The aftermath of the first run on a British bank for 150 years ended yesterday as Chancellor Alistair Darling announced that the beleaguered Northern Rock was to be nationalised.
Both the Chancellor and Gordon Brown had been desperate to avoid taking the crisis-hit mortgage lender into state control and had spent five frantic months trying to find a private buyer for the bank.
Mr Darling, who has endured a torrid start to his stewardship of the Treasury, finally gave up the search and confirmed the dramatic retreat in a hastily announced press conference. The Chancellor stressed that nationalisation was only a temporary step and said he intended to return the bank to the private sector once market conditions improve.
But public ownership represents a massive gamble for ministers, who are now responsible for mortgages worth £100bn and for the livelihoods of thousands of Northern Rock staff, mainly in Labour's heartlands in the north-east of England.
If the markets fail to pick up, the Government could be left with a financial and political liability for years to come.
The move, described by the Tories as the day Mr Brown's reputation for economic competence died, also threatens to revive memories of nationalisation by Labour governments of the 1960s and 1970s, an era New Labour had hoped to consign to the history books.
Mr Darling's announcement came five months after Northern Rock was engulfed by the turmoil over sub-prime mortgages in the United States. Facing the threat of collapse in September, the bank was forced to turn to the Bank of England for an emergency bail-out. The Government, shaken by images of savers queuing at Northern Rock branches to withdraw their cash, propped it up with loans and guarantees of more than £50bn to avert the development of a fully-fledged banking crisis.
Ministers had initially been optimistic about the chance of finding a private buyer for the bank, with Sir Richard Branson's Virgin group and a management buy-out emerging as front-runners.
But Mr Darling was eventually forced to abandon the negotiations, choosing yesterday for the announcement before the money markets open this morning.
The Chancellor explained that neither of the private proposals to take over Northern Rock offered "sufficient value for money to the taxpayer".
He said: "It is better for the Government to hold on to Northern Rock for a temporary period and as and when market conditions improve, the value of Northern Rock will grow and therefore the taxpayer will gain. The long-term ownership of this bank must lie in the private sector."
He stressed that the Financial Services Authority had reassured him that the bank was solvent and its mortgage book remained of good quality.
Mr Darling will make a Commons statement today, confirming that emergency legislation will be rushed through Parliament to take the bank into public ownership. The Prime Minister will also defend the decision in his monthly press conference today.
The Chancellor has already been forced to retreat over plans to overhaul capital gains tax and to clamp down on "non-domiciles", foreigners who live in Britain but do not pay tax on their overseas income.
A month before his first Budget, he faces fears of a slowdown in the economy and stagnating house prices. He is also under pressure to abandon planned increases in fuel duty because of worries about its impact on business and industry.
George Osborne, the shadow Chancellor, said the nationalisation had dealt a hammer blow to Britain's reputation for financial services. He told Sky News: "We have had months of dithering and delays and ended up in the catastrophic position, on a Sunday afternoon, of the Chancellor announcing this decision to nationalise Northern Rock."
He added: "They have dithered for months and months trying to create a private sale that was never really there."
Vince Cable, the Liberal Democrat Treasury spokesman, who first argued for nationalisation, said: "Belatedly the Government has made the right decision." But he warned: "There will be difficult times ahead, especially for the employees, as the bank is downsized.
"However, there is now hope for the long-term future of the bank when it is eventually sold in more satisfactory conditions."
Sir Richard Branson, who had wanted to rebrand Northern Rock as Virgin Bank, said he was "very disappointed" by the announcement. He said: "We were very clear the business plan we put forward was robust, conservative but ultimately capable of rescuing the interests of all stakeholders.
"However, we must accept the decision with good grace and hope that the Rock will somehow find better fortune in the future."
Northern Rock will now be run by Ron Sandler, the former chief executive at Lloyd's of London, who will travel to Northern Rock's Newcastle upon Tyne headquarters today for talks with the bank's managers and unions.
Most observers believe widespread redundancies are inevitable as part of an attempt to trim some of the fat off the business to make it more attractive to future buyers.
Its investors will be offered compensation for their shares set by a government-appointed arbitration panel which will settle on a fair price. But shareholders, including two hedge funds, could launch legal action if they are unhappy with the amount offered.
Robin Ashby, founder of the Northern Rock Small Shareholders' Group, said that he was "shocked and appalled" at the decision. He said: "It's terrible for Britain's reputation as a financial centre and bad news for the shareholders having the bank stolen away from them."
Mr Ashby said he was "disgusted" that proper consideration had not been given to the latest offer from the bank's management on Friday, which he believed was the "sensible" option to rescue the institution. "This will be hanging around the Government for years to come, right up until the next general election," he said.
A hard place for the Rock
* 13 SEPTEMBER
It emerges Northern Rock has been given emergency funds. Run on bank starts next day.
* 12 OCTOBER
Virgin Group-led consortium tables rescue plan. Olivant tables rival bid on 7 December.
* 4 FEBRUARY
Deadline for offers for Northern Rock. Olivant pulls out, leaving Virgin and Northern Rock's own board to fight it out.
* 12 FEBRUARY
The Treasury warns Virgin to improve rescue plan.
* 17 FEBRUARY
Rock to be nationalised.Reuse content