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Rock and nationalisation

• Robert Peston
• 5 Dec 07, 10:11 AM

One of the participants in the auction of Northern Rock will drop out today.

It’s not a devastating blow to the rescue of the Rock, since the possible bidder – the Tyne Consortium, which includes the US private equity house, – was not a front runner.

But it’s indicative of the huge obstacles in the way of a commercial solution to the Rock’s financial crisis.

Tyne, as I understand it, became increasingly frustrated by the uncertainty over whether the Rock’s future is being decided by its board or the Treasury (the confusing answer is that, in theory, the Rock’s directors are in charge – though no deal can be done without approval from the chancellor).

Also prospects for the UK housing market are deteriorating fast, with from the Halifax only the latest in a bad-news glut – which reduces the value of the Rock’s assets and undermines its business model.

What’s more, there isn’t a level playing field for the putative bidders, in that only one of them, the , is having some of its expenses met by the Rock (up to a maximum of £5m plus VAT).

The justification for recompensing Sir Richard Branson and his chums is that the Rock believes any jumbo loan raised by Virgin could be used by the company, even if the Virgin bid flops.

Unfortunately, that jumbo loan – from Royal Bank of Scotland, Deutsche Bank and Citigroup – looks more and more elusive.

These banks have made no firm commitment to provide the £11bn which Virgin thinks it can raise.

And, as I pointed out yesterday, the banks would only provide the loan if all the Rock’s plum assets are pledged to it – which would leave the taxpayer lending between £15bn and £16bn to the Rock secured against less attractive assets whose value looks set to fall for some months.

Just as disturbing, those running our biggest banks are deeply concerned that there’s now a structural shortage of liquidity in the sterling money market. The normally sanguine head of one was extraordinarily pessimistic last night when I saw him.

That liquidity shortage can only be exacerbated if £11bn is taken out of the system and provided to the Rock to pay off some of the taxpayer-backed loans from the Bank of England.

So in going for a commercial solution to the Rock’s problems, the Treasury could worsen the credit crunch that is wreaking havoc to our growth prospects.

It’s a mess of considerable size and complexity. Which is why, as I’ve been boring on about for weeks, nationalisation of the Rock may yet turn out to be the best of some unattractive options.

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