Announcement on 21 January 2008
376. On 21 January 2008, the Treasury issued a statement
detailing how it would proceed with offers for Northern Rock.
This statement indicated that the current support for Northern
Rock would continue until 17 March 2008.
To aid a sale of Northern Rock, the Treasury put forward a financing
option that would be available to potential private sector parties.
The Chancellor explained how this financing option would work:
Northern Rock would raise the funds it needs
from investors by selling assets. The Treasury would guarantee
payment to these investors in the event that the assets were insufficient
to meet its obligations, for which Northern Rock would pay the
Treasury a fee. In this arrangement, shareholders and other providers
of capital in Northern Rock accept the first risk; with the Government
acting as a backstop.
The Chancellor of the Exchequer also explained in
his statement to the House why he thought that a purely private
sector solution for Northern Rock was impossible:
Whilst conditions [in financial markets[ are
better now than they were before Christmas they remain difficult
and the Government's financial advisers believe that there is
no chance of achieving a private sector deal backed entirely with
private finance in the near future.
377. The plan set out on 21 November requires approval
by the European Commission in line with the State aid rules relating
to restructuring of a company that we referred to earlier.
The Treasury statement set out what would be required of bidders
should they wish to follow this plan:
implementation of the financing structure would
require the submission by HM Treasury to the European Commission
of an appropriate restructuring plan and the authorisation by
the Commission of any state aid which it involves. The company
and other relevant interested parties would be expected to assist
HM Treasury with the preparation of such a plan. Implementation
of the financing structure would follow receipt of the necessary
state aid authorisation.
378. The Treasury emphasised that the solution to
the financing problem proposed in the statement of 21 January
did not rule out the possibility of nationalisation. In his statement
to the House, the Chancellor said that "I will only authorise
support for the private sector if the public interest will be
better served than through taking the company into temporary public
The market statement by the Treasury outlined what would happen
to Northern Rock if it were nationalised because a private sector
solution was not forthcoming. The Treasury sought to reassure
savers and borrowers that Northern Rock would continue to operate
as it did now in the event of nationalisation.
However, the management would change. The Treasury stated that,
should Northern Rock be brought into temporary public ownership,
the company "would be managed on arms' length terms, as a
commercial entity, by a newly appointed experienced and professional
The Treasury also stated what would happen to shareholders should
Northern Rock have to be nationalised:
It is envisaged that any such power would be
used to transfer Northern Rock's share capital, including its
preference shares, into public ownership. It is anticipated that
the remaining Tier 1 and Tier 2 capital instruments would continue
in their existing ownership as listed securities. Holders of these
capital instruments would remain at risk of first loss ahead of
the Bank of England and HM Treasury as providers of secured financial
support to the company.
To compensate shareholders for the loss of their
shares, the Treasury envisaged an
assessment by an independent valuer of compensation
payable to any holder of securities transferred to HM Treasury.
The principles for assessing compensation, which would be set
out in the legislation brought forward, would reflect the principle
that the Government should not be required to compensate shareholders
for value which is dependent on taxpayers' support and the fact
that public sector ownership would be an alternative to an administration
of the company. Accordingly, the compensation would be assessed
by the valuer on the basis, among other things, that all financial
assistance to Northern Rock from the Bank of England or HM Treasury
(including HM Treasury's existing guarantee arrangements) had
been withdrawn and no other financial assistance (apart from Bank
of England assistance on its usual terms through standing facilities
or open market operations) were made available by them to Northern
379. The Treasury noted that "The Tripartite
Authorities do not consider that an administration of Northern
Rock would meet [their stated] objectives". 
The Chancellor in his statement to the House explained why he
could not agree with administration:
Administration would mean that control would
immediately pass to an administrator who would look to realise
the value of the company's assets which, under current market
conditions, would amount to a fire sale. It could also exacerbate
current market turbulence. And costs would be significant. I have
therefore rejected such a proposal.
380. In his statement of 21 January, the Chancellor
of the Exchequer also referred to the possible implications for
fiscal policy of his announcement on that day:
It is for the independent Office of National
Statistics to determine whether or not Northern Rock is classified
to the public sector in the National Accounts. Any liabilities
classified to the public sector would be temporary and backed
by significant assets and do not represent any meaningful measure
of fiscal sustainability. The Code for Fiscal Stabilityunderpinned
in legislation passed by this Houseprovides for such situations.
Paragraph 11 of The Code for Fiscal Stability states:
The Government may depart from its fiscal objectives
and operating rules temporarily, provided that it specifies:
a. the reasons for departing from the previous
fiscal policy objectives and operating rules;
b. the approach and period of time that the Government
intends to take to return to the previous fiscal policy objectives
and operating rules; and
c. the fiscal policy objectives and operating
rules that shall apply over this period.
We expect to explore the implications for fiscal
policy of the Government's decisions relating to Northern Rock
in due course.