At 7am yesterday morning, Chancellor Alistair Darling issued a statement to the London Stock Exchange.
He outlined plans to convert the £25bn of taxpayers’ money handed to the Northern Rock bank, in the form of a Bank of England loan, into Treasury-backed bonds.
This is so parcels of Northern Rock debt can be sold off to investors, with the public purse still acting as guarantor against bankers’ losses.
Meanwhile, Darling said that if a sale to a private buyer cannot be agreed, the bank will come under temporary public ownership, before returning it to private ownership.
Either way, the bank is to be propped up.
He added that Northern Rock’s Bank of England loan facility will be extended until 17 March to allow time to explore the proposed financing structure with Northern Rock and interested parties.
Leading the pack for a cheap buyout are Richard Branson’s Virgin Bank, the Olivant private equity consortium, and a stand alone plan being developed by the Northern Rock’s current board of directors.
Bidders have until 4 February to come forward with rescue proposals based on the Treasury’s plans.
Shares in Northern Rock soared by 26.5 pence to 91 pence.
Darling repeated his outline in a statement to MPs in the House of Commons at 3.30pm yesterday, where he repeatedly stressed that the world capitalist crisis had ‘prevented a purely commercial solution’.
The scheme was proposed by bankers Goldman Sachs and was given the green light by Prime minister Gordon Brown over the weekend.
Analysts say the government’s plan will mean the taxpayer will be exposed for a much longer period than planned, at least five years.
The plan still needs to be be ratified by the European Commission in relation to rules on state aid for companies.
Liberal Democrats Treasury spokesman, Vince Cable, said outright nationalisation would have been ‘much more satisfactory and more transparent than this extraordinarily complicated arrangement.’
Prime minister Brown was yesterday asked, at a joint press conference in India with prime minister Singh, ‘why the British taxpayer should subsidise to the tune of billions of pounds a private firm that takes over a bank that would be bankrupt if it were not for the support of your government?’
Brown said: ‘The only reason that we have intervened in Northern Rock is to ensure the stability of the British economy.
‘When we were faced last August with the problems of Northern Rock and the danger that these would spread to the rest of the economy, it was right that the government intervened to protect the depositors and their savings and at the same time to ensure the stability of the economy.’
Around £79bn was wiped off share prices on the FTSE 100 index which fell 323 points, its biggest one-day fall since September 11 2001.
