Feb. 17 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling said the U.K. government will nationalize Northern Rock Plc because bids from private companies didn't ensure taxpayer loans to the struggling lender would be repaid quickly enough.
Darling rejected proposals to buy the bank from Northern Rock managers and Virgin Group Ltd. and will introduce legislation to Parliament to enable the government to act. Northern Rock shares will be suspended, and an independent panel will determine how to compensate shareholders, he said.
Bids for the bank didn't ``deliver sufficient value for money,'' Darling said at a press conference in London today. He said government ownership would be ``temporary'' until ``current market conditions'' make a rescue possible.
British authorities have extended 55 billion pounds ($107 billion) in loans and guarantees to Northern Rock since September, when its credit lines dried up and triggered the first run on a U.K. bank in more than a century.
Ron Sandler, a former National Westminster Bank Plc executive who has advised the Treasury on pensions, will manage the bank's 113 billion pounds in assets and 6,500 employees.
Blow for Brown
The move is a blow to Prime Minister Gordon Brown's Labour government, which already has been criticized for bungling efforts to rescue Northern Rock and angering the business executives with new taxes. It also will expose the government to lawsuits from shareholders of the bank.
``This is the day when Labour's reputation for economic competence died,'' said George Osborne, a Conservative member of Parliament who speaks on Treasury policy. ``Gordon Brown has dithered his way to the disaster.''
In the past few days, Treasury officials pressed Virgin to boost a bid worth 1.25 billion pounds. Branson trimmed the value of that offer by about 300 million pounds after Luqman Arnold's Olivant Advisers Ltd. withdrew his plan on Feb. 4.
``All of us in the Virgin consortium are very disappointed that the government has chosen to opt for nationalization,'' Branson said in an e-mailed statement. ``However, we must accept the decision with good grace and hope that the Rock will somehow find better fortune in the future.''
Shareholder Lawsuits
Shareholders controlling almost a quarter of Northern Rock's stock complicated efforts to hand the company to Virgin by suggesting they'd take the issue to the courts. SRM Advisers, RAB Capital Plc and Legal & General had threatened to reject the Virgin plan, which would have diluted their holdings.
Neither fund had any immediate comment, and Northern Rock officials weren't available.
``There will be legal action,'' said Roger Lawson a spokesman for the U.K. Shareholders' Association which has about 2,000 members including Northern Rock investors. ``It is clear that the shareholders will get nothing. It will be valued as though the government loans were not available, which would mean the company is worth nothing.''
Brown and Darling met at about 2 p.m. today to look over final proposals from the bidders then made the decision that nationalization was their best option. Darling told a press conference at the Treasury that he wanted to detail the decision before markets opened tomorrow morning.
Darling will make a statement to Parliament at 3:30 p.m. tomorrow. Brown will hold a press conference at his residence in Downing Street at 11 a.m.
`Shocked and Appalled'
``I am shocked and appalled,'' said Robin Ashby, spokesman for the Northern Rock Small Shareholders' Group in Newcastle. ``It is bad news for the image of Britain as a financial center. The big shareholders may decide to take legal action. Downsizing is inevitable, and we are worried about the jobs.''
A YouGov Plc poll conducted Feb. 14-15 showed that 44 percent of 2,469 voters surveyed want Darling to quit, while 27 percent said he should stay. The same poll showed 32 percent back Brown's government compared with 41 percent backing the Conservatives.
Darling wouldn't discuss what the government's purchase will be worth to shareholders. SRM and RAB have suggested they think the government will have to pay Northern Rock's book value of around 4 pounds a share. The stock closed at 90 pence on Friday, valuing the company at 379 million pounds.
The decision marks the first time since 1984 that the government has taken control of a bank. Ron Sandler, a former head of National Westminster Bank Plc and Lloyd's of London, will manage the Northern Rock for the government. He will meet the employees and hold a press conference in Newcastle tomorrow.
Taxpayer Focus
``My objectives are clear: to deliver back to taxpayers the money they are owed and to revitalize the bank,'' Sandler said at a press conference with Darling today. ``We will continue to operate on a normal commercial basis.''
The company's balance sheet already has been added to the public finances, boosting Britain's debt burden above 40 percent of gross domestic product for the first time since the Labour government took office in 1997.
The move to acquire Northern Rock is the biggest bank nationalization since Clement Attlee's Labour government brought the Bank of England into public control in 1946.
``It comes after far too long, but it's the right thing to do,'' Vince Cable, a lawmaker from the Liberal Democrats who speaks on finance, said in an interview on Sky News. ``It's Gordon Brown who has been calling all the shots on this. It's the prime minister who that deserves the rap.''
Nationalizations
The government last acquired a bank in 1984, when the Bank of England purchased Johnson Matthey Plc's lending operation for 1 pound to support assets of 400 million pounds. The gold refiner had expanded its commercial loans business and racked up bad debts. A decade before, the government rescued Slater Walker Securities by advancing about 70 million pounds.
In Germany, state-owned banks including Landesbank Baden- Wuerttemberg, Landesbank Sachsen Girozentrale and WestLB AG have received billions in euros in financial aid from the government to cover potential losses related to U.S. subprime investments.
IKB Deutsche Industriebank AG, the first German casualty of to the worst U.S. housing market in 25 years, last week received pledge of a 1.5 billion-euro bailout, the third rescue package for the lender since July and brining the total aid to IKB to about 7.7 billion euros.
``At last we have the correct decision to sort it out,'' said Howard Wheeldon, an analyst at BGC Partners in London. ``The Virgin bid never seemed to be the right solution as they didn't seem to have the experience, and there was little confidence in the management proposal.''
BLOOMBERG
