The Chancellor said yesterday that the Treasury would veto any sale of Northern Rock that did not meet its requirements as the stricken bank revealed that bid proposals received so far had been below its market value.
Alistair Darling told the House of Commons the Government's main aim was to get its money back as quickly as possible. He drew a clear distinction between the Government's priorities and the board's respo nsibility to shareholders.
Northern Rock is thought to have received up to 10 expressions of interest from potential buyers since its loose Friday deadline, but all were "substantially below" the bank's closing market value on Friday, the bank said yesterday.
Mr Darling told the House of Commons: "The Government is, as a major creditor, a very direct investor in the future of Northern Rock and has to agree to any proposals for the future of Northern Rock." Any sale "would have to be approved or vetoed by the Government", he added.
Northern Rock's shares slumped 21.4 per cent to a new low as investors found themselves caught between the Government wanting its money back and potential bidders trying to get the best deal possible.
"The Government will step in if the board continues to muck around, because any sale is better than putting Northern Rock into administration or receivership," said Nick Wood, a corporate recovery partner at Grant Thornton.
Mr Darling said the Government's February deadline gave Northern Rock some time to try to find a buyer that could take over the bank on agreeable terms. But the bank's difficulties are so great, a bidder is likely to need Government backing, which could fall foul of European rules prohibiting state aid to companies.
The Government is not ruling out nationalising the mortgage lender as it seeks to put pressure on the board to sort out the mess.
The authorities said bidders should not assume Bank of England funding would continue after the February deadline or when a sale is completed. Mr Darling said the authorities would consider all proposals, but that arrangements would have to comply with European Union state-aid rules.
Vincent Cable, the Liberal Democrats' Treasury spokesman, said the Government should nationalise Northern Rock, perhaps for about three years. He said this was "the least worst option" now that the Government was on the hook for billions of pounds in loans and guarantees.
The Government put Railtrack into administration and bought out its shareholders in 2001. The decision caused fury among shareholders, including small investors who had bought stock in the privatisation. The Government was accused of misleading shareholders and Gordon Brown, then the Chancellor, was attacked for the Treasury's handling of the crisis.
It would be much harder for the Government to put Northern Rock into administration because savers would rank below other creditors and could lose out without the Government's guarantee of deposits.
If Northern Rock went bust, the bank would have about £46bn of assets to repay its creditors. Mr Wood of Grant Thornton said an administrator would probably sell off the whole £97bn loan book and then allocate whatever money it received according to creditors' seniority. But with investors scared of mortgages and the UK housing market weakening, there is virtually no market for UK mortgage assets and they would be sold at a deep discount to hard-nosed buyers – if at all.
With holders of £50bn of securitised mortgages ranking above the Government and depositors, whose savings are guaranteed by the Bank of England, there may be little cushion to ensure the Government gets its money back.
The Bank of England's loan to Northern Rock is thought to be about £22bn. Depositors would come behind other creditors, including the Government, in the event of bankruptcy.
Because of Britain's inadequate depositors' protection scheme and the large balances held by many individual Northern Rock savers, the Bank of England was forced to guarantee Northern Rock's deposits, which are said to have shrunk to about £14bn.
Northern Rock ran out of top-notch collateral to borrow from the BoE at about £13bn. High-level sources have said the BoE is now "an agent" for the Government to lend to Northern Rock, though the Treasury rejects that description. Some of Northern Rock's interest on its borrowing is wrapped up into subordinated, unsecured debt which is owed to the Treasury.
On Friday, Northern Rock announced that Adam Applegarth, the chief executive who oversaw its breakneck growth, would leave by the end of January. Mr Applegarth will probably be paid six months' notice when he goes but will get no additional severance pay or bonus.
Northern Rock shares plunged to 104.2p. They have lost 91 per cent of their value this year, valuing the bank at about £439bn.