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Rock's rocky valuation

• Robert Peston
• 7 Jun 08, 06:59 AM

The spec for a reputation-testing, privacy-shattering, job-from-hell was published this week on the Treasury's website.

It's the official advertisement for the job of determining compensation for some 200,000 former investors in Northern Rock, whose shares were expropriated when the bank was nationalised in February.

Putting a fair value on the shares should be an intellectual challenge, given that there's never really been a financial debacle quite like the run on the Rock.

But that's not why the main qualification to be official valuer of Rock stock is probably a strong masochistic bent, along with the formal requirement to have proven professional skills in company valuation.

The thing is that although the Treasury insists it wants someone demonstrably independent from Government, it's also sent an unambiguous message about the result it wants from the valuation.

The Treasury has a strong conviction that the shares are worth nothing, give or take a farthing or two, and has enshrined this conviction in the mandate for the valuer.

That mandate says the shares have to be valued on the hypothetical basis that it's not a going concern, that it had been put into administration under insolvency procedures and that the Treasury and Bank of England had withdrawn all financial support from the bank.

On those fictional assumptions, the Rock would have a massive funding gap. There would be a fire sale of assets at a knockdown price. And there would almost certainly be a massive deficit on reserves.

All of which would put a price on the shares of zero.

So far, so straightforward.

Some might argue that the valuation has been rigged, but it looks like a pretty easy job.

The problem is that the 200,000 former Rock shareholders - including a couple of feisty hedge funds and a leading insurer - regard the valuation mandate as state-sanctioned theft.

They have begun legal proceedings to secure what they would perceive as a fairer basis for valuation.

The shareholders believe that the shares are worth at least the value of net assets in the company's balance sheet - which even after the mayhem of the autumn was still 拢1.7bn at the turn of the year.

So anyone signing up to be the valuer would probably make instant enemies of an angry mob of City institutions and thousands of Geordies who saw their Rock shares as a nest egg.

No wonder the Treasury is insisting the successful applicant should take out "an appropriate level of professional indemnity insurance".

It's not, therefore, a sinecure - and there is unlikely to be a deluge of credible applications by the closing date of July 4th, although the Treasury says that interest in the post is rather greater than commonsense might suggest.

Is there any chance of the Treasury changing the spec to allow a valuer to set the terms for the valuation in an independent way?

That's unlikely because the stakes are just too high.

The Treasury doesn't have 拢1.7bn going spare.

It recoils at the idea of paying off the hedge funds, which built up their stakes only after the crisis at the Rock had begun.

And, most important, it's a principle for the Treasury, the Bank of England and the Financial Services Authority that when a bank runs into difficulties and has to be rescued by the injection of taxpayer-backed loans, the shareholders should suffer pain and punishment.

Bailing out shareholders, they fear, would remove the incentive for the owners of other banks to ensure their institutions are run properly and avoid the Rock's fate.

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