SO FAR, it hasn’t been Alistair Darling’s year; a climbdown on changes to capital gains, an embarrassing retreat on taxing nondomiciles and now he is faced this weekend with having to make a decision on the future of Northern Rock.

And there’s a good chance he will muck this one up as well.

Darling has three options. To nationalise the bank, to back a rescue by a consortium led by Sir Richard Branson’s Virgin and, third, to pick a revised restructuring proposal put forward on Friday evening by the existing management.

The first option, where there is still a 50:50 chance, would leave the government facing years of litigation from angry Rock investors. The legal case would be championed by two hedge funds, SRM and RAB Capital. These funds, which have a fiduciary duty to protect their own investors, have invested about £150m for a 20% stake. The paper value of that stake is now some £80m and they will not go down without a fight.

And, as we say on page one, Jon Wood, the head of SRM, has sent a detailed briefing note to Darling spelling out grounds for legal action.

The second option, to back Virgin’s bid, will lead to a public punch-up with SRM and RAB. They have said they will vote against it – a move that would inevitably lead to nationalisation and legal action.

There is nothing wrong with the Virgin offer. It is well financed, has a solid chairman in Sir Brian Pitman and Virgin has promised a top-drawer finance director, whose name has yet to be revealed. But shareholders don’t like the dilution or the terms of the deal.

Some of them have already seen a 90% drop in the value of their stake and under the terms of the Virgin rescue – if they didn’t subscribe to the rights issue – they would be diluted by a further 60%.

The third way is starting to look more credible. Paul Thompson, a former investment banker, would become chief executive. He has lined up a new chairman and has tweaked his terms to offer the government a warrant for more than 10% of the equity. The in-house team also has written support for a £700m cash injection.

It is an offer that is getting more difficult for Darling to turn down. One face-saving option for the chancellor is to pick both the in-house and Virgin rescues and let the bank’s investors decide. Despite being propped up by a £25 billion loan from the Bank of England, this is still a public company. The European Central Bank is also propping up a number of banks on the Continent and they are still being run as public companies.

Darling and Brown should depoliticise this debate and follow the corporate-governance rules of business rather than use politics to sort it out. The government has succeeded in ensuring that both bids are now well financed and the loan will be repaid in three years. The likelihood of the Rock running into financial trouble again is now much less than at some other high-street financial institutions.

A degree of sense

I HEAR Gordon Brown’s council of businessmen are throwing about some interesting ideas to ensure we give students incentives to take degrees that matter.

There is a view, shared among prominent council members, that undergraduates studying for engineering and science degrees need to receive financial encouragement. Two options that are being discussed include laddering the tuition-fee structure, making degrees like engineering significantly cheaper to take than a degree in media studies, for example. The other, more radical option is to drop fees for engineering and science degrees altogether and increase fees for courses where there is less chance of securing employment.

Brown’s wise men include figures like Standard Chartered’s chairman, Mervyn Davies – who is chairman of the council – Damon Buffini of Permira, Sir John Rose of Rolls-Royce, Sir Alan Sugar and Sir Terry Leahy of Tesco.

These ideas are worth pursuing. Britain is not producing the right level of graduates to ensure the country has a strong future in technology, high-end manufacturing and science. And even if we can’t keep them here, at least we will produce graduates who are able to compete in a global talent pool.

Studying for a degree is becoming far too expensive, but if the government was seen to promote the ones that will go some way to ensuring Britain is at the cutting edge of science and technology, the investment will have been worth making.

The proposals being discussed by Brown’s men need to be put into the open to see if they secure some traction. But if they are to work, as a society we have to value workers in industry as much as we do doctors and lawyers.

Motor mayhem

OUCH! The share price of Pendragon, the country’s biggest car dealer, has taken a beating over concerns it has been hit by the fall in value of secondhand cars.

This week we will know just how bad it has been. The problem is carmakers have cut the price of new vehicles, which has had a big impact on used-car prices. Pendragon’s profits will be flattered by profits from property disposals, but the impact of falling prices will hit the bottom line. Whether it will cut its dividend, which is yielding 12%, is a moot point. The dramatic fall in the share price suggests it will be.

john.waples@sunday-times.co.uk

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