2007 when the lender sought emergency funding from the Bank of England. The inter-bank lending markets, previously a dominant source for Northern Rock’s liquidity, had all but dried up after the U.S. subprime mortgage fallout crippled credit conditions and investor confidence.
But with approximately 24 billion pounds ($47 billion) of taxpayer money already loaned to Northern Rock, Darling has in the end been forced to try and pacify voters instead of shareholders.
To conclude, it remains to be seen just how “temporary” this nationalization will be. Darling said that once market conditions improved, Northern Rock would be returned to the private sector, but that will be of small comfort to those that see little improvement ahead. And actually there were not any improves, this bank fully immersed in Virgin’s Empire.