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Rock judgement day delayed

• Robert Peston
• 14 Dec 07, 08:43 PM

There’s been a bit of creative thinking at the Treasury to improve the prospects of a commercial solution to the Rock’s ailments.
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It has made its own financial adviser, Goldman Sachs, available to the Rock, to find funding for the troubled bank that would replace some of the £26bn of taxpayer-backed loans.
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And if Goldman succeeds in raising, say, £11bn or so of bank finance, well those facilities would be made available to either of the Rock’s putative rescuers, Olivant and the consortium led by Virgin.
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Which means that Olivant and Virgin are now on a wholly level playing field, especially since the Rock has agreed to reimburse Olivant’s expenses – in the way it had already agreed to do with Virgin.
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That should reassure the Rock’s shareholders, many of whom feared Olivant was getting short shrift from the bank’s board.
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The timetable for Goldman to report back on whether the money can be raised is mid January. Which, by implication, is the date at which the Rock would be nationalised, if neither Goldman or Olivant or Virgin succeeds in procuring substantial committed facilities from private-sector sources.
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So the Treasury and the Rock have bought a bit of time. And all of us as taxpayers can perhaps take a little comfort that if this bank is ultimately nationalised, the commercial alternatives will have been explored and weighed in a rational and proper way.

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Rock and Nationalisation 2

• Robert Peston
• 14 Dec 07, 08:10 AM

Having noted my broadcasts and blogs for the past few weeks, a banker asked me last night why the Government is planning to nationalise the Rock, as a fallback if a commercial solution were to prove impossible.

What he could not understand is why the Treasury would not allow the troubled bank to collapse into administration under insolvency procedures.

The answer is simple.

In administration, the Government would have little direct control over the bank’s future, which would be in the hands of a court-appointed administrator.

More specifically, the Treasury could not be certain that all retail depositors would have instant access to their savings – and that could prompt a serious panic, with the risk of contagion to other smaller banks.

One of the flaws of insolvency laws, as it pertains to banks, is that retail deposits rank right at the bottom of the queue of creditors.

So it could well take a while for an administrator to allow the Rock’s retail customers to draw on their precious savings. And even after months of withdrawals, they still have between £10bn and £11bn of their cash deposited at the Rock.

That said, the Treasury has guaranteed that no Rock depositor will lose a penny.

But the guarantee does not eliminate the risk of high anxiety among those depositors if they were unable for a while to actually get their mits on the wonga.

So administration is simply not an option for the Treasury.

However nationalisation is a very real possibility, as I’ve been saying for some time.

Nationalisation is not the Chancellor’s preferred option.

He would much rather have a commercial solution to the Rock’s serious ailments.

But a commercial solution hinges on the ability of one of the putative rescuers to secure a jumbo loan of around £11bn to repay a portion of the taxpayer-backed loans to the Rock – which are around £26bn.

And the tightness of money markets means that the prospects of obtaining such a loan have been receding in recent days.

On the plus side, in an emergency meeting with the Rock and its advisers yesterday, Olivant was persuaded not to abandon its rescue attempt – largely because the giant US bank Citigroup was prevailed upon to finally meet with Olivant and discuss the provision of a possible loan.

What that means is that both of the possible rescuers, the consortium led by Virgin and Olivant, have some residual hope of persuading the duo of Royal Bank of Scotland and Citigroup to provide committed facilities that would allow a deal to be done.

What are the realistic chances of the banks eventually providing those committed facilities?

No better than 50:50, according to one of the rescuers.

Which means that the odds of nationalisation are about the same.

But the Chancellor would not dare to push the nationalisation button unless and until the last rites have been said over a possible commercial rescue.

And his plan is to wait and assess the health of credit markets in the new year, before making his momentous decision.

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