Why has the Government nationalised Northern Rock?

In the immediate aftermath of the run on the Rock last autumn, Gordon Brown faced three options: placing the stricken bank into administration, taking into public ownership or finding a private buyer.

The first was rejected as a “firesale” while nationalisation was deemed politically unacceptable. Thus began a five-month search for a private buyer.

That search ended yesterday when Mr Brown and Alistair Darling agreed that there was no prospect of improving a bid from a consortium led by Sir Richard Branson to the point where they could claim to have protected taxpayers’ interest. That left nationalisation as the only option.

How will the nationalisation process work?

Today the Chancellor will bring new legislation before the House of Commons that will allow the Government to nationalise Northern Rock. The Treasury estimates that it can push the legislation through both Houses and receive Royal Assent within a few days.

The legislation will last for only 12 months but the Chancellor says that Northern Rock will stay in public ownership until market “conditions improve”.

What does nationalisation mean for the bank's customers?

Nationalisation will not affect the day-to-day running of Northern Rock. People with money in the bank’s accounts are protected by a government guarantee so that they cannot lose their cash. Customers of other banks are protected by the Financial Services Compensation Scheme, which covers any savings up to £35,000 so, technically, savers are safer with Northern Rock than with its rivals.

People with mortgages will have to continue paying off their borrowings, although nationalisation means that, if they defaulted on their loan and their house was repossessed, then technically the property would then belong to the Government.

What could the cost to taxpayers be?

In theory, taxpayers are on the hook for Northern Rock’s estimated £91 billion worth of liabilities. Northern Rock had assets worth more than its liabilities last year but these assets are now difficult to put a value on because the market for packages of retail mortgages has died since the problems with US sub-prime mortgages - loans given to poor homeowners - last year. Also, some of Northern Rock’s loans are unsecured, which means that borrowers did not put down any collateral when they obtained cash from the bank.

Who will now manage Northern Rock?

The Chancellor has chosen Sir Ron Sandler, the former chief executive of Lloyd’s of London, the insurance market, to act as executive chairman of Northern Rock while it is in the Treasury’s control. Ann Godbehere, the former financial officer at Swiss Re, the reinsurer, will become the bank’s financial director.

How did Northern Rock get into financial difficulty?

Until last June Northern Rock was Britain’s fastest-growing bank. It was able to increase its number of mortgage customers rapidly by raising money in the wholesale money markets, rather than relying on using savers’ deposits.

It raised money by packaging up its mortgages and selling the debts on to investors in a process called securitisation. But last year, when poor American homeowners began defaulting on their home loans, the investors who bought such securitised mortgage packages became nervous about the whole market. They stopped buying securities containing home loans. At the same time, banks were worried about whether their rivals were sitting on huge losses. This made banks doubt each others’ creditworthiness and as a result they stopped lending.

What does nationalisation mean for the shareholders?

Trading in the bank’s shares will be frozen before the London Stock Exchange opens this morning. The Chancellor has promised to give more details today on how shareholders might be compensated for the loss of their investment.

A government-appointed arbitration panel will work out the amount of compensation to be given to shareholder. The arbitration panel could decide that, without the guarantee that the Government gave Northern Rock accounts, that the bank would have gone bust and thus has no value. This would mean that shareholders receive nothing.

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