LONDON/NEWCASTLE (Reuters) - British Prime Minister Gordon Brown defended his handling of the nationalization of Northern Rock on Monday, but will now have to grapple with the fallout of possible job cuts and shrinking the bank.
Brown, who helped transform the Labour Party in the 1990s by ditching an attachment to state ownership, has been accused of dithering in a five-month crisis in which the government lent around 25 billion pounds ($49 billion) to keep Northern Rock afloat, while it cast around for private bidders.
“We did the right thing, at the right time for the right reasons,” Brown told a news conference. “We have contained the problems. It has not spread across to the rest of the economy.”
Finance minister Alistair Darling announced on Monday draft legislation in parliament allowing the government, which rejected two private sector-led bids this weekend, to take over Britain’s fifth-largest mortgage bank.
“It was right to look at all the options available to us,” Brown told the news conference, dismissing questions over why he took months to come to a decision. “We have lost nothing in doing so.”
Day-to-day running of Northern Rock passes to Ron Sandler, the troubleshooter who rescued the Lloyd’s of London insurance market from the brink of collapse.
Sandler, executive chairman, told reporters the bank had been granted a “period of stability” and a chance to pull back after a torrid few months.
“Public ownership is not about running down this bank,” said Sandler. “It is all about stabilization and building back from a sound, solid platform.”
He declined to comment on job losses at the bank or on a business plan, which he will hammer out with UK regulators.
“The bank will have to contract and there will be job losses,” said Vincent Cable, economic affairs spokesman for the opposition Liberal Democrats.
The bank is likely to shrink its mortgage book while boosting retail savings, aiming to revive funding while capital markets remain uncertain.
European Union rules could also force the bank to pull back from being one of the sector’s most aggressive lenders.
Sandler, speaking at the bank’s headquarters in Newcastle, northern England, said operations had not degraded during the crisis, but added it would still take “some years” to repay the government’s loans.
The government has consistently said the nationalization — the first major such step in Britain since engine-maker Rolls-Royce was brought under public ownership in 1971 by the then ruling Conservatives — would be only temporary.
But Brown declined to comment on how long public ownership could last: “We can’t have a timetable when we’re talking about the return of better market conditions as a first step.”
Even a temporary state role, however, will carry political and financial risks for a government already tarnished by the debacle, linking its fate to a shrinking mortgage bank at a turbulent time for Britain’s housing market.
The opposition Conservative party called for Darling to resign.
“He is politically a dead man walking,” George Osborne, the opposition Conservative Party’s economic affairs spokesman said in parliament after Darling announced the draft legislation.
Darling retorted: “He might have risen to the occasion rather than playing petty politics with the stability of the banking system.”
The government also faces the threat of a drawn-out legal battle with disgruntled shareholders.
Shareholders in Northern Rock, who stand to lose all their investment, reacted with anger as the suspension of the bank’s shares left them unable to sell their stock.
Jon Wood, founder of the bank’s top shareholder SRM Capital, told UK newspapers he would consider legal action, while the UK shareholders’ association said it would not accept a solution which could allow an eventual buyer to profit.
An independent audit is set to determine the value of the shares and how much the government will pay shareholders.
Northern Rock has been put on the government’s books, classified as around 90 billion pounds of public debt, and the focus will now shift to how soon a buyer or buyers can be found for its assets.
Analysts say that could be easier if lending slows over coming years, shrinking the mortgage book as many of its customers remortgage with other banks, and as the funding model becomes driven by retail deposits and not capital markets.
But the outcome will still depend on wider markets and could take years. Rolls-Royce, for example, took 16 years to refloat.
Darling, who himself has a Northern Rock mortgage, said he would welcome approaches. “We remain confident ... that the Bank of England will be able to get its money back,” he said.
Opposition politicians blame Brown for the crisis, pointing to the regulatory framework he put in place a decade ago when he was finance minister under Tony Blair.
While the government has criticized Northern Rock’s business model, Brown blames the bank’s woes on a credit crisis that started with risky mortgage lending in the United States and has since spread throughout the world’s banking system.
Financial groups such as Citigroup Inc, Merrill Lynch & Co Inc, UBS AG and Bank of America Corp have all taken multi-billion dollar hits on bad mortgage investments, while Germany is rescuing lender IKB.
Shares in British banks rose on Monday, partly buoyed by Northern Rock. Analysts at investment bank Bear Stearns said a smaller Northern Rock, once one of the most aggressive competitors, could ease competition in the mortgage market.
Sterling, however, dropped as nationalization worries added to concerns about the UK economy.
Additional reporting by David Clarke and Steve Slater; Writing by Clara Ferreira-Marques; Editing by Sue Thomas and David Holmes