Northern Rock Bank to be Nationalised by UK Government

Companies / UK Banking Jan 15, 2008 - 09:02 PM GMT

It now seems like another era when I first warned of the problems specifically facing Northern Rock bank back in August 2007, some four weeks before the run on the bank occurred and the interbank money markets freeze hit the headlines. Over that period we have witnessed the initial £2 billion of tax payer loans and guarantees mushroom to an estimated £55 billions today.

The news that nationalisation is now a near certainty is not entirely unexpected as I pointed out on 18th December, that the government's announcement of the extension of guarantees to cover all deposits AND debts amounts to the tax payer expanding on original risks of about £25 billion to as much as £100 billions.

Under these circumstances a bid by any of the suitors such as the consortium led by Richard Branson's Virgin Group without an implicit guarantee and plan to repay the monies would be tantamount to giving the bidders a free lunch i.e. ALL the assets without any of the risks for as little as £400 million. I recommended at the time that the best option under the circumstances would be for a nationalisation of Northern Rock Bank, as this would allow the bank to be sold off in chunks with the outstanding tax payers monies expected to be fully repaid as Northern rocks assets are estimated to more than cover total liabilities. This would leave any left over balance to be distributed to existing shareholders at probably the rate of between £1 and £2 per share.

The shareholders put up a last ditched effort earlier today to fend off nationalisation led by two of the banks biggest shareholders, hedge funds SRM Global and RAB Capital, which jointly own 18% of the bank. As highlighted above, it is highly unlikely that the potential suitors will be able to acquire the financing to enable them to guarantee repayment of the £25 billions loaned to date, especially as the credit crunch persists.

Nationalisation of Northern Rock is expected to be announced sometime over the next 2 weeks. In advance of this move the government recruited Ron Sandler as the provisional chairman. Confidence in the bank and the sector is not helped by news that senior staff are receiving secret bonuses of up to £100,000 a year despite the banks near collapse and a new black hole in the companies pension funds.

Whilst eyes are firmly on Northern Rock Bank, investors should keep a wary eye on the next bank to face the same crisis as the UK housing bear market kicks into gear.

The banks at most risk are the small mortgage banks such as Bradford and Bingley and Alliance and Leicester. Apart from banks, financial institutions such as Paragon, Britain's third largest buy to let mortgage financing company will continue to teeter on the brink liquidation. In Paragons case, its share price has fallen from £6.20 to just 80p in 6 months.

By Nadeem Walayat

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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