From a meeting room on the fourth floor of Northern Rock’s headquarters, Ron
Sandler last Friday began trying to dig the government out of a £25 billion
hole.
He formally took charge of running Britain’s new, state-owned high-street bank
and was glad-handing staff high and low - while refining a business plan
that many suspect will slash the workforce in half.
“He comes across as very personable,” said one employee who had been greeted
by Sandler. “But many people assume nationalisation means the workforce will
shrink.”
Another reflected the sombre mood, saying: “The government has never done this
before, so it feels like they are making it up as they go along.”
They are. These are uncharted waters for the government, and many
uncertainties remain over the rescue of Northern Rock, despite the public
optimism of prime minister Gordon Brown and chancellor Alistair Darling.
This weekend the Tories were accusing Labour of back-tracking on promises to
reveal Sandler’s plans for the bank, which will have to be approved by
Darling. “Only a brief overview will be made public,” said one of Sandler’s
team.
The move will raise further concerns that the government’s hopes of a
“temporary period of public ownership” with a swift sale back to the private
sector are wildly overoptimistic. As more details of the nationalisation
emerged last week, the higher the hurdles seemed to grow.
Outraged shareholders muttered darkly about taking legal action unless they
received hefty compensation. Rival banks feared the Rock’s state-owned
status would distort the market. And nobody was entirely clear what
liabilities the taxpayer might face if the Rock’s offshore funding operation
- a key source of all its problems - ran into further difficulty.
Observers noted wryly that Sandler, a “nondom” being paid £90,000 a month, has
hired the management consultancy McKinsey to advise on how to revive the
bank - even though three teams of expensive City advisers have already pored
over the problem.
“We did laugh when we saw that McKinsey had managed to get involved,” said a
partner at a leading City firm who had been advising one of the private
bidders for the bank. “Everything they’ve said so far about their plans for
the bank sound incredibly similar to what everyone else said they were going
to do.”
None of those plans stacked up for the government. Can it do better on its
own? Or has it bitten off more than it can chew?
DARLING never wanted to be in the mortgage business. Early on, the chancellor
said that a private deal was “by far the best option” for resolving the
Northern Rock crisis.
So only hours before he announced nationalisation, advisers to Sir Richard
Branson, whose Virgin Money group hoped to buy the Rock, were still
negotiating hard.
The key figures gathered on Saturday, February 16 at the Mayfair offices of
Greenhill, the boutique investment bank. They included James Lupton, a
managing director of Greenhill; Sir Brian Pitman, the veteran banker who
would head Northern Rock if Branson won control; Jayne-Anne Gadhia, chief
executive of Virgin Money; her senior colleagues Stephen Murphy and Gordon
McCullum; and lawyers from Allen & Overy.
By lunchtime they had finalised plans for apportioning equity stakes and
meeting EU rules on state aid. The Branson bid reckoned that the £25 billion
the Rock owed to the Bank of England could be repaid by 2010 and that if the
business performed well the government could make at least £100m from
capital gains on its stake. Branson, who was going to inject cash and assets
of £1.25 billion and pay £200m of banking fees, stood to make £400m –
possibly much more.
At 5pm the group held a conference call with Goldman Sachs, the government’s
adviser. All seemed on track. The Branson team believed its offer was ahead
of a rival bid by Northern Rock’s management, which would inject only £700m
into the business. Late that night Lupton spoke yet again with Goldman and
afterwards called the Virgin team to say they were “still in the race”.
Branson himself was at Necker Island, his private Caribbean paradise. On the
74-acre hideaway (yours for £24,000 a night), he was hosting a meeting of
The Elders, a group of venerable statesmen formed to help solve world
problems. If they had any advice on how he could get his hands on Northern
Rock, it wasn’t going to help.
For the government, time was running out. Brown and Darling had to have a
clear business plan for the bank in place before March 17, otherwise they
and the Rock were likely to fall foul of EU rules on state aid. They had to
make a decision soon to get the necessary changes under way.
Last Sunday Darling based himself in the Cabinet Room at No 10, ran through
the options with his advisers one more time and consulted with Brown. They
had spent five months trying to find a buyer for the stricken bank and had
been left with only one realistic option – Branson, a billionaire maverick
whose showmanship belied a hard business edge.
For Brown and Darling there were three stumbling blocks: shareholders, state
aid and, paradoxically, success.
They feared that activist shareholders, particularly the hedge funds SRM
Global and RAB Capital, which had bought into Northern Rock as its share
price collapsed, would try to block a Branson takeover. Insiders said John
King-man, managing director of finance at the Treasury, “bent Darling’s ear”
on the risk.
Nor was it clear that the Branson deal, underpinned by a huge government
guarantee, would escape EU rules on state aid. Either scenario could simply
prolong the agony of the Rock - and the government.
And the third factor was success: could the prime minister and his chancellor
stomach Branson, a character hardly in Brown’s puritanical mould,
potentially making a private killing with government help? Soon after 3pm
Darling called Branson and broke the news: there would be no private sale.
Instead, the government was going to take the bank, once the sixth-largest
mortgage lender in the country, into public ownership.
Branson, as Darling later put it, was “disappointed”. One source close to the
Branson camp was far more scathing about the government’s retreat: “Imagine
Mrs Thatcher being spooked by a couple of hedge funds – it would never have
happened.”
Darling also put in calls to George Osborne, the Tory shadow chancellor, and
Vince Cable, the Liberal Democrat deputy leader, but failed to raise either
of them.
As Darling issued a statement declaring Northern Rock was to be taken into
“temporary public ownership”, other interested parties also learnt of the
drama by chance. Angela Knight, chief executive of the British Bankers’
Association (BBA), was at her local recycling centre disposing of garden
waste when she heard the news. The import hit her straightaway.
“Obviously we have concerns,” she said later, “not least to do with
competition.” How would private high-street banks compete against one owned
by the state? She was doing the rounds of the television studios before she
had even had time to shower.
Philip Richards, the chief executive of RAB Capital, was having a late Sunday
lunch when he received a call from one of his advisers warning him of
Darling’s announcement. Though Richards, a devout Christian known for his
charitable giving, tries to avoid work on a Sunday, he felt compelled to
watch Darling’s announcement on television. As he listened, a friend said
later, he grew more and more agitated.
The source said: “He thought, if this really was a viable bank with a strong
mortgage book, as Darling claimed, why was it being nationalised?”
Jon Wood, boss of SRM Global, was on a fleeting visit to Britain from his home
in Swit-zerland when he also received a call. Wood, a volatile character and
no stranger to legal battles, was furious. Last week a source close to SRM
said the hedge fund would fight unless it received compensation of at least
400p a share: “This is going to be a very long and bloody affair,” he said.
THE government had spent months preparing for nationalisation and Darling made
it all sound straightforward in his announcement to the House of Commons.
Public ownership would be temporary; new managers would run the bank on a
commercial basis; the billions in taxpayer loans and guarantees would be
repaid; and the government might even make a profit when the bank was sold
back to the private sector.
No mention was made of Granite, the offshore vehicle that holds almost half
the assets on the Rock’s balance sheet. It was only on Tuesday evening, as
MPs debated the nationalisation bill, that they learnt Granite was not part
of the deal.
Confusion erupted. If taxpayers were not acquiring such a large chunk of the
bank, what were they getting? Some MPs suspected Granite of being a tax
dodge. Others suggested it had swallowed the Rock’s best assets, leaving the
taxpayer with “the rubbish”.
Yvette Cooper, chief secretary to the Treasury, struggled to explain the
status of Granite. “It is on the bank’s balance sheet,” she told the House
of Commons but added “it is not being taken into public ownership and is not
in fact owned by Northern Rock . . . Granite is a separate legal entity”.
As MPs continued to question Granite’s position and its implications, Cooper
sought refuge in Treasury advisers. “She was sitting on the bench, getting
rather agitated,” said Cable. “She went across to the Treasury civil
servants and was obviously trying to get a briefing. But instead of coming
back to improvise an answer, she disappeared. She fled the chamber. She came
back later and read out an anodyne statement that didn’t tell us anything.”
The next day Darling invited Cable to the Treasury and tried to elucidate. “He
looked battered but was in reasonably good form,” said Cable. “He deals with
these things with a kind of low-key irony.”
Darling explained that Granite was a special-purpose vehicle set up to give
Northern Rock access to funding by selling bonds, backed by the Rock’s
mortgages, to international investors. The chancellor declared that Granite
was “no barrier” to the government’s plans and that it was indeed an
“independent legal entity”.
Yet the Tories soon pointed out that even the Rock took a different view in
its own accounts. Its last annual report, for 2006, states that the Granite
group of companies “are regarded as legal subsidiaries under UK companies
legislation”.
Osborne’s remarks were withering. “It is increasingly clear that the
government do not know what they are getting into,” he said. “How can
[Darling] expect the taxpayer to take on so much risk when he cannot explain
exactly what they are buying?"
The issue remained unresolved as the government rammed the nationalisation
legislation through parliament.
So what is the position? In many ways, Granite is separate from Northern Rock.
Its shares are held by a trust and it has no direct claim on assets held by
the Rock.
On the other hand, Granite has no employees and no offices; it relies on the
Rock for its administration; and the terms of its bonds entwine the Rock in
various obligations.
The Rock must keep a “minimum seller’s stake” in Granite, which may mean
funnelling new mortgages into the business. Though there appears to be a
cushion of about £2 billion before the Rock would breach its minimum
seller’s stake, some observers believe Granite will need huge injections of
assets to keep it going.
“We would have kept Granite going,” said a source familiar with Virgin’s plans.
Darling claimed that it would be up to Northern Rock’s new management to
decide whether to continue using Granite or to “let it run off in an orderly
way”. Others argue that if the company were wound down or went into default,
the Rock would have to buy back the mortgages that it has sold to Granite.
There are other complications, too. Bondholders can force the Rock to buy back
mortgages from Granite if they were not made under “reasonable and prudent”
criteria. As house prices falter, it could become debatable whether some of
the Rock’s high loan-to-value deals were prudent.
The potential cost to the taxpayer appears to be huge because the government
has guaranteed to fund any repurchases that Northern Rock has to make from
Granite. SIMILAR confusion reigns over who will really call the shots at the
publicly owned bank and what strategy it will be able to pursue. Darling,
doubtless reluctant to be blamed for any redundancies or repossessions,
insists that Sandler and his team will be in charge.
But on Friday, when new directors of the Rock were confirmed, one was Tom
Scholar, a former key Downing Street aide. Moreover, the government is the
bank’s owner and Sandler will be getting his business plan approved by
Darling and Brown. Whatever the niceties of control, they all face tricky
challenges.
Sandler has promised a smaller business, which means jobs will have to go. If
so, it will be politically uncomfortable. At the Rock’s Newcastle
headquarters last week Russell Greig, who has been with the group for eight
years, said: “If they slash the workforce, it will devastate this area.”
On the other hand, if the Rock, albeit smaller, tries to recreate value by
competing hard, rival institutions are likely to cry foul. They could accuse
the Rock of being able to raise funds more cheaply thanks to its government
backing.
Adrian Coles, director-general of the Building Societies Association, said:
“We are very concerned that taxpayer-funded compensation for an institution
that has failed would lead to pressure being put on organisations that have
not failed and do not need taxpayer support.”
Knight and her team at the BBA are working on proposals to limit the amount of
money that individuals would be allowed to deposit with Northern Rock -
perhaps to only a few thousand pounds. Price controls are another option on
the table. Northern Rock could
be forced to set the interest rates it offers to savers and borrowers with
reference to a basket of rates offered by a group of 10 other leading
institutions.
The government must also tackle the question of compensation for shareholders.
It plans to hire independent experts to value the shares - a task one of the
big accountancy firms last week said it “wouldn’t touch with a bargepole”.
Even if the valuation is independent, the government will still be in the line
of fire. The Treasury insists compensation will be calculated on the basis
of the Rock’s value without government support. Since the bank would have
collapsed without taxpayers’ billions, it implies little or no compensation
for shareholders.
Wood of SRM Global has already lined up two QCs to take legal action, though
Richards of RAB Capital is thought to be more willing to negotiate.
For all the positive talk from Brown and Darling, the road to rescuing the
Rock and returning the taxpayers’ £25 billion will be long and expensive.
With hindsight, Brown and Darling missed the best opportunity at the outset
of the debacle.
When Northern Rock first ran into trouble, it approached Lloyds TSB about a
possible takeover. Last week a source familiar with those talks said:
“Lloyds believed it could do something. It made it clear to the authorities
that it was interested. But it had to have a credit line facility.”
The Treasury and the Bank of England refused one. Yet the source said: “In
reality, because of the strength of its balance sheet, Lloyds would probably
never have used the credit facility.”
There were other hurdles, of course; but if the Lloyds deal had worked, the
Rock might have been saved at no cost to the public purse.
As it is, the government is now in the mortgage business, the public accounts
are loaded with another £100 billion of liabilities and it’s not clear when
the Bank of England will get its £25 billion back.
Additional reporting: John Penman
FATE OF THE PLAYERS IN THE NORTHERN ROCK DRAMA
THE WINNERS
Northern Rock advisers Though it has all gone awry for the Treasury
and the Rock, their bankers and lawyers will still rake in huge fees.
Goldman Sachs and Slaughter & May are in line for £20m for advising the
Treasury. Blackstone, Citigroup and Merrill Lynch, plus lawyers Allen &
Overy and Freshfields, stand to get £50m for advising Northern Rock. Even
advisers acting for the losing bidders stand to get something – though
the £6m to be shared among Virgin’s advisers has to feed a lot of hungry
mouths.
Vince Cable The grey-haired deputy leader of the Lib Dems has outshone
his youthful boss, Nick Clegg, on the Rock debacle. Cable was one of the
first to suggest that nationalisation was the least-worst option and last
week he was swift to latch on to the potential problems posed by Granite,
Northern Rock’s offshore operation.
Ron Sandler He made his reputation turning round Lloyd’s of London in
the 1990s and if he can salvage anything from Northern Rock, he will be
feted as a hero. If he can’t, many people will say he was handed an
impossible task – though his £90,000 a month fee will cushion the blow
of failure. Securing future nonexecutive directorships will also be a bit
easier, now that the Rock has been put on his CV.
THE LOSERS
Alistair Darling After bungles on capital-gains tax and the taxation
of nondoms, the chancellor has now retreated from his hopes of a
private-sector solution to Northern Rock. If he steps back any more, he
might find himself falling off the edge.
The shareholders The government has yet to decide how much, if
anything, to pay the owners of the Northern Rock shares that it is
appropriating. Thousands of long-term small investors are likely to lose
out. There will be less sympathy for speculators, such as Jon Wood, the
hedge-fund investor, who piled in late, hoping to make a big profit. But
Wood may still have the last laugh by launching a judicial review.
The taxpayer The Bank of England has lent the Rock £25 billion or
more. Government guarantees add another huge chunk and, overall, the public
debt could be about £100 billion worse than before the Rock was
nationalised. It won’t help cut taxes or improve services.
The would-be bidder Sir Richard Branson’s bid team will share
compensation of £6m from the government, barely enough to cover three months
of costs.
The former boss The biggest loser is Adam Applegarth, the Rock’s
former chief executive. He is unlikely to work in the City again.
why does branson get £6m? another eg of the government wasting taxpayers money
janshan, london,
Won't really matter come the next election. Whilst we may get rid of the present government then, Northern Rock is going to be draining the taxpayer 's pockets for many years after this slimy crew are long consigned to the history books.
Another point , you really think any other party will be any more competent or less corrupt?
Howard, Basildon, England
Is the government going to compensate everyone whos shares have collapsed in value over the past year? If so I'd like a payment for my Friends Provident and Bradford and Bingley shares. I hope that the Tories (ho ho!) will insist that Darling doesnt make a mockery of free market capitalism by giving the Northern Rock Shareholders a penny. The Tory party has completely misjudged the public mood on this issue, which I believe explains their recent fall in the polls. It recalls their misguided support for the disruptive fuel tax protestors which damaged them in a previous election.
e skelton, cardiff, uk
The news that Granite is claimed to be a charitable organisation but has not actually given any money to charity means that we do not know the true financial position as its own records cannot be trusted.
Until that we thought it was £113 Billion of taxpayers money at risk. Now there is no limit.
An immediate independent audit is required.
Brian Gilbert, HAMPTON, Middx
Not one penny of taxpayer's money should ever have been spent on this fiasco, instead, the fat cats who receive large salaries and obscene bonuses, should be held accountable.
Who do the Government think they are fooling? this nonsense has to stop!
We can all express our feelings at the next election!
Clive Burghard , LANCING, England