Rock rescue explained
The scale of the financial support the Chancellor has today promised to provide to Northern Rock is breathtakingly large and without precedent.
The Treasury has said that it will guarantee bonds to be issued by Northern Rock both to repay £25bn of loans it has received from the Bank of England and to provide it with sufficient additional funds to run itself as a going concern.
So the taxpayer would support this bank to the tune of well over £25bn – and could still be providing at least some of this financial support five years from now.
No British Government has ever provided financial help on that scale to a business.
The Treasury would be guaranteeing the principal and the interest on bonds or “notes” to be issued by the Rock.
That effectively turns those notes into Government bonds, gilt-edged stock.
It means that Rock will be able to raise a colossal sum and at a relatively low rate of interest rate.
What would that be worth to the Rock?
Well it’s difficult to be precise, because it depends on what happens to money markets over the coming weeks, months and years.
But the value of the guarantee to the Rock would be more than £1bn, according to my calculations – based on the price at which Northern Rock’s existing mortgage-backed bonds were trading in the market on Friday morning.
Or to put it another way, the guarantee would be the equivalent of a one-off injection into the Rock of more than £1bn, a subsidy of that amount.
That said, the Treasury says that the Rock would pay a fee for this succour – though it doesn’t specify how much the fee would be.
Right now, the bank could not afford to pay anything like £1bn in cash as a one-off.
And if it paid that amount in equity to the Treasury, the bank would end up majority-owned by the public sector, it would be the equivalent of almost total nationalisation.
In return for propping up the business, the Treasury is taking control of what happens to the troubled bank, turning its shareholders and board into bit-part players.
The Treasury will determine which of the groups promising to rescue the Rock offers the best business plan.
At the moment there are three front-runners: Olivant, the consortium led by Virgin, and a standalone plan being developed by the Rock’s current board.
However the Government hopes that when other financial groups see how generous the Treasury is prepared to be, they might be tempted to come back with new offers – though they would have to move very fast to meet a tight timetable.
Detailed proposals from the rescuers are to be submitted by February 4 at the latest – so that a decision can be taken a couple of weeks before March 17, which is the expiry date of the European Commission’s approval for the current state-aid package being provided to the Rock.
I am told that its primary consideration in choosing the winner of a contest to control the Rock will be the speed at which taxpayer support can be withdrawn.
Which implies that if one of the contestants were to offer less to shareholders while pledging to do without the public-sector crutch quicker than any of its rivals, it could be the victor.
And for those who fear that the Treasury will be providing cheap money to a Richard Branson or some other entrepreneur to enable them to make a quick and easy fortune out of the Rock, the Treasury has said there will be restrictions on dividend payments and on selling the business, until we as taxpayers have got our money back.
What’s more, the Treasury has lost its fear of owning some of this business.
It says it will take a stake in the bank by being given warrants.
That would provide taxpayers with some of the upside, if the value of the bank were to bounce back at some point.
So to call what’s on the table a private-sector rescue is a misnomer.
Really it would be a partial privatisation, or a public-private partnership.
Which is still a bit of a humiliation for the Government, because it was never its explicit ambition to go into business with a provider of commercial mortgages.
What’s more, the Chancellor can’t be certain that a private-sector rescue will be agreed, even with the provision of so much taxpayer help.
So he also lays out the basis on which the bank would be nationalised, if all else fails.
As I’ve said before, nationalisation would be carried out through legislation.
And the Treasury would pay to shareholders what it thinks the shares would be worth absent any taxpayers support – which it believes would be pretty close to zero.