Will Northern Rock be nationalised?
Northern Rock shares have fallen to an all time low as rumours abound that Northern Rock is close to becoming nationalised. The final decision will ultimately lay in the hands of the Prime Minister, Gordon Brown and the Chancellor of the Exchequer, Alistair Darling.
Why have Northern Rock had these problems? It began in September 2007, when the housing market credit costs rose as a direct result of the US sub-prime mortgage collapse. Funding for the banks lending activities severely dropped and they had to ask the Bank of England for an emergency loan, which was duly given to tide them over until a decision was made on their future.
What will it mean if the Treasury buys Northern Rock? Essentially by the UK 'buying' Northern Rock and making it nationalised, they would be able to get back the full amount that it has loaned the bank so far, which comes to a staggering £26 billion.
It also means that when the market has picked up and confidence in the markets have lifted the market shares, the bonds would be able to be sold off, essentially making the bank private again. Until then the bank will essentially be in public ownership, which is apparently the simplest and cheapest way to the get Northern Rock out of its current situation.
So far there have been offers from 2 private groups namely Olivant, and a consortium put together by the Virgin company. However these commercial offers would have to be subsidised by the Treasury for an initial period of 5 years, maybe longer, which the Treasury wanted to avoid.
The final decision could be made in less than 2 days, which reduces the amount of time that account holders and employees would be uncertain about their future. The government would also use an emergency bill to nationalise, instead of going the long-winded route of buying out the business in the conventional way.
It certainly seems like nationalising is the favourite option, especially as the government have already chosen an executive chairman to take over the reigns if it does go ahead.
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