Government 'changed story' over Northern Rock nationalisation

Northern Rock's biggest former shareholder has accused the Government of deliberately changing its story over the way in which it had nationalised the bank, in order to avoid having to compensate the stricken mortgage lender's shareholders.

At a High Court hearing yesterday, SRM Global accused the Government of changing its story on why it had nationalised Northern Rock and whether the state would make a profit when the bank was sold back to the private sector. David Pannick QC, representing SRM, told the court the Chancellor, Alistair Darling, and Gordon Brown had repeatedly said the Government would make a profit on loans to the bank made prior to its nationalisation. The Government also said nationalising the bank would maximise the "upside" for the taxpayer, Mr Pannick added.

He said that once the Government realised it was facing legal action over the terms of the compensation to be paid to Northern Rock shareholders, it changed its story. He said that John Kingman, the Treasury civil servant who now heads the Government's financial investment arm, had provided the court with a statement that was impossible to square with the previous statements of the Chancellor and the Prime Minister. "By the time the decision was taken to bring Northern Rock into public ownership it was not anticipated that the Government would make a profit," said Mr Kingman's statement.

Estimates made by Goldman Sachs of the value to the Government of nationalisation, a bid from Virgin and a management bid all put a "very substantial" value on the bank, even in a recession, said Mr Pannick. But the Government was able to disregard this advice because Goldman had also calculated a "net subsidy" already handed over by the Government, worth £450m to £2.55bn, representing the value of the support offered prior to nationalisation.

SRM argued that loans and guarantees made to Northern Rock were not a subsidy as the bank had paid penal terms for the support. SRM also rejected the Treasury's assertion that the taxpayer had been put at risk, arguing that the Government imposed a margin on its loans which were secured against assets. "The reality is that by taking Northern Rock into public ownership... the Government ends up with a very, very valuable asset which it is intending to sell back to the market in circumstances which the Chancellor repeatedly emphasised it would be able to do so in the not-too-distant future," said Mr Pannick.

SRM and RAB Capital bought into Northern Rock after the bank received emergency support from the Bank of England in September 2007 and built up a joint stake of nearly 18 per cent. Along with small shareholders, they are asking the High Court to overturn the Government's terms for shareholder compensation, which they claim are rigged to produce a nil or negligible figure as the valuer must assume the bank was not a going concern. The case continues until Friday, with RAB, the small shareholders and the Government still to give evidence.