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The rescue of the embattled Northern Rock could cost the taxpayer millions of pounds, thrusting the Chancellor, Alistair Darling, into the spotlight once more over his handling of the banking crisis.
As 21 per cent was wiped off the bank's share values, Darling came under sustained fire in the Commons when he faced Opposition accusations of "incompetence and weak leadership" in the management of the UK's first run on a bank for nearly 150 years.
George Osborne, the Shadow Chancellor, said Darling's job was "on the line" as the Chancellor made a statement to the Commons. Brushing aside the criticism, Darling said the Government would have a veto over any rescue plans for the mortgage lender which sought emergency funding from the Bank of England in September.
Treasury officials said that "nationalisation" of Northern Rock had not been ruled out, but signalled a buy-out was the preferred option.
Vowing to protect the interests of both taxpayers and savers, a defensive Mr Darling refused to admit how much of taxpayers' money was at risk, although he did deny reports that it could be as much as £500 million ($1.36 billion). "The sum concern is nothing like that," he said. "It is a very small amount of money."
Senior Treasury officials, however, did not deny the sum at risk could run into hundreds of millions of pounds. The money is owed to the taxpayer for interest at penalty rates on the £24 billion loan provided by the Bank of England to prop up Northern Rock because of its exposure to subprime loans in the US.
The bank's share value plummeted after the Newcastle-based lender revealed it had received bids from would-be suitors including Richard Branson's Virgin group which were "materially below" the value of the company. Darling was criticised by the acting leader of the Liberal Democrats, Vincent Cable, who said one Northern Rock executive had enjoyed a £2 million pension underwritten by the taxpayer.
Darling said the consequences of letting Northern Rock fail "would have been immensely damaging" for the country's financial institutions and said it was "not in the public interest" to reveal the terms of the lending to the bank.
The Treasury warned that potential bidders and Northern Rock "should not assume" that the Bank of England's emergency funding facility would be in place after February. It also warned that bidders dependent on any extra public funding would be likely to breach European rules on state aid.
The Chancellor limited his promises to getting the "best possible deal" for the taxpayer. That raised suspicions some of the interest payments could be written off if the bank is sold.
- INDEPENDENT
