Darling on Rock
There have been more proposals to buy all or part of Northern Rock than the bank might have expected even a couple of weeks ago.
However of the ten-odd expressions of interest, two stand out.
They are from the US private equity firm, JC Flowers, and from a consortium led by Sir Richard Branson's Virgin (Flowers is finalising its bid and will submit it formally by Tuesday morning; Branson's went in yesterday).
Both would buy all of it, not just a supposedly profitable rump.
Both would inject a significant amount of new capital into the business - in Virgin's case, a billion in cash plus an in-kind injection of its existing financial business, worth somewhere between £100m and £200m.
And both would supply a new management team, including a chief executive and chairman.
Virgin is slightly out in front, according to those involved in scrutinising the bids.
If Virgin were to emerge as victor, its consortium would end up owning around two-thirds of the equity – leaving the existing shareholders with a third of the business.
The ball is now in the court of Alistair Darling, the Chancellor.
No deal can be done till he makes up his mind about how long he is prepared to sustain the enormous financial support he has provided - in the form of insurance for depositors and a Treasury-backed loan from the Bank of England of around £24bn.
His actual and potential exposure is well over £40bn.
How long he is prepared to keep that in place has wide ramifications, particularly for shareholders.
If he wanted his money back tomorrow, for example, the bank would go straight into administration under insolvency procedures and the shares would be worth nothing.
If he is prepared to leave the financial prop in place for three years – subject to not falling foul of EU state-aid rules – existing shareholders might recoup some of the losses they’ve incurred.
Now Darling made it crystal clear, in letters to the Public Accounts Committee and the Treasury Select Committee, that protecting shareholders is not on his to-do list in any shape or form.
And he won’t be feeling under any moral obligation to help the ten big investment institutions – hedge funds and more conventional investors – which control more than 50 of the Rock’s stock. It’s caveat emptor for them, Darling would say.
However, some 20 per cent of the Rock is owned by 150,000 small shareholders – many of whom received their stakes as payment for their previous de facto interest in the Rock as a mutual building society.
They are not, on the whole, experienced investors. Few of them had any inkling of the risks of equity. And for many the shares were an important retirement nest-egg.
Could Darling really contemplate wiping them out, even if it’s his official responsibility not to subsidise them with taxpayers’ money?
It is a potential nightmare for him.
And here’s what complicates matters.
He said during and after the run on Northern Rock that the bank is solvent.
As much as anyone, therefore, he is responsible for giving hope to small shareholders.
The political backlash were he now to dash that hope would be something to behold.
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