Rock in the zone
Northern Rock has been advised by its lawyers that it’s in the “zone of liquidation”.
Which sounds scary, but it’s really just a statement of the bloomin’ obvious, in that the Rock cannot fund its operations from normal commercial sources and is in hock to the taxpayers to the tune of £25.5bn.
The significance of being in that unappetising zone is that the board has to put the interests of its creditors ahead of those of its shareholders.
And that’s why the board cannot simply approve Olivant’s rescue plan, even though Olivant’s scheme is much friendlier to the interests of shareholders than the takeover proposal from a consortium led by Sir Richard Branson and Virgin.
Or to put it another way, ultimately it’ll be up to the chancellor – as proxy for the lead creditor, all of us – to decide what happens to the Rock.
Alistair Darling’s priority – apart from maintaining the stability of the financial system and protecting depositors – is making sure that we, as taxpayers, get our money back.
And what’s scary for him (and, frankly, for all of us) is that conditions in money markets are as bad as anyone can remember.
Virgin is no longer confident it can raise a jumbo loan of £11bn to repay a chunk of taxpayer-backed loans from the Bank of England – which currently total £25.5bn.
In theory, that undermines the Virgin proposal.
Except that Olivant too cannot give a cast-iron guarantee that it would be able to raise a comparable sum. All it can offer is hope that it will be able to repay somewhere between £10bn and £15bn within the next two or three months.
The Treasury had wanted to make a decision on the Rock’s future by mid December – which in reality means by the end of next week.
The options have narrowed to nationalisation versus two potential commercial solutions that are not yet wholly nailed down.
How is the chancellor to make a rational choice when money markets are so unstable?
What he needs to think about, and fast, is whether he genuinely believes the Rock is a going concern.
If it is, then there’s no ambiguity about what he should do.
He should back the Olivant plan, since the Rock’s shareholders, its owners, are shouting very loudly that they like it.
But if he loses confidence in the ability of Olivant or Virgin to raise a meaningful sum on acceptable terms from the money markets, then it will be nationalisation or bust.