It will be "some years" before Northern Rock has sufficiently recovered to be
returned to the public sector, the man chosen by the Government to lead the
bank's turnaround admitted today.
Speaking at his first press conference as Northern Rock’s executive chairman,
Ron Sandler, said: "It is clearly unrealistic to be talking about months.
We're clearly talking about some years".
Mr Sandler said that he did not intend to run down the bank into "extinction"
but said that how hard Northern Rock competed for new business would be
dictated by as-yet unknown European Union rules, based in its principles for
state aid.
"The bank will have to operate according to a set of rules set in Brussels,"
Mr Sandler said. "Precisely what those constraints will be are not yet
known. We'll submit plans to Brussels and told how we can operate. Within
those constraints, we'll compete vigorously," he said.
Northern Rock has until March 17 pay back £25 billion of emergency funding
authorised by the European Commission for no more than six months.
If the bank cannot pay back the money, the British Government must ask the EU
executive to authorise restructuring aid.
To avoid competing unfairly with rival high-street banks, Mr Sandler will
almost certainly be prevented from seeking new business for the Rock, which
employs 6,000 staff, meaning the bank will only service existing customers,
causing it to shrink rapidly.
A management-led team that attempted to buy the Rock had said that, under its
own plans to downsize the bank, as many as 30 to 40 per cent of staff, equal
to 2,400 jobs, would not be replaced as they left over the next three years.
Mr Sandler said today that he had already met staff members and planned to
address them on a larger scale, but refused to be drawn on possible
redundancies.
Mr Darling said earlier today, in a joint press conference with Prime
Minister, Gordon Brown: “The conditions under which Northern Rock will do
business have to be approved under the (EU) state aid rules, which are
deliberately designed to stop there being unfair competition from something
that has the state standing behind it.”
He added: “I am very aware of the banks’ concerns and I want to be fair by
them. But I think they also recognise that we have got to have a situation
where Northern Rock can continue to trade”.
Mr Sandler said today that he would retain the Northern Rock name. "This is a
very sound and well-managed institution," he said.
The former Lloyd's of London chief executive also said that he planned a
four-part recovery plan for the bank.
This will include ensuring Northern Rock is "operating on sound principles";
to make sure that the Tripartite's needs are being met; to put in place a
new management team and to "create a business that's profitable and can be
returned to the private sector".
Mr Sandler will remain as executive chairman until a new management team was
selected and the bank back on the road to recovery, and then would step back
into a non-executive chairman role. At that time, his £90,000-per-month
flat-rate would be changed to a performance-related payment plan, he said.
Gordon Brown insisted today that Mr Darling had made the "right decisions" in
his five-month attempt to the bank's problems and that the Chancellor’s
stewardship of the UK economy had enabled it to avoid the economic problems
to have hit parts of the EU and the US. He also said that London's
reputation as a global financial centre had been damaged by the Northern
Rock crisis.
"I don't accept that London or Britain has been uniquely affected by world
events," Mr Brown said.
The Prime Minister added that the Chancellor would have been wrong to
nationalise Northern Rock last September, without trying to find a private
sector buyer for the bank.
Graham Goddard, deputy general secretary of the Unite union, said that he
would see urgent clarification on what nationalisation meant for the Rock's
employees. "Employees will be even more anxious about their long-term
security, terms and conditions and pensions arrangements," he said.
Doug Henderson, the Labour MP for Newcastle Upon Tyne North, said that jobs in
the constituency could only be saved if the new public sector management of
the Rock rebuilt a viable business. "I know the work people will be up for
this challenge [and] they and the new management should be given all the
support and time to get on with the job," he said.
The Chancellor will present the legislation he requires to undertake the
nationalisation to the House of Commons this afternoon. Until then, there is
unlikely to be further information on the future of the bank.
Investors were this morning waiting for Alistair Darling to reveal more
details about how compensation might be awarded to shareholders for the loss
of their investment.
Northern Rock's board, which, like Sir Richard Branson, had hoped to rescue
the bank, expressed its disappointment over the Chancellor's decision to
reject a proposal for its management to take control of the business.
In its first statement on the bank's nationalisation since yesterday's
surprise announcement by Mr Darling, Northern Rock said that it had hoped
that one of the private bidders for the bank would succeeded and was "very
disappointed that the Government concluded that it was unable to provide
funding to support a private sector solution".
The bank reiterated that customers would be unaffected by the nationalisation,
with all branches open for normal business hours.
The Chancellor said this morning that Northern Rock remained up for sale,
despite its move into public ownership. Mr Darling said: "If people have got
proposals for us, we'll listen to them but they have to pass a simple test -
what's the best value for the British taxpayer?"
However, last night, furious Northern Rock's shareholders said that the
Chancellor's decision to nationalise the troubled bank had effectively
rendered their shares worthless. Both institutional and retail shareholders
are likely to take legal action if they consider the compensation on offer
insufficient.
Trading in Northern Rock shares was suspended this morning. Bankers involved
in attempts to sell the bank described Mr Darling’s decision to abandon the
auction as an “astonishing failure”. One said: “Darling has to go.”
The UK Shareholders’ Association, which represents 100,000 small shareholders
in Northern Rock, said that Mr Darling’s decision to abandon negotiations
with the two commercial bidders was akin to theft.
Roger Lawson, director of the association, said: “It seems the only reason
that the Government has chosen nationalisation is because ‘it offers better
value to the taxpayers’. This is equivalent to a thief telling you it offers
better value to him to steal from you than to enter into a commercial
transaction with you.”
The association vowed to use any legal option to block nationalisation. SRM
Global, the hedge fund that is Rock’s largest shareholder, has already
threatened to sue the Government if it does not offer investors compensation
of 400p a share. SRM and the RAB hedge fund have invested £150 million in
Rock for a stake of nearly 20 per cent.
One institutional investor said: “This is clearly disappointing and shouldn’t
have been necessary.”
The Chancellor said that he would appoint an independent arbitration panel to
value the bank and calculate any compensation due. This process could take
months and Mr Darling has already told investors that the valuation would be
conducted as if Rock had never received government assistance.
Shareholders said that without the Government guarantee on accounts or the
estimated £25 billion emergency loan from the Bank of England, Rock is
effectively bust, rendering their investments valueless.
Peter Montagnon, of the Association of British Insurers, which represents
Britain’s largest shareholders, said that nationalising Rock could make it
harder for UK banks to raise money by issuing corporate bonds.
He said: “We will have to look for any arrangements for compensating
shareholders and it is also important that the rights of bondholders are
respected. If not, we could see a reduced willingness in the bond market to
fund banks. We will be watching very closely what happens to bondholder
rights.”
Angela Knight, chief executive of the British Bankers’ Association, said that
Mr Darling’s dithering over Rock had harmed the reputation of the UK’s
financial services sector. “A decision should have been reached much
earlier, as this has not helped the perception of the industry,” she said.
The Chancellor rejected rival offers by the Branson consortium and the Rock
management because he believed that they posed too high a risk to taxpayers
and involved too much public subsidy for funding the bank in the next three
years.
Virgin’s offer, he complained, would offer a return for the Government only
after the bank was worth £2.7 billion, while the management team’s proposal
required the Government to maintain its guarantee of Northern Rock’s
deposits for too long.
Sir Richard Branson said that his Virgin group would make no further attempt
to rescue the bank after his £1.25 billion offer was rejected by the
Government. Sir Richard said: “We put all the resources of Virgin’s senior
management team on this for five months and, we believe, had a very strong
proposal.”
A source with knowledge of the consortium’s bid said that the £2.7 billion
target was not over-optimistic, given that the Virgin consortium planned to
inject £1.25 billion into Rock and that Rock has a present market
capitalisation of almost £400 million.
Sources close to the management said it is to stay on for a handover to Mr
Sandler.
Virgin and the management will have their bid costs met by the Government up
to £5 million, but both are thought to have run up higher bills.
