Statement re Northern Rock

RNS Number:1758O
H M Treasury
18 February 2008








                18 February 2008



                                  NORTHERN ROCK PLC



1.      The Government has today decided to bring forward legislation that will
enable Northern Rock plc to be taken into a period of temporary public
ownership.  The Government has taken this decision after full consultation with
the Bank of England and the Financial Services Authority.  The Government's
financial adviser, Goldman Sachs, has concluded from a financial point of view
that a temporary period of public ownership better meets the Government's
objective of protecting taxpayers.



2.      Northern Rock will be open for business as usual tomorrow morning and
thereafter.  Branches will be open; internet and call centre services will
operate as normal.  All Northern Rock employees remain employed by the company.
Depositors' money remains absolutely safe and secure.  The Government's
guarantee arrangements remain in place and will continue to do so.  Borrowers
will continue to make their payments in the normal way.  The Financial Services
Authority have advised that Northern Rock remains solvent.



3.      The Government set out its objectives last year that would guide its
actions in relation to Northern Rock: the protection of depositors' money;
protection of the taxpayer; and maintaining wider financial stability.



4.      The Government has consistently and successfully taken action to meet
these objectives.  Last year the Government agreed to provide support to
Northern Rock because, in the prevailing market conditions, there was a serious
risk that other parts of the banking system in Britain could have been
destabilised.  That support was successful and prevented further contagion.  The
Government was also determined to safeguard depositors' money and took action to
put in place arrangements which have been successful in doing so.  None of the
guarantees have been called and therefore there has been no cost to the
taxpayer.

5.      While in September and October uncertainty in the market place made it
difficult to attract potential buyers for Northern Rock, in November and
December the board of Northern Rock received a number of expressions of
interest.  The Government decided to test these proposals.  However, it became
clear that no institution was prepared to make an offer for Northern Rock
without some form of public support because of prevailing market conditions.



6.      The Government was, therefore, prepared to consider a backstop guarantee
arrangement to allow the Board and shareholders to explore a private sector
solution, provided the terms and conditions were acceptable and met the
principles set out by the Government.  In the meantime, the Chancellor made
clear that a temporary period of public ownership remained an option, and that
any solution would need to represent good value for money for the taxpayer.



7.      Two detailed private sector proposals were received: one from the Virgin
Consortium and the other, a Northern Rock led restructuring plan. These were
considered alongside temporary public ownership.



8.      The Government is very grateful to the bidders for their work to
establish whether a private sector-led solution on acceptable terms could be
found.



9.      Both proposals involve a degree of risk for taxpayers and very
significant implicit subsidy from the Treasury, involving a payment below the
market rate to the Government for continuation of its guarantee arrangements and
for the financing the Government would be putting in place.



10. Each proposal has pros and cons. The Virgin proposal would have brought a
new brand and management.  However, the taxpayer would only have seen any share
of the private sector's return if the value of the business to its investors had
reached at least £2.7bn.



11.  The Board's proposal would have involved a similar level of subsidy.  But
it had other disadvantages, compared with Virgin, including: it would bring in
less new capital, providing less "buffer" protecting the taxpayer from risk; and
the business would have been dependent on Government guarantees for new retail
deposits for longer.



12. A subsidy on the scale required would not, in the Government's judgement,
provide value for money for the taxpayer, in circumstances where the private
sector rather than the taxpayer would secure the vast majority of the value
created over the period ahead.  This would be a poor reflection of the balance
of risk borne by the two sides.



13. By contrast, under public ownership the Government will secure the entire
proceeds from the future sale of the business in return for bearing the risks in
this period of market uncertainty.



14. The Government has concluded that the private sector alternatives do not
meet the test of protecting the taxpayer's interest, when compared with the
alternative.  Accordingly, and taking all the wider considerations into account,
the Government has concluded that the right approach is to take the company into
a period of temporary public ownership.



15. It is also the Government's clear assessment that, under the approach the
Government is taking, the taxpayer will see its outstanding loans to Northern
Rock repaid in full, with interest - and that the business can and will be
returned to the private sector as financial markets stabilise.



16. Tomorrow, before the markets open, it is expected that the UK Listing
Authority will announce that Northern Rock's shares will be suspended from
listing prior to the opening of the London Stock Exchange.



17. The Government will tomorrow also introduce a Bill that will enable the bank
to be brought into temporary public ownership.  Full details will be provided to
Parliament.



18. The legislation will enable the Government to acquire the bank's shares. It
will provide for compensation to be determined by an independent valuer. It will
allow for the running of the bank and for the eventual transfer back into the
private sector as soon as it is right to do so.



19. The Bill gives the Government a general power to acquire the shares in, or
assets and liabilities, of institutions.  But the Government is clear that this
legislation is only being introduced now because there is a need to bring
Northern Rock into temporary public ownership.



20. The Bill has deliberately been drafted to ensure that a bank can only be
acquired in certain tightly defined circumstances. And that power will only last
for twelve months.  The Chancellor has previously announced a consultation which
will lead to permanent legislation to deal with situations like this in the
future.



21. Northern Rock will be managed on arms' length terms, as a commercial entity,
by a newly appointed experienced and professional management team.



22. The Government has appointed appointed Ron Sandler CBE, former Chief
Operating Officer of NatWest Group and Chief Executive of Lloyd's of London, who
will be Executive Chairman of the company immediately upon the legislation
coming into force.  Mr Sandler will in due course recruit a new Chief Executive,
at which point he will become Non-Executive Chairman.



23. Ann Godbehere, former Chief Financial Officer of Swiss Re, will be appointed
as Chief Financial Officer of the company for the initial phase of public
ownership.



24. Subject to the passing of the Bill, the Treasury intends to make an Order
which would transfer all of the shares in Northern Rock to the Treasury
Solicitor, as the Treasury's nominee.  The Order would also, among other
things, extinguish the existing share options; convert the foundation shares
to ordinary shares and terminate the existing Foundation deed; make limited
technical adjustments to the provisions of certain Tier 1 securities;
provide for the rights or obligations of lenders, bondholders, swap
counterparties or suppliers which would be triggered by the act of bringing
Northern Rock into temporary public ownership not to be triggered;
facilitate board changes; deal with the issue of liability of those
directors appointed to or continuing on the board of Northern Rock whilst it
is in public ownership; modify the application of certain provisions of the
Financial Services and Markets Act 2000 to the company; and disapply shadow
directorship provisions to specified public sector persons.    A separate Order
would be made which would set out the detail of a compensation scheme called for
under the Bill.










Notes to Editors



1.      It is expected that the company's ordinary and preference shares will be
suspended from listing tomorrow prior to the opening of the London Stock
Exchange. The company's debt securities, which are not being transferred, will
continue to trade.



2.      The suspension of shares will have no effect on the rights or
obligations of lenders, bondholders, swap counterparties or suppliers to
Northern Rock, except for modifications principally aimed at ensuring that
arrangements continue as before and that no counterparty triggers additional
payments in public ownership.



3.      The Northern Rock Foundation will be guaranteed a minimum income of £15m
per year in 2008, 2009 and 2010. This will be paid directly by Northern Rock,
and would be a condition of any sale if it were sold in this time.  The new
board will be asked to identify a viable long-term future for the foundation.



4.      The proposed legislation provides for the assessment by an independent
valuer of compensation which may be payable to any holder of shares transferred
to HM Treasury.  The principles for assessing compensation, set out in the
legislation, reflect that Government should not be required to compensate
shareholders for value which is dependent on taxpayers' support.  A compensation
order will be made under the legislation setting out some further details of the
arrangements for compensating shareholders and others whose rights may have been
affected by the transfer into public ownership.  The independent valuer will set
their own, more detailed, procedures.



5.      The FSA has confirmed that Mr Sandler and Ms Godbehere are suitable
persons to direct the business.



6.      Ron Sandler, CBE, has over two decades of experience in the financial
services industry. He was Chief Executive of Lloyd's of London from 1995-1999.
In 1999 he became Chief Operating Officer of NatWest Group up to its takeover by
Royal Bank of Scotland.  He currently chairs a number of companies. In 2002 he
led a Government-sponsored review of the UK Long Term Savings Industry, which
led to the creation of a new suite of simplified, lower cost savings and pension
products for consumers. He has an MA from Queens' College, Cambridge and an MBA
from Stanford University.



7.      Ann Godbehere has extensive experience of the financial services sector
having moved to London as Chief Financial Officer of Swiss Re Life & Health
Division in 1998 and joined the Property & Casualty Business Group, based out of
Zurich, as Chief Financial Officer on its establishment in 2001. In 2003 she was
appointed Chief Financial Officer of the Swiss Re Group. Ann has also been an
independent non-executive director of Prudential since 2 August 2007.



8.      Ron Sandler will receive £90,000 per month and Ann Godbehere will be
paid £75,000 per month. These are flat rates. No additional incentives will be
discussed until the new board has discussed its business strategy with the
Government.



Media enquiries should be addressed to Stephen Field and John Battersby at the
Treasury Press Office on 020 7270 5238.



Non-media enquiries should be addressed to the Treasury Correspondence and
Enquiry Unit on 020 7270 4558, or by email to
[e-mail]



Customers of Northern Rock wishing to contact the company should call 0845 600
7301 or visit www.northernrock.co.uk



This press release and other Treasury publications and information are available
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                      This information is provided by RNS
            The company news service from the London Stock Exchange
END

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