Northern exposure: Cameron calls for Darling to be axed after bank bail-out

Nationalised bank will take years to repay taxpayers, says new chairman
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Indy Politics

The new executive chairman of Northern Rock has issued a stark warning that it will take "years" for the stricken bank to pay back its loans from the taxpayer, adding that the lender's future will continue to hang in the balance, despite its nationalisation.

Ron Sandler, the former boss of the Lloyd's of London insurance market, said: "All of the possible solutions carry with them an element of risk." Predicting that government loans would not be paid back quickly, he added: "It is clearly unrealistic to talk about months. We are clearly talking about a period of some years."

His comments came as Westminster and the City of London came to terms with the rejection by the Government of two private-sector proposals for taking over the bank and amid calls by the Conservatives for Northern Rock to be taken into public administration. The Government also faced fresh embarrassment over the £110bn nationalisation after it emerged that millions of pounds may have to be paid to Sir Richard Branson's Virgin group because of delays in reaching a decision over the banking debacle. The taxpayer is expected to have to underwrite a hefty fee to the preferred bidders Virgin and Olivant, who dropped out of the race at an earlier stage, and the Government's City advisers, Goldman Sachs.

Virgin and Olivant were guaranteed the money as "preferred bidders" by Northern Rock. The money will be paid by the bank, but will be underwritten by the taxpayer. It could run into many millions of pounds.

David Cameron, the Conservative leader, said the nationalisation was a "disaster for the British taxpayer, a disaster for this Government and a disaster for our country".

He said the Chancellor, Alistair Darling, had lost all credibility and should be moved to another job as soon as the emergency legislation was on the statute book. Mr Cameron added: "He has no credibility left. It did not have to be like this. The Government could have rescued Northern Rock the weekend before the run by taking the offer from LloydsTSB.

"The Government could have rescued the bank during the run if it had made a guarantee sooner as recommended by the Governor of the Bank of England."

Vince Cable, the Liberal Democrat Treasury spokesman, an advocate of nationalisation ever since the run on the bank in September, was critical of the lengthy decision-making process that led to the announcement. "It's frankly ridiculous a decision has taken so long," he said. "Months of delay have meant the Government now owes hefty bills to both Goldman Sachs and its original preferred bidder, Virgin."

At his monthly press briefing, Gordon Brown said the decision to nationalise Northern Rock was "the right move at the right time for the right reasons". But ministers are now bracing themselves for potential job losses in branches of the bank, which is based in the Labour stronghold of the North-east.

The extent of the cuts will be revealed when a new business plan for the bank is produced by Mr Sandler. Yesterday, he refused to be drawn on possible cuts among Northern Rock's 6,000-strong workforce but Mr Darling, admitted: "The bank will have to be restructured and refocused."

As the Government came to terms with the fall-out from the latest twist in the saga, ministers were also expecting an outcry over the repossession of homes from householders unable to keep up their mortgage repayments. The bank has one of the highest rates of repossessions and its nationalisation could leave the Chancellor taking the blame for hardship when householders are forced out of their properties.

Questions were also being asked last night over whether the Government will intervene to stop the bank stoking up the debt crisis facing many householders in a falling housing market. Northern Rock loans of 125 per cent of the house value were still being advertised on its website yesterday but they are expected to be halted by Mr Sandler.

MPs with large constituency interests in the North-east are likely to ask for government intervention if their repossessions increase. Mr Sandler has until 17 March – the deadline for emergency state aid clearance by the EU Commission – to deliver a new business plan for the bank.

He confirmed it would continue to operate under the Northern Rock branding and be run as aggressively as possible under EU state aid rules. The legislation will last for the next 12 months, raising questions over whether the Government will use it to rescue other banks hit by the sub-prime lending crisis in America.

Mr Darling said that was not the intention but he could not rule out other rescue operations. "This piece of legislation is being introduced because of the particular circumstances in place at the present time and it gives us powers to restructure Northern Rock," he said. "It is temporary."

Many Labour MPs with seats in the North-east welcomed the move to nationalise the bank. Their support means the Bill is certain to get through with Liberal Democrat backing.

But it will be opposed by the Conservatives, who were accused by the Prime Minister of ditching their earlier support for nationalisation.

Will Brown decide to dispense with his Chancellor?

Any notion that Alistair Darling possesses the Government's "safest pair of hands" has been swept away by a turbulent eight months in the Treasury. The minister who shuns publicity will now find a spotlight on his every move.

His decision to nationalise Northern Rock is just the latest blow to his hard-won reputation for low-key competence. He faced derision in October when he increased the starting point for inheritance tax just a week after the Tories announced similar plans. He was then forced to retreat over proposals to overhaul capital gains tax. Last week he backtracked over a threatened clampdown on taxes paid by "non-domiciles". Now he has taken the gamble of his career – the first nationalisation of a high street bank in British history.

If Northern Rock is swiftly returned to the private sector, with the taxpayers' investment intact, he will have pulled off a remarkable coup. As the bookmakers cut Mr Darling's odds of surviving in office until the end of the year to 5/2, few observers were betting on that.

In the shorter term the Chancellor faces worries over the health of the economy and has to present his first Budget next month.

The irony of Mr Darling's predicament is that his predecessor, Gordon Brown, will have been intimately involved in every key decision.

Nigel Morris

So many questions, so few answers

1. Who's to blame?

Formally, the board of a company is responsible for its running and the Financial Services Authority is statutorily charged with overseeing individual financial institutions. In the words of the Treasury Select Committee, the FSA was guilty of a "systematic failure of duty" because it failed to halt Northern Rock's "reckless" business plan. The former chief executive Adam Applegarth led the Rock's disastrous dash for growth.

2. How temporary is nationalisation?

Treasury sources are spinning that the Rock will be publicly owned for three years or more (usefully beyond the next general election).

3. What future for the Rock?

The Chancellor is unclear on this, delegating any business decisions to the new boss, Ron Sandler. Mr Sandler has three options. He could run down the business, in which case there won't be much of a bank to sell on after nationalisation. Or he could run it as a proper bank, at which point its competitors would cry foul about its unfair state-backed advantages. Alternatively, Mr Sandler could save face by pretending to run it as a proper bank, but by offering uncompetitive savings and loans rates limiting any growth and trouble.

4. How many jobs will go?

Probably all 6,000 of them. Though the staff are well regarded, administering a declining mortgage book doesn't take many people. The taxpayer will pick up the redundancy bill: at, say, £20,000 each that would make a charge of £120m.

5. Is it fair on the other banks?

This is the issue of "moral hazard". The idea is that banks will trade recklessly to gain extra business and make more money if they think they'll get rescued if things go awry. That's a bad system anyway, but it also effectively penalises the "good guys" – prudent bankers who play by the rules and don't lend irresponsibly. In the case of Northern Rock, nationalisation adds insult to injury by providing the bank with an inbuilt advantage on cheap funding, state guarantees to depositors and a very sympathetic shareholder (HM Government). EU rules on state aid may curb the worst of these excesses, but if no important bank is allowed to go to the wall then this extraordinary turn of events may well repeat itself.

6. Will it end in the courts?

Yes. Some shareholders will be hoping that the hassle for the Government of getting bogged down in legal action will persuade them to pay up. But the sums are vast. The Rock's largest shareholder, the hedge fund SRM Global, has threatened to sue if it does not receive compensation of 400p a share, which would cost taxpayers – in total – well over £1bn. The Government claims the shares only had any value because of state support, and the independent arbiter is asked to value them on that basis.

7. Who's next?

Northern Rock is unlikely to be the last casualty of the credit crunch. Banks don't want to lend to each other and prefer instead to "hoard cash" and bolster their own balance sheets. It is making life in the financial sector particularly stressful.

8. What should I do with my cash?

Oddly, Northern Rock might be a good place to put it, offering 6.35 per cent gross on one of its fixed-rate bonds. After all, except for National Savings, no one else offers the majestic benefit of an unlimited state guarantee that you will get your money back.

9. Where does it leave Mr Brown?

Exposed, but not as vulnerable as Alistair Darling. Mr Darling may recall the fate of predecessors such as James Callaghan and Norman Lamont, who faithfully executed the policy of their bosses only to find themselves ditched when it collapsed. Maybe Mr Darling is merely keeping the Chancellor's seat warm for Ed Balls, Mr Brown's economic ex-wunderkind and now Schools Secretary. Mrs Balls, aka Yvette Cooper, is already ensconced in the Treasury as Chief Secretary, which must be a strange sensation for all concerned.

10. What will it cost the taxpayer?

The most apocalyptic estimate is that the liabilities of Rock, amounting to £110bn (the equivalent of the annual NHS budget), will be shouldered by the taxpayer – about £3,500 for each of us. However, most of those liabilities are covered by assets, although those– the mortgage book – could drop in value if there is a housing slump. Having the debt on the public books indefinitely will wreck the Government's fiscal framework. It will push the ratio of national debt to national income from 36.7 per cent to 44 per cent – well above the Sustainable Investment Rule's limit of 40 per cent. Shareholders and redundant Rock staff might also cost substantial sums.

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