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Treasury's Rock?

• Robert Peston
• 15 Oct 07, 10:30 AM

A slightly odd from Northern Rock this morning about how the expressions of interest in saving it - from the likes of Virgin - are all terribly preliminary and uncertain. Whoever drafted it has a Masters in the use of the conditional tense.

What does it mean? Err. Well, I mentally paraphrased it as "the share price is too high". Ouch.

The point is, and to give credit where it's due, Northern Rock would not be in business and hopeful of recovering from its recent spot of bother if it were not for the Bank of England and the Treasury.

Without the 拢13bn and rising of emergency loans made by the Bank and underwritten by the Treasury, Northern Rock's liquidity crisis would by now have become a solvency crisis: it would have gone bust.

And in the absence of the 100% insurance provided to all Northern Rock retail depositors by the Treasury, the bank would find it hard to raise a bean in new money even now.

The Treasury is being paid for all this support - though its refusal to disclose how much makes me fear that it is not being paid enough.

Also, the putative bidders for Northern Rock - Virgin, Flowers, Cerberus - would not be remotely interested in doing a deal if the government had not stemmed the Rock's crumbling by gluing it together with public money.

So what bemuses me is why the Treasury is not taking equity in the Rock. The hard truth is that the Rock's shares would be worth a big fat zero without the support of taxpayers' money.

That's our money, to state the obvious. And there is quite a powerful argument that we should share in any upside in the value of Northern Rock, since it鈥檚 our readies that to a large extent are generating that upside.

If, for example, Virgin and its well-heeled friends were proposing to acquire all of Northern Rock's existing shares at a decent premium and instantaneously terminate all public support that would be one thing. But they aren't.

The Virgin consortium simply wants to heavily dilute those long-suffering holders by buying a vast quantity of new shares for the cheapest price the Rock's board would tolerate and repay the Bank of England loans over time.

The risk of converting the Rock into Virgin Money would be shared with the current shareholders, and with taxpayers, unless and until all those emergency loans can be repaid and that state insurance is cancelled.

Some might feel it would be simpler and cleaner for the Treasury to be the bidder. But since it is queasy about carrying out an explicit nationalisation, it should perhaps take some of the equity action as and when a takeover takes place.

If the public-sector financial support remains in place for weeks or months after a takeover (as it will have to, as the sine qua non of a deal, whatever the Treasury may hope), the quid pro quo should surely be an option or warrant over new Rock shares for the Exchequer.

If we are paying for the elaborate care that should eventually take the Rock out of intensive care, shouldn't we get some of the spoils?

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