Q&A: Nationalising Northern Rock
Updated on 18 February 2008
Chancellor Alistair Darling will put forward emergency legislation in parliament today to nationalise Northern Rock, but what does this mean?
What will it mean for the bank's customers?
Alistair Darling says that nationalisation means that savers' money is "safe and secure".
What does it mean for shareholders?
Shares in Northern Rock have been suspended, with trading in the bank's shares closing at 90p on Friday.
Robin Ashby, founder of the Northern Rock Small Shareholders' Group, is critical of nationalisation:
"I am shocked and appalled that the government has decided to do this," he said.
The UK Shareholders Association, representing individuals with a stake in the bank, said it intended to "pursue any legal options available to it to thwart the nationalisation process and to ensure that fair and reasonable compensation is paid".
David Greene, of the law firm Edwin Coe, representing 6,000 Northern Rock shareholders, warned that legal action now appeared inevitable.
What does it mean for the employees of the bank?
There is a likelihood that Northern Rock will shed staff as part of the bank's restructuring.
Liberal Democrat Treasury spokesman Vince Cable said that "there will be difficult times ahead, especially for the employees, as the bank is downsized."
What does it mean for the economy?
Mr Darling says the move offered the best value for taxpayers' money.
"We had independent advisers look at this, and they all pointed in one direction: the best thing to do was to take the bank into a period of temporary public ownership before ultimately trying to return it to the private sector, which is the only solution in the long term, because the government cannot run a bank," he told the BBC.
Northern Rock's "temporary public ownership" comes after the government decided that bids for the bank from the likes of Richard Branson's Virgin group would not deliver "sufficient value for money" for the taxpayer.
"Once the bank has been taken over, if people have got proposals, we will listen to them, but they have got to pass a simple test - what is the best value for the British taxpayer?" Mr Darling said.
Shadow chancellor George Osborne, however, accused the prime minister of "dithering" over the decision and said yesterday was the day that "Labour's reputation for economic competence died".
"Gordon Brown has dithered his way to the disaster of nationalisation," he said.
What is the political fallout?
Political opponents said the move marked the death of the government's reputation for economic competence.
Mr Osborne warned that the bank would have to be "run down" as it would now enjoy a commercial advantage over its rivals that was economically and politically "completely unacceptable.
"This bank, Northern Rock, unlike any other bank on the high street, can go to the Bank of England and borrow money much more cheaply than any other bank out there. As a result they can offer much better terms than any other bank out there. That is commercially unfair."
What are the pros of nationalisation?
John McFall, chairman of the Treasury Select Committee, said: "At the end of the day the biggest issue is the safeguarding of taxpayers' money. If nationalisation saves that money, that has to be the correct step in the long term."
Vince Cable also said nationalisation of Northern Rock was the right decision.
"This is the option the Liberal Democrats have argued for from the outset, unlike the Tories who have no alternative to offer."
And what are cons?
Matthew Sinclair, policy analyst for the Taxpayer's Alliance said:
"The government has left the taxpayer saddled with billions of risky debt that no one else would touch. Taxpayers could now end up paying a very high price for the government's incompetence."
"Now the taxpayer will bear the full risk of lending £100bn of mortgages in an uncertain housing market.
"We will not back nationalisation. We will not help Gordon Brown take this country back to the 1970s."
Mr Osborne said nationalisation was the "worst option" for resolving the future of the bank.
"The trouble with nationalisation, as we are about to discover, is that getting into nationalisation is a lot easier than getting out," he told the Today programme.
"Once you are into public ownership, then the taxpayer is liable for everything that the mortgage bank does - every time it forecloses on a loan, every time it fails to extend a mortgage to someone. Also, there is the reputational damage."
