Q&A: Northern Rock rescue plan

Last Modified: 21 Jan 2008
By: Channel 4 News

The treasury announces a deal to encourage a private sale of the beleaguered high street bank. But what does it mean for the taxpayer?

Who issued today's statement?

The treasury issued a statement at 7am this morning on behalf of the "Tripartite Authorities" on "a new financing structure that could be made available to Northern Rock and other interested parties".

The Tripartite Authorities are a three-way financial overseer consisting of the treasury itself, the Bank of England and the Financial Services Authority watchdog.

What does the statement say?

It proposes a financing structure whereby Northern Rock raises "funds from investors in the financial markets backed by a mixed pool of assets". The treasury "would put in place a guarantee for the payment of investors in the event that the assets were insufficient to fulfil the obligations".

In other words, it is intended that Northern Rock sell of a pool of its assets, including mortgages, to a financing vehicle, which would fund its purchase through bonds (the treasury guarantee) sold to private investors in money markets

What are the benefits and disadvantages?

If successful, the arrangement would ensure that the Bank of England's loan facilities to Northern Rock are repaid in full, and with interest, as soon as the funds are raised. It also holds out the distant prospect of Northern Rock shareholders recouping some of their investment.

However, there is no guarantee that the funds will be raised. Moreover, the proposals need state aid approval from the European Commission.

What is more, it is possible that none of Northern Rock's three main suitors - Olivant, a Virgin-led consortium, and a group led by the Northern Rock board - will meet the 4 February deadline.

What has been the opposition's response?

Shadow chancellor George Osborne said last night that the prime minister, was "mortgaging the taxpayer to try to get him out of the political hole he has dug for himself."

And Vince Cable, for the Liberal Democrats, said that today's proposed arrangement was not a true private sector solution because the taxpayer was continuing to carry the risk.