Will Northern Rock Sink Brown?

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British Chancellor Alistair Darling: Taking the heat for the Prime Minister?

In late June 2007, on the day Gordon Brown took over as Britain's Prime Minister, Northern Rock was enjoying the summer. In a good first half of the year, it had lent a lucrative fifth of the U.K.'s new mortgages. Its stock traded around a healthy $17 mark. That glorious summer is over now. The harsh winter has put a very different shine on things.

On Sunday, Brown was forced to nationalize Northern Rock, after months of searching for a private sector buyer for the stricken lender. The move — the first nationalization of a British business since the 1970s — triggered the suspension of the bank's shares Monday. (Price? Less than $2.) And it's left the Brown government's own stock much more vulnerable.

In his defense, the Prime Minister had little option but to take on Northern Rock, which was caught short of cash after the money markets it depended on for funds froze over last fall. There were two private bids — one from Richard Branson's Virgin Group, another from the bank's own management. But the Treasury's statements indicated that they fell short of offering enough in return for the $100 billion in loans and guarantees made to Northern Rock by taxpayers. Goldman Sachs, the investment bank advising the government on its handling of the company, didn't disagree. And in a bid to return Northern Rock to the private sector as swiftly as possible — and to pay back those loans — the Treasury has made what most observers see as a credible choice: Ron Sandler, who rescued a struggling Lloyd's of London insurance market in the '90s. Sandler began meetings with the bank's management and union representatives Monday.

There'll be a lot more developments to follow. It'll be years before Northern Rock can think about returning to the private sector. And though it'll be managed by Sandler "at arms length," as Brown insisted to reporters Monday, the potential for further government embarrassment remains high. Shareholders of Northern Rock — unlikely to get much in return for their investment — are threatening legal action. Robin Ashby, founder of the Northern Rock Small Shareholders' Group, said the bank had been "stolen away from them." Worse still, the dirty business of trimming the bank's 6,000 strong staff — something Sandler is expected to do — or repossessing homes, suddenly becomes the government's.

For Brown, who was once so keen to crow about a successful decade spent steering the British economy, the turnabout is hard to stomach. Opposition pols have been keen to make hay. "We will not back nationalization," Tory Shadow Chancellor George Osborne said. "We will not help Gordon Brown take this country back to the 1970s." While that's unlikely to happen — it's been years since Labour could pretend to be a Socialist party — Brown's government will be hoping the same decade offers a useful precedent. When Rolls-Royce was on the brink of collapse in 1971, Osborne's own Conservative party nationalized the aerospace company, arguing it was crucial for the country's science and industry base. "[Rolls-Royce has] been a main stayer ever since," says Patrick Dunleavy, chairman of the Public Policy Group at the London School of Economics. Not all such government action has worked, however. The nationalization of carmaker British Leyland four years later couldn't stop it "running into the sand," Dunleavy says.

Guessing the fate of Northern Rock is no less popular right now than guessing that of Chancellor of the Exchequer Alistair Darling. When Brown picked him as his successor as finance minister last June, Darling's closeness to Brown was his strength. Dependable, gaffe-free (and, like the Prime Minister, a Scot), Darling was a safe bet at the Treasury. Much less so now. Recent controversies over changes to Britain's capital gains tax, and plans to tax non-domiciled foreigners living in the U.K., have heaped criticism on Darling. And the strung-out — and fruitless — search for a buyer for Northern Rock hasn't helped his cause. Brought in to brief reporters at the Prime Minister's monthly press conference Monday, Darling looked like a man positioned to take the heat off Brown. That, and the embarrassment that firing a close ally would cause to the Prime Minister, may be enough to keep Darling at the Treasury for now. Either way, he better hope spring brings a more pleasant outlook.