Struggling bank Northern Rock PLC will be nationalized after the British government rejected two private takeover bids, Chancellor of the Exchequer Alistair Darling said Sunday. Darling told a news conference that the ailing mortgage lender would be placed under temporary public ownership because both private proposals had failed to meet the government's criteria for protecting taxpayers.
"The government has decided to bring forward legislation to introduce a temporary period of public ownership" until market conditions improve said Darling. "Our financial adviser, Goldman Sachs, has concluded from a financial point of view that a temporary period of public ownership better meets our objectives of protecting the taxpayer" he added. "The bank will be run at arm's length though on a commercial basis". Ron Sandler, nominated by the government to run Northern Rock, said savers' deposits would be secure. But shadow chancellor George Osborne told the BBC that the Conservatives would oppose plans to nationalize Northern Rock. "After months of dither and delay we have ended up with this catastrophic decision," said Mr Osborne. "We now have the situation where the government will be making decisions on whether or not to foreclose on people's loans in a falling housing market" he added. A consortium led by the Virgin group was leading bids to run the beleaguered bank, while a management buyout had also been considered. But ministers have decided that nationalization - the first such move since the 1970s - was the only option. Virgin boss Sir Richard Branson criticized the government's decision: "We believe we had a very strong proposal, an experienced team and one of Britain's best brands". "We believe nationalization is not the right answer and that a commercial solution would have been the best way forward." Explaining the government's decision, Mr Darling 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". Northern Rock got itself into financial difficulties last year because its business model left it ill-prepared for the global credit crunch. It was forced to ask the Bank of England for emergency funding, triggering the first run on a British bank in more than a century. Nationalization will be pushed though parliament with emergency legislation on Monday. Shares in Northern Rock will be suspended on Monday morning. Under nationalization rules, shareholders will be offered compensation for their holding, at a level set by a Government-appointed panel. Investors could begin legal action if they are unhappy with the amount offered, with BBC Business Editor Robert Peston saying that it was "inevitable" that the government would be sued by shareholders who felt they had been "fleeced". UK taxpayers are now subsidising the bank in loans and guarantees to other lenders to the tune of about £55 billion (100 billion US dollars). The Treasury now feels that nationalization offers the most certainty of securing these guarantees, Mr Peston said. It is thought that the business model it proposes will be similar to those put forward by the Virgin Group and the in-house management consortium. These were likely to see a downsizing of the bank, with job cuts among its 4,300 employees likely, observers say. The Treasury had already recruited Mr Sandler, the former boss of the Lloyd's of London insurance market, to lead Northern Rock, in case it was nationalized. Mr Sandler is widely regarded as having restored confidence in Lloyd's after its years in financial disarray. He said the changes would have no impact on the guarantees made to lenders, or the government-backed support for savers' deposits. "It is business as usual," he said. Mr Sandler is well known to Prime Minister Gordon Brown and worked for the Treasury in developing the so-called stakeholder pension and investment products that were intended to help those on lower incomes save for retirement. Chairman of the Commons Treasury Select Committee John McFall said that he welcomed the Government's decision to nationalize. "They have explored every avenue. At the end of the day the biggest issue is the safeguarding of taxpayers' money. If nationalization saves that money, that has to be the correct step in the long term." Liberal Democrat treasury spokesman Vince Cable said that the right decision had been taken, though "belatedly", and that the government should have walked away from the prospect of a private takeover some time ago. "The important thing now is to do the right thing and the government has got to immediately establish what the problems are with this bank".