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Rock: Brown blinks

• Robert Peston
• 19 Jan 08, 07:30 AM

The Chancellor will imply on Monday that were Northern Rock to be nationalised, shareholders would receive nothing or next to nothing.

What Alistair Darling will say, in a Stock Exchange announcement and in a statement to the House of Commons, is that a valuation of the Rock’s shares, were to it be nationalised, would be based on what the business would be worth in the absence of the Government’s current financial support to the troubled bank.

In the absence of that £55bn of taxpayer loans and guarantees to Northern Rock, the bank would be in administration under insolvency procedures – and the Rock’s shareholders would have to wait in line, probably for years, to receive anything for their shares, pending the total dismantling of the business.

Mr Darling’s motives in making the threat to shareholders are transparent.

He wants to scare them into accepting any deal the company and Treasury were to reach with the private-sector groups still vying for control of the Rock – even if that deal gave little to shareholders.

Many in the City will see the Chancellor’s statement as giving a particular boost to the prospects of the Virgin consortium, since its takeover proposal was regarded as particularly hostile to the interests of the Rock’s shareholders.

This determination to scare shareholders into submission is also why both the Chancellor and the Prime Minister said last week that nationalisation remain a very live option for the bank.

And it’s why they have made detailed contingency plans for a nationalisation, which included appointing Ron Sandler – the former insurance executive – to chair a nationalised Rock, and preparing legislation as their preferred route to nationalisation.

The Chancellor and Prime Minister felt they won a victory at the bank’s extraordinary meeting on Tuesday, when two big hedge funds failed in their attempt to win shareholder support for their attempt to severely limit the ability of the bank’s board to sell the business without their approval.

There’s only one problem for Gordon Brown and Alistair Darling.

Their other actions this weekend tell a very different story.

They have signalled that they are deeply scared of the political ramifications of nationalising Northern Rock, and are prepared to accept almost any price to avoid nationalisation.

That’s apparent in the way that they have massively sweetened the terms on which they are prepared to support any private-sector group wishing to take control of the Rock.

By accepting the proposal from Goldman Sachs, the investment bank, to convert a taxpayer loan – which is currently around £24bn – into bonds for sale to international investors, they have decided to provide public-sector support on a greater scale and for much longer than they had initially said they would do.

Those bonds would be guaranteed by the Government. And the Bank of England will endeavour to sell as many of them to investors as it can, as quickly as market conditions permit.

But unless there is some miraculous improvement in conditions in money markets, it means that taxpayers will continue to prop up the Rock to the tune of tens of billions of pounds for years – because the loans will be guaranteed by the Government until such time that private-sector insurers are prepared to take over that guarantee at an acceptable price (no chance of that right now).

And because these bonds have a five-year term, the Government will be promising to provide taxpayer support to the Rock for at least five years.

That’s quite a change from what the Treasury was saying before Christmas, when it was demanding that any private-sector rescuer should repay between £10bn or £15bn of those taxpayer loans straight away.

The way to see all this is as a game of chicken between the Prime Minister, Gordon Brown, and the two hedge-fund shareholders, SRM and RAB.

The hedge funds want to make as much money as they can from their 18 per cent holding in the bank.

Mr Brown wants a private-sector deal that tilts the rewards away from shareholders and towards the taxpayer.

In this game of chicken, by signalling how reluctant he is to push the nationalisation button, it was the Prime Minister who blinked this weekend – and the hedge funds may well be feeling pretty chipper.

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