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Newsroom & speeches
18 February 2008
1. With your permission Mr Speaker I would like to make a statement on Northern Rock.
2. I hope the House will understand that it was necessary for me to issue a statement yesterday ahead of the markets opening so that trading in Northern Rock shares could be suspended this morning.
3. It was also essential to allow the management of Northern Rock time to tell their employees what was happening so that the bank could open as normal this morning.
4. Mr Speaker, as I said yesterday, the Government has decided to introduce legislation to take Northern Rock into a period of temporary public ownership. I took this decision after full consultation with the Bank of England and the Financial Services Authority.
5. The draft Bill has been available in the Vote Office and also in the House of Lords since this morning.
6. I did so to provide as much time as possible for Right Honourable and Honourable Members, as well as the Other Place to examine the provisions of the Bill.
7. If the House agrees, the Bill will begin its Parliamentary passage tomorrow I have also arranged for the principal Opposition spokesmen to be briefed by Treasury officials today.
8. Mr Speaker, it is important for savers and depositors to be reassured that their money remains safe and secure. Northern Rock will continue to operate as a bank on a commercial basis. It has been open for business as usual today.
9. The Government guarantee arrangements I announced last year remain in place and will continue to do so.
10. Borrowers will continue to make their payments in the normal way.
11. I have appointed Ron Sandler as the Executive Chair and he is in Newcastle today and has had meetings with the company and its employees.
12. The new Board and the bank will operate at arm's length from the Government, with commercial autonomy for their decisions.
13. I will publish shortly the framework agreement which will outline how the relationship between the Government and Northern Rock will work.
14. As I said yesterday the Board's proposals will also cover the Northern Rock Foundation, which is very important to the North East.
15. The Board will commit to guaranteeing a minimum income of £15m per year in 2008, 2009 and 2010. This will be paid directly by Northern Rock as now, and would be a condition of any sale if it were sold in this time.
16. The new Board will be asked to identify a long-term future for the Foundation.
17. Mr Speaker, I want to set out the reasons for the decisions that I made and also to outline what the new legislation will do.
18. Before that let me remind the House that last September there was almost universal agreement that the Government was right to intervene to save this bank, to stop its problems spreading into the wider banking system.
19. There was also agreement that ultimately the long-term future of this bank must lie in the private sector
20. Even those who have advocated nationalisation in the Autumn did so on the basis that it could only be a temporary step - a stepping stone - to return it the private sector when market conditions made that possible.
21. Throughout last Autumn, and from the start of this year the Government wanted to test all the options and to give the shareholders and the management time to find a solution which was acceptable and, which met the three principles I set out last year.
22. These were to support financial stability, protect depositors' money and to protect the interest of the taxpayer.
23. I have said throughout that all options, including a temporary period of public ownership, remained on the table.
24. As the House will know the Government had two private sector bids to consider. Each of them was tested against the option of a temporary period of public ownership to see which met our objectives and decision principles, including the best value for the taxpayer.
25. 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 we would be putting in place.
26. Each proposal has its pros and cons. The Virgin proposal, for instance, would have brought a new brand and management.
27. 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.
28. The Board's proposal would have involved a similar level of subsidy. But it has other disadvantages, compared with Virgin, including: that it would bring in less new capital; and, the business would have been dependent on Government guarantees for new retail deposits for longer.
29. A subsidy on the scale required would not provide best value for the taxpayer: 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.
30. By contrast, under public ownership the taxpayer will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty. And that is why we made the decision we did.
31. Therefore, we have made the decision we have to protect taxpayers, after having weighed up all the various competing considerations.
32. In deciding which was the best option for the taxpayer it was clear that a temporary period of public ownership was the better option.
33. Mr Speaker, I will go through the contents of the Bill in more detail at second reading tomorrow
34. We have deliberately drafted the Bill to ensure that a bank can only be acquired in certain tightly defined circumstances. And that power will only last for twelve months.
35. I've already announced a consultation which will lead to permanent legislation to deal with situations like this in the future.
36. The Bill potentially applies to a range of financial institutions. I want to make clear that the Government has no intention at present to use the Bill to bring any institution into temporary public ownership other than Northern Rock.
37. The Bill also provides for appropriate compensation for shareholders. As I explained on 21 January, these are on the basis that:
38. I believe that this is fair to both shareholders and to the taxpayer.
39. The Bill also makes provision for transfer of the bank, or parts of it, into the private sector.
40. Mr Speaker, let me remind the House that following the problems that started in the US last summer, Northern Rock was unable to raise the billions of pounds it needed to stay in business.
41. We were right to save the bank. We were right to do everything we possibly could to find a private sector buyer on terms that were acceptable to the taxpayer.
42. Because of current market conditions, we are right now to take over this bank on a temporary basis because that is what is in the interest of the taxpayer.
43. There were choices to be made. We could have let the bank go under. But the risks to the wider financial system, for savers and the general public were not acceptable.
44. Mr Speaker, having made the decision to save the bank and maintain financial stability and protect savers, we are now taking this decision to protect the taxpayer.
45. I commend this statement to the House.
