Submitted by jessonerik on Wed, 10/14/2009 - 08:08.
So, once Northern Rock had received its lender-of-last-resort loan and deposit guarantee in September 2007, the Tripartite Authorities should have been in no rush for the loan to be repaid. Unfortunately houston real estate, the Treasury was anxious that the assistance to Northern Rock constituted state aid under EU law. If the assistance were state aid, it was subject to a specific set of rules, including – crucially – rules about the length of time the aid could continue before it became illegal. Indeed, unless a number of conditions were met and an exemption obtained from the European Commission home equity loans, state aid had to be repaid within six months. The logic of the situation and a large body of precedents argued that a deadline for early repayment of Northern Rock’s loan should not be imposed; the obligations of EU membership, as understood by the Treasury, implied that a deadline for early repayment was mandatory.
From an early stage the Treasury’s lawyers were busy in enunciating their interpretation of EU law and taking the steps necessary for its enforcement. On 28 September the UK authorities made a submission to the European Commission, in which they sought clarification of the legal status of the Northern Rock rescue package. Since they believed that parts of the package were state aid, they expected 17 March 2008 (i.e., six months from 17 September 2007) to be the effective cut-off point. In late 2007 a number of private sector parties were interested in investing in or even acquiring Northern Rock, despite its well-publicised difficulties. In line with the final cut-off date of 17 March, these parties were told that they must put together their proposals by 4 February. The Treasury insisted that, to be considered valid at all, bidders must include clear and definite plans for full repayment of the lender-of-last-resort loan day trading.
The evident tensions between the Bank of England and Britain’s leading commercial banks and the high-handed attitude of the Tripartite Authorities did not encourage potential investors. But the rigidity of the deadline for the repayment of the lender-of-last-resort loan was the more fundamental deterrent. One of the front-runners, the Olivant private equity group, withdrew in early February, citing the Treasury’s insistence on a three-year deadline for the loan repayment as the main stumbling-block. The government’s preferred bidder turned out to be Sir Richard Branson’s Virgin Group. But several newspapers carried stories that Virgin had been unable to line up the inter-bank funds needed to repay the lender-of-last-resort loan. So for Virgin also the Treasury’s inflexibility on the timing of the loan repayment was a basic problem. This inflexibility may have been partly the result of Treasury ministers’ and officials’ own attitudes unsecured loan, but it must also have owed something to their apparent fear of being reprimanded by the European Commission for breaching state aid rules.
Finally, on 18 February the Chancellor of the Exchequer, Alistair Darling, announced that the two remaining private sector options – the Virgin bid and another from an in-house management team – were unacceptable to the government. Northern Rock would be nationalised. Over the next week a bill for that purpose was passed by both Houses of Parliament. The resulting legislation – the Banking (Special Provisions) Act 2008 – included criteria for the compensation of shareholders that would, if interpreted at face value, leave them with only a fraction of the book value of Northern Rock’s equity.
What did the European Commission think of all the shenanigans between Northern Rock and the Tripartite Authorities in late 2007 and early 2008? On 5 December it produced a decision on the various measures of state assistance to Northern Rock. The Commission’s main finding was that the lender-of-last-resort loan from the Bank of England was not, by itself, a form of state aid, but that the subsequent guarantees on Northern Rock’s deposits were state aid. On the face of it, the Tripartite Authorities would have been justified in making every effort to present their approach as – in all the key essentials – a lender-of-last-resort operation. After all, Northern Rock had to pay for the government’s guarantee and the guarantee fee was analogous to the penalty element in the interest cost on a last-resort loan. However, that was not the line taken by the UK’s Tripartite Authorities who, by this stage, were clearly being led by the Treasury. Instead the Treasury and its ministers, who ultimately pulled the strings, showed a remarkable willingness to kowtow to the Commission’s verdict.
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So, once Northern Rock had received its lender-of-last-resort loan and deposit guarantee in September 2007, the Tripartite Authorities should have been in no rush for the loan to be repaid. Unfortunately houston real estate, the Treasury was anxious that the assistance to Northern Rock constituted state aid under EU law. If the assistance were state aid, it was subject to a specific set of rules, including – crucially – rules about the length of time the aid could continue before it became illegal. Indeed, unless a number of conditions were met and an exemption obtained from the European Commission home equity loans, state aid had to be repaid within six months. The logic of the situation and a large body of precedents argued that a deadline for early repayment of Northern Rock’s loan should not be imposed; the obligations of EU membership, as understood by the Treasury, implied that a deadline for early repayment was mandatory.
From an early stage the Treasury’s lawyers were busy in enunciating their interpretation of EU law and taking the steps necessary for its enforcement. On 28 September the UK authorities made a submission to the European Commission, in which they sought clarification of the legal status of the Northern Rock rescue package. Since they believed that parts of the package were state aid, they expected 17 March 2008 (i.e., six months from 17 September 2007) to be the effective cut-off point. In late 2007 a number of private sector parties were interested in investing in or even acquiring Northern Rock, despite its well-publicised difficulties. In line with the final cut-off date of 17 March, these parties were told that they must put together their proposals by 4 February. The Treasury insisted that, to be considered valid at all, bidders must include clear and definite plans for full repayment of the lender-of-last-resort loan day trading.
The evident tensions between the Bank of England and Britain’s leading commercial banks and the high-handed attitude of the Tripartite Authorities did not encourage potential investors. But the rigidity of the deadline for the repayment of the lender-of-last-resort loan was the more fundamental deterrent. One of the front-runners, the Olivant private equity group, withdrew in early February, citing the Treasury’s insistence on a three-year deadline for the loan repayment as the main stumbling-block. The government’s preferred bidder turned out to be Sir Richard Branson’s Virgin Group. But several newspapers carried stories that Virgin had been unable to line up the inter-bank funds needed to repay the lender-of-last-resort loan. So for Virgin also the Treasury’s inflexibility on the timing of the loan repayment was a basic problem. This inflexibility may have been partly the result of Treasury ministers’ and officials’ own attitudes unsecured loan, but it must also have owed something to their apparent fear of being reprimanded by the European Commission for breaching state aid rules.
Finally, on 18 February the Chancellor of the Exchequer, Alistair Darling, announced that the two remaining private sector options – the Virgin bid and another from an in-house management team – were unacceptable to the government. Northern Rock would be nationalised. Over the next week a bill for that purpose was passed by both Houses of Parliament. The resulting legislation – the Banking (Special Provisions) Act 2008 – included criteria for the compensation of shareholders that would, if interpreted at face value, leave them with only a fraction of the book value of Northern Rock’s equity.
What did the European Commission think of all the shenanigans between Northern Rock and the Tripartite Authorities in late 2007 and early 2008? On 5 December it produced a decision on the various measures of state assistance to Northern Rock. The Commission’s main finding was that the lender-of-last-resort loan from the Bank of England was not, by itself, a form of state aid, but that the subsequent guarantees on Northern Rock’s deposits were state aid. On the face of it, the Tripartite Authorities would have been justified in making every effort to present their approach as – in all the key essentials – a lender-of-last-resort operation. After all, Northern Rock had to pay for the government’s guarantee and the guarantee fee was analogous to the penalty element in the interest cost on a last-resort loan. However, that was not the line taken by the UK’s Tripartite Authorities who, by this stage, were clearly being led by the Treasury. Instead the Treasury and its ministers, who ultimately pulled the strings, showed a remarkable willingness to kowtow to the Commission’s verdict.