18 February 2008

Telegraph: Alistair Darling nationalises Northern Rock

The economic credibility of Gordon Brown's government has suffered a serious blow after the Chancellor was forced to announce the nationalisation of Northern Rock - the first time that a major high street bank has been taken into state ownership in modern times.

The unexpected move left the taxpayer liable for close to £100 billion and led to a furious reaction from shareholders, who threatened legal action. The decision is an admission of failure by the Prime Minister and his Chancellor, Alistair Darling, who for months have argued for a private sector sale, and has left the Government facing accusations of incompetence. It was taken after a weekend of frantic meetings in which the Prime Minister returned from Scotland early to thrash out the details.

The announcement was made in a hastily-convened press conference in which the beleaguered Mr Darling insisted that neither of the two private proposals to take over the stricken bank - including one from Virgin - offered "sufficient value for money to the taxpayer".

An emergency Commons statement will be made this afternoon and legislation brought forward immediately that will pave the way for nationalisation. George Osborne, the shadow chancellor, accused the Government of "dithering" for months only to arrive at a "catastrophic position".

The move is the most significant blow so far to Mr Brown's reputation for economic competence. It drew comparisons with the Tories' "Black Wednesday" moment. Mr Darling insisted that the company would be transferred back into the private sector "as soon is it is right to do so", but he was unable to put forward even an approximate timescale.

Ron Sandler, the City troubleshooter, has been put in charge of the bank but admitted that there was now the prospect of job losses. Investors in Northern Rock, which has about 144,000 small shareholders, are likely to take legal action. Robin Ashby, from the Northern Rock Small Shareholders' Group, said: "I'm shocked and appalled. Unless they come up with a fair compensation offer, the big shareholders are going to sue them."

Until Saturday night it was still thought that a private sale could be secured. But after failing to get better terms from Sir Richard Branson's Virgin bid, the Chancellor was forced to telephone him to say that it did not give anywhere near enough value for taxpayers. The call was said to be "acrimonious" and Mr Darling acknowledged that Sir Richard was "disappointed" that his plan had been ditched.

He said: "It is better for the Government to hold on to Northern Rock for a temporary period and as and when market conditions improve the value of Northern Rock will grow and therefore the taxpayer will gain.

"The long-term ownership of this bank must lie in the private sector". Sir Richard said: "We believe nationalisation is not the right answer and that a commercial solution would have been the best way forward."

Earlier this month the Office for National Statistics forced the Government to put the liability for Northern Rock on its balance sheet - a move that was estimated to have meant an extra £100 billion of exposure.

The Chancellor and Mr Sandler said repeatedly that it would be "business as usual" at Northern Rock. The new boss refused to rule out job losses, admitting that the bank had overstretched and saying that a period of "contraction" was likely. Neither man would be drawn on the level of refunds for shareholders.

© Daily Telegraph