Least bad option

18 December 2007 By Jeffrey Goldfarb Follow @jgfarb

The government might have to choose between administration and nationalisation of the stricken UK lender. Neither is especially appealing. Both come with job cuts, political costs and uncertainty. But if push comes to shove, administration looks like the least bad option.

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The British government offered on Tuesday to guarantee more of Northern Rock's liabilities, including nearly all its senior debt obligations. The move is designed to protect taxpayers and consumers and to protect the bank's credit rating amid attempts to sell the nation's fifthlargest mortgage lender. Northern Rock, which has borrowed about £25bn from the Bank of England this year, would pay an appropriate fee for the new guarantees, the Treasury said.

The government said it was now covering all of Northern Rock's uncollateralized and unsubordinated wholesale deposits, payment obligations on uncollateralised derivative transactions any obligation to make payments on the repurchase of mortgages under the Granite securitisation programme.

Bank of England officials also discussed the option of nationalising Northern Rock with members of Parliament on Tuesday. They said it would be on a temporary basis and that the bank's assets might be sold off piecemeal if it cannot be sold in its entirety to one of the remaining suitors, Virgin or Olivant.

"Plan A is to find a private bidder," deputy BoE governor John Gieve said, according to Reuters. "Plan B, if were forced down the road of nationalisation, would clearly be as a temporary measure to then relaunch it in some form."

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