LONDON — The British government waded into the sub-prime quagmire Sunday with the announcement that it would move to nationalize Northern Rock, the nation's fifth-largest mortgage lender.
The treasury department rejected two private rescue plans for the ailing bank because they failed to "deliver sufficient value for money for the taxpayer," said the treasury chancellor, Alistair Darling.
The northern England bank, which wrote a fifth of all new home loans in Britain last year before it fell victim to cash shortfalls stemming from the U.S. sub-prime crisis, will be held under temporary public ownership until it can be stabilized and resold, government officials said.
Like most British banks, Northern Rock didn't have a significant portion of its loan portfolio in the sub-prime market. The bank was nonetheless caught up in the turbulence because of its substantial reliance for funding on short-term money markets, which rapidly eroded as banks lost lending confidence.
"Under public ownership, the government will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty," Darling said. "We could have chosen to pursue either of the two private sector options. But I have always said that I was determined to protect the taxpayers' interest."
The government has extended about $104.5 billion in loans and other guarantees to prop up the Newcastle-based bank and was reluctant to agree to any private sector bailout that didn't guarantee taxpayers an early repayment with interest.
The request for government aid in September triggered Britain's first bank run in more than a century and led to fears that more banks could be damaged by the global credit crunch.
The move to temporarily nationalize the bank could be a blow to Britain's efforts to establish London as the global capital of finance and politically costly to Prime Minister Gordon Brown, who has staked his career on his stewardship of Britain's economic boom.
Political opposition leaders accused the Labor Party government of spinning its wheels too long in reaching a decision, and Conservative Party leaders signaled they would oppose the nationalization legislation when it is presented to the House of Commons today.
"Gordon Brown has dithered his way to the disaster of nationalization. Now the taxpayer will bear the full risk of lending 100 billion pounds of mortgages in an uncertain housing market," George Osborne, the Conservatives' shadow chancellor, said in a statement.
