Government denies it tricked Rock investors

Jun 12 2009 by William Green, The Journal

THE Government denied in court yesterday that it deliberately set out to make a profit from its nationalisation of Northern Rock at the expense of the bank’s shareholders.

There was “no evidence whatsoever” that the statutory compensation scheme under which shares were valued was an “opaque attempt” to make sure shareholders got nothing, Jonathan Sumption QC, for the Treasury, told the Court of Appeal in London.

Mr Sumption was replying to suggestions by former shareholders that the Government knew from the start that the scheme would result in a nil valuation and that this was the main reason it preferred nationalisation rather than private sector bids for the ailing Newcastle-based bank.

The former shareholders – two hedge funds and many individuals, including past and present employees of the bank – are asking three judges to rule that the scheme, introduced by statute when the bank was taken over by the Government in February last year, infringes the human rights principle that the taking of property by the state must be balanced by compensation reasonably related to its value.

They claim the compensation scheme was based on false criteria which would lead to shares being valued at zero so the Government would inevitably make a profit when the bank was sold off.

That sell-off could happen as early as this autumn, with the Government favouring splitting the bank in two, a move which unions fear could further threaten jobs.

Earlier this year, the High Court upheld the Government’s argument that, but for support from the Bank of England, Northern Rock would have been unable to pay its debts as they became due and would have had to eventually cease business.

It was not unreasonable that shares should be valued on that basis, the court ruled.

The case was brought by SRM Global and RAB Capital, and up to 200,000 private shareholders. They say shares should be valued at more than £4 each.

But Mr Sumption told Master of the Rolls Sir Anthony Clarke and Lords Justices Waller and Laws it was established policy that the proprietors of a failing business should not benefit from taxpayers’ financial support which they had no right to expect and which was given as a result of their own failures.

He pointed out that the provision of public support was purely discretionary. The Bank of England had taken great care to ensure that no-one was given the impression they had a right to financial support.

This avoided the “moral hazard” that, if owners or proprietors were sure of getting public support, they would be less likely to manage their affairs prudently.

For more Rock stories, go to www.journallive.co.uk/ northernrock