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Last Updated: Monday, 18 February 2008, 16:38 GMT
Q&A: Nationalised Northern Rock - What next?
Customers outside a Northern Rock branch
The Northern Rock saw the first run on a bank in 150 years
The Chancellor Alistair Darling has announced that the troubled Northern Rock bank is to be temporarily nationalised.

He ruled out two rescue bids put forward by Virgin and the bank's management, saying that they would not provide best value for money for the British taxpayer.

Q: What is nationalisation?

Nationalisation involves the government taking a business from its shareholders into public ownership.

The last time it occurred in the UK was in the 1970s, with firms such as British Leyland.

Nationalisation is now seen as a "dirty word", says BBC Business Editor Robert Peston, and one that has become associated with failures of previous Labour governments.

In the past thirty years, firms have moved the other way, from public to private ownership.

Q: How does nationalisation take place?

The government had a contingency plan for how it would approach nationalisation should it arise - and has opted to do so through legislation.

On Monday afternoon, Mr Darling formally announced to MPs plans for nationalisation.

And he told the Commons that the Bill to nationalise Northern Rock would begin its parliamentary passage on Tuesday.

The bill will be rushed through parliament - which is certain to move through quickly and largely unopposed.

Q: What happens to the firm now?

The Treasury already had a management team in place. Former Lloyd's of London chief executive Ron Sandler has been lined up to take over as executive chairman.

He says that it is "business as usual" with customers able to continue to use the bank as normal.

Analysts expect sweeping job cuts at Northern Rock but Mr Sanders said it was too early to say whether this would happen.

However there were no plans to get rid of the Northern Rock brand, he said.

"People I have spoken to say that the name is still held in good esteem and the brand is far from irreparably damaged."

The main first goal was stabilisation he said, with temporary public ownership being a chance to regroup and build a firm that could be sold on.

Mr Darling said he would "shortly" release a framework for how the relationship between the board of the bank and the government would work.

Given it will be owned by the government, observers have asked how it can compete on a level playing field with its High Street rivals.

Q: How long will the bank be nationalised for?

Ron Sandler
Ron Sandler says it will be "business as usual" at the bank

Nationalisation is embarrassing for the government and Alistair Darling has been quick to stress that it is a temporary measure and that its future lies in the private sector, "when market conditions improve".

That situation is so rare these days that it is difficult to predict when, in reality, the government will loosen its grip on the bank.

Mr Sandler says it will take years for the bank to pay back its loans from the taxpayer.

"It's unrealistic to be talking about months. We're clearly talking about a period of some years."

However, it is worth considering that most of Rolls-Royce remained in public ownership for 16 years after an emergency nationalisation in 1971.

Q: How did Northern Rock get into this mess?

Northern Rock got itself into financial difficulties last year because its business model left it ill-prepared for the global credit crunch.

It fuelled its rapid growth by relying on world markets to borrow most of the cash it loaned as mortgages.

This meant that when the credit crunch hit, sparking fears over potential losses linked to high-risk US sub-prime mortgages, the banks which Northern Rock had relied on were less willing to lend money.

Instead they chose to hoard it.

Those who would loan did so at higher rates, meaning that Northern Rock's borrowing costs sky-rocketed.

UK taxpayers are now subsidising the bank in loans and guarantees to other lenders to the tune of about 55bn.

Other mortgage lenders were not so badly hit because they were less reliant on money markets, instead drawing heavily on saver's deposits to fund their mortgage loans.


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