14 The Treasury set itself objectives at an early stage: to protect the taxpayers' interest; keep the company stable to protect depositors; and maintain wider financial stability. The Treasury had to operate under a number of constraints: it needed to be aware of how its actions might be interpreted by volatile financial markets; not put itself in the position of controlling the actions of the company as a shadow director; remain aware of shareholders' rights; and find a solution that would be consistent with European Union state aid rules.
15 In late September 2007, the Treasury identified through a systematic assessment of the available options essentially three choices:
■ allowing Northern Rock to fall into administration;
■ stopping it taking deposits and writing new mortgages and beginning a process of winding down the company; or
■ allowing it to continue to take deposits and write new mortgages while putting in place a longer term recovery plan which would keep the company in business.
A wind-down or a continuation of business could be taken forward with Northern Rock remaining in the private sector, probably under new ownership, or by taking the business into public ownership.
16 Allowing Northern Rock to fall into administration would have prevented depositors from accessing their money and entailed potential taxpayer losses of between £2 billion and £10 billion. There were no special procedures under UK law that would allow depositors in a bank to be treated any differently from the creditors of another private sector business in difficulty. Allowing Northern Rock to enter an insolvency procedure would therefore have resulted in depositors not having access to their savings for a period of months, thereby risking a loss of confidence at other banks and hardship for individuals. The Treasury was also concerned that a rapid sale of the company's assets at reduced prices might mean that part of the emergency support was not repaid. The Treasury and its advisers estimated a potential loss of between £2 billion and £10 billion, the wide range reflecting the uncertainties in estimating the prices that might be obtained for the company's assets.
17 The option of winding down the business was considered, but inadequate IT systems at Northern Rock meant that depositors would have had to wait for their money, risking another major run and potential hardship for those reliant on access to their funds. A wind-down of the business would have involved a sale of the branches, deposits and some of the mortgages to another bank, followed by longer term disposals of the remaining assets to repay creditors. If the sale of the deposits and branches proved impossible, the alternative would have been to implement a scheme for rapid repayment of retail and wholesale deposit accounts. Northern Rock was not, however, able to return depositors' cash quickly. The company operated a manual account closure process and estimated that it would have taken up to 10 to 12 weeks to repay depositors with a likely error rate of 25 per cent. The scope for securing better prices through a more controlled and longer term series of asset sales would have depended on financial market conditions not deteriorating further. The Treasury therefore ruled out an immediate wind-down on practical grounds, although work was put in hand to update the IT systems to enable quicker repayment of depositors if needed at a later stage.
18 In September 2007, the Treasury took a timely decision to commission a team of officials to work on proposals for public ownership, as a contingency measure. While the Treasury considered that public ownership would provide the control over the company necessary to protect the interests of the taxpayer, it did not see it as an immediate response as other options were preferable and should be considered. Public ownership might introduce uncertainty for investors in the UK banking system, as well as risking reputational damage to the UK's standing as a leading international provider of other financial services. There was, at that time, no legislation on the statute book or available in draft form that would allow the Government to take the company into public ownership should it be required at a future date.
19 The Treasury's preferred option was to support the company's search for a private sector solution. Before and after approaching the Bank for emergency support, Northern Rock had searched for a private sector buyer, initially of the entire business and later for parts of it as well. The Treasury considered that the search for a solution was a matter for the Board of Northern Rock which remained in place and was accountable to shareholders. As this initial search failed to find a suitable purchaser, the Treasury asked Goldman Sachs to liaise with the company as it took the process forward. Following legal advice received in September 2007, the Treasury considered that it should avoid taking any actions that were properly a matter for the directors of Northern Rock. The Treasury judged that it could not directly intervene in the process run by the company to find a potential buyer. Bidders reported that the sale process to December 2007 had been frustrating and confused, partly as a result of challenges arising as a consequence of the company employing three sets of financial advisers.
20 During this period depositors continued to withdraw money, despite the guarantee arrangements, with the pace quickening again in November when a total of £1 billion was withdrawn during a week. Amid media reports that the bidding process was in difficulty, Northern Rock, with agreement from the Treasury, announced on 26 November 2007 that discussions would be taken forward with one of the bidders, the Virgin Consortium. The announcement reduced deposit outflows. But competitive tension in the bidding process was interrupted on the basis of a non-binding bid, which in the event could not be taken forward because of difficulties in obtaining financing.
21 As financial market conditions worsened the prospect of a sale to a sufficiently well capitalised buyer, who could repay the publicly financed element in due course, became increasingly remote. The Treasury announced in November 2007 that it would consider financing bids on a matched basis with the private sector. Potential buyers, however, were not in a position to arrange private funding for a bid and further public support would be needed if the process was to be taken forward. The Treasury therefore began to take a more active role in finding a solution and announced in January 2008 proposals to replace the emergency support from the Bank with a guarantee covering a bond issue worth up to £27 billion, secured over the company's assets. A new invitation to bid was therefore issued in January. Only two detailed bids were received, from Virgin and from Northern Rock's management team. Across a wide range of criteria, the Treasury considered that these proposals did not meet the test of protecting the taxpayers' interest, and would carry considerable uncertainties over their deliverability as the financing plan was put in place and State Aid clearance sought.
22 The Treasury estimated in February 2008 that if Northern Rock was taken into public ownership for three years it was likely to require a net subsidy of £1.3 billion. On a base case scenario, the subsidy to Northern Rock in public ownership was below the estimate of £1.9 billion to £2.2 billion if one of the two final private sector bids had been chosen.
23 The estimate of public support to Northern Rock was, however, highly dependent on the forecast price of £1.2 billion the Treasury might obtain if the company was restructured and returned to the private sector when market conditions had stabilised. Such an estimate would always be uncertain given its dependence on the economic climate, changes in the housing market and on potential buyers' perceived confidence in the Northern Rock brand. As there were material uncertainties around the deliverability of the private sector bids, the Treasury considered that in all the circumstances the best option to protect the taxpayer interest was a period of public ownership.
24 Northern Rock was therefore placed into public ownership on 22 February 2008 using powers provided by the newly enacted Banking (Special Provisions) Act 2008.