Page last updated at 18:14 GMT, Sunday, 17 February 2008

Full text: Alistair Darling's statement

Alastair Darling
Alistair Darling announcing nationalisation of Northern Rock

The following is the full statement of Chancellor Alistair Darling on the nationalisation of the Northern Rock bank.

I would like to make a statement on the government's decision on the future of Northern Rock.

I am doing so today because it is necessary to make a formal announcement before the markets open tomorrow morning.

The government has now completed its review of the two detailed proposals on the table. We have made our choice after considering all proposals.

Last autumn, the government stepped in to save Northern Rock to stop its problems spreading to other parts of the banking system.

Full consultation

But in current market conditions, we do not believe that they deliver sufficient value for money for the taxpayer.

So the government has therefore today decided to bring forward legislation to take Northern Rock into a period of temporary public ownership.

We have done so after full consultation with the Bank of England and the Financial Services Authority.

Northern Rock will continue operating as a bank on a commercial basis. It will be open for business as usual tomorrow morning and thereafter.

Money safe

Importantly savers' and depositors' money remains safe and secure.

The government guarantee arrangements I announced last year remain in place and will continue to do so.

Borrowers will continue to make their payments in the normal way.

Our financial adviser Goldman Sachs has concluded from a financial point of view that a temporary period of public ownership better meets our objective of protecting taxpayers.

Commercially run

The bank will be run at arm's length and on a commercial basis. I will appoint Ron Sandler as Executive Chair to run the bank.

I will also appoint Ann Godbehere, former Financial Officer at Swiss Re, as Chief Financial Officer.

The Financial Services Authority continue to assure me the bank is solvent. It believes that Northern Rock's mortgage book is of good quality. And the FSA will also continue to regulate the Northern Rock.

We will be introducing the necessary legislation tomorrow to do that. I will also be making a statement to the House of Commons tomorrow afternoon.

Sub-prime market

Let me now turn to the background to the decision we have made.

The problems in the sub-prime mortgage market last year that started in the US, spread to Europe and Asia, with banks extremely reluctant to lend to each other in the autumn.

As a result of this market turbulence a number of firms have run into difficulties in the United States and in Germany, for example.

$100bn have been written off the books of financial institutions globally since the summer.

German difficulties

In Germany, a number of banks have experienced difficulties and received support, and only last week the German government announced a further one billion euros of support to IKB.

And the authorities have had to take action to preserve financial stability in countries right across the world.

Here in Britain, because of its particular business model, Northern Rock, last summer, found it increasingly difficult and then impossible to raise the billions of pounds it needed to finance its business.

For financial stability reasons, we decided that it was right to support Northern Rock to allow it to continue operating. It was right to protect to depositors' money and to protect the wider financial system.

Financial stability

In agreeing to that support, the government had three objectives.

First, financial stability. In the then prevailing conditions, there was a serious risk that other parts of the banking system in Britain could have been destabilised.

It was right and necessary for the government to intervene because of the need to preserve financial stability in the system. That support was successful and prevented further contagion.

Safeguard depositors

Secondly, the government was also determined to safeguard depositors' money and we took action to put in place guarantee arrangements which have been successful in doing so.

None of the guarantees have been called and therefore there has been no cost to the taxpayer.

Protect taxpayers

That brings me to my third objective of protecting the interests of the taxpayer.

We believed it was right to allow the Board and shareholders to explore every opportunity to find a private sector solution, subject to not increasing taxpayer costs.

While in September and October uncertainty in the market place made it difficult to attract potential buyers, in November and December the Board of Northern Rock received a number of expressions of interest.

And we decided to test them; we wanted to give time to shareholders and the management to find a solution.

Backstop guarantee

But it became clear that no institution was prepared to make an offer for Northern Rock without some form of public support because of prevailing market conditions.

That is why the government was prepared to consider a backstop guarantee arrangement to allow the Board and shareholders to explore a private sector solution, provided that the terms and conditions were acceptable and met the principles I set out.

In order to provide certainty for all interested parties and meet state aid rules, a solution has to be found by 17 March. It is not possible, nor would it be desirable to go beyond that time.

Two detailed proposals have been received, one from the Virgin consortium and one from Northern Rock. And they had to be considered alongside temporary public ownership.

Grateful to bidders

We are very grateful to the bidders for their work with us over many months to establish whether a private sector-led solution on acceptable terms could be found.

Both proposals involve a degree of risk for taxpayers and very significant implicit subsidy from the Treasury, involving a payment below the market rate to the Government for continuation of its guarantee arrangements and for the financing we would be putting in place.

Each proposal has its pros and cons. The Virgin proposal, for instance, would have brought a new brand and management.

However, the taxpayer would only have seen any share of the private sector's return if the value of the business to its investors had reached at least 2.7bn.

Not best value

The board's proposal would have involved a similar level of subsidy. But it has other disadvantages, compared with Virgin, including: that it would bring in less new capital, providing less "buffer" protecting the taxpayer from risk; and, that the business would have been dependent on government guarantees for new retail deposits for longer.

A subsidy on the scale required would not in the government's judgement provide best value for money for the taxpayer, in circumstances where the private sector rather than the taxpayer would secure the vast majority of the value created over the period ahead. This would be a poor reflection of the balance of risk borne by the two sides.

Public ownership

By contrast, under public ownership the government will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty.

We could have chosen to pursue either of the two private sector options. But I have always said that I was determined to protect the taxpayers' interest.

It is clear that the private sector alternatives do not meet this test, when compared with public ownership.

Accordingly, and taking all the wider considerations into account, I have concluded that this is the right approach.

Moreover, it is my clear assessment that under the approach we are taking the taxpayer will see its outstanding loans to Northern Rock repaid in full, with interest - and that the business can be returned to the private sector as financial markets stabilise.

Shares suspended

Let me set out the next steps. Tomorrow, before the markets open, it is expected that the UK Listing Authorities will announce that the company's shares will be suspended from listing tomorrow prior to the opening of the London Stock Exchange.

Tomorrow, I am also publishing a Bill to bring the bank into a period of temporary public ownership. I will give full details of the legislation to the House of Commons.

The legislation will enable the government to acquire the bank's shares and its assets. It will provide for compensation to be determined by an independent valuer.

It will allow for the running of the bank and for the eventual transfer back into the private sector as soon as it is right to do so. Because public ownership is a temporary arrangement.

Bill drafted

The bill gives the government a general power to acquire the shares in, or assets and liabilities, of institutions.

But let me make it clear that this legislation is only being introduced now because there is a need to bring Northern Rock into temporary public ownership.

We have deliberately drafted the bill to ensure that a bank can only be acquired in certain tightly defined circumstances. And that power will only last for twelve months.

I've already announced a consultation which will lead to permanent legislation to deal with situations like this in the future.

Further details of this arrangement are contained in the bill which I will publish tomorrow morning when the House returns.

Restructuring

As you can see Ron has joined me today and is ready to answer any questions you may have.

He will want to consider carefully the options and will outline his proposals shortly including in relation to restructuring the business.

Ron expects to be in Newcastle tomorrow to discuss the business and meet staff and their representatives.

His proposals will also cover the Northern Rock Foundation, where he will commit to guaranteeing a minimum income of 15m per year in 2008, 2009 and 2010. This will be paid directly by Northern Rock, and would be a condition of any sale if it were sold in this time.

Arm's length

The new board will be asked to identify a viable long-term future for the Foundation.

The new Board and the company will operate at arm's length from the government, with complete commercial autonomy for their decisions.

As agreed in the memorandum of understanding all operational decisions will be made by the board with no interference from the government.

Earliest opportunity

It is our expectation that the company can be moved into the private sector at the earliest and most prudent opportunity.

We are clear that this is the most effective way of continuing to support Northern Rock's business, its savers, the wider financial system and safeguard taxpayers' money.

At every stage the stability of the economy and the interests of depositors and taxpayers have been - and remain - our first concern.

This will continue to be the basis on which we will move forward in the coming months.

I will make a full statement to the House of Commons tomorrow afternoon.




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