February 18th, 2008 01:48 EST
Following bank run, Britain Nationalizes Mortgage Bank
By Tom Rivers
Britain's Treasury Secretary has announced the temporary nationalization of the British mortgage-lending bank Northern Rock. Six month ago, the financial institution found itself caught up in the U.S. sub-prime meltdown and a run on the bank ensued. The government then stepped in to calm fears and to find potential private sector buyers. For VOA, Tom Rivers in London has the latest developments.
Over the months various suitors came forward and in the end two remained for consideration, a consortium led by the Virgin group and a Northern Rock management buyout team.
But it was decided that neither of the offers was good enough for the British taxpayers. So the government will formally nationalize Northern Rock for what it is hopes will be a temporary period, while market conditions improve. It also hopes the additional time will allow other potential investment bidders to study the bank and offer alternative solutions.
In London, Treasury Secretary Alistair Darling said it was a tough choice to make, but it is one he says is best for the country.
"When we looked at the two proposals that we had from Virgin and from Northern Rock as compared to the option of a temporary period of public ownership, simply the numbers did not stack up. The better deal was for a temporary period of public ownership," said Darling. "That is why we have reached the decision that we have today."
Darling firmly believes the future of the bank will be in private hands, but selling in the current economic climate is difficult.
"I think that most people realize that we are going through, you know, unprecedented conditions in the markets in recent years. There is huge uncertainty. As I said, Germany is having to restructure and to give financial assistance to some of its banks. The problems in America are well known and well documented," he added. "This is a highly unusual period and I think it is better for the government to hold on to Northern Rock for a temporary period and as and when market conditions improve, which they will, the value of Northern Rock will grow and therefore the taxpayer will gain for a hundred percent of any gain that may be realized."
Unprepared for the global credit crunch, Northern Rock was forced six months ago to ask the Bank of England for emergency funding, which triggered the first run a British bank in more than a century.
At that point, the government stepped in to guarantee all assets in the institution. British taxpayers are currently underwriting the bank in loans and guarantees in the neighborhood of $110 billion.
Northern Rock shares are being suspended from trade Monday, while an emergency nationalization bill is expected to be pushed through parliament.