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Rock and central banks

• Robert Peston
• 13 Dec 07, 07:42 AM

“Do they know something we don’t know?” That question was always bound to be asked about yesterday’s coordinated attempt by five leading central banks to alleviate the painfully tight conditions in money markets.

With both the Federal Reserve and the Bank of England announcing a serious volte face, by providing loans against a far greater range of collateral – without the imposition of a penalty interest rate – some investors were bound to conclude that the central banks had evidence that the problems at commercial banks are even greater than we all fear.

If both the Fed and the Bank of England no longer wish to be seen to be punishing the banks for their foolish lending and investing, it may mean that they believe the banks have been punished enough – or it may mean that at this delicate stage of the cycle, such punishment would turn out to be capital punishment.

In Asia overnight, they drew the gloomiest conclusions and stock markets fell.

So what does it all mean for our friend Northern Rock?

Well, in theory, if the central banks have succeeded in persuading the commercial banks that they feel their pain and are on the case, that can only be good news for the Rock – in the sense that it may yet be possible for the consortium led by Virgin to raise a jumbo loan from a banking troika (Royal Bank of Scotland, Citigroup and Deutsche Bank) to repay part of the massive taxpayer-backed loan to the Rock.

But, apart from that, all news from the Rock right now is pretty scary news for the Treasury and the Rock’s board.

Here is a quick recap of where we are:

1)As I disclosed last night, Olivant is furious about the decision of the Rock board and the Treasury to delay until January any decision on which of the two competing rescue proposals to recommend or whether to recommend either of them. And because Olivant, led by Luqman Arnold, believes the Rock is frustrating its own plans and giving unfair help to Virgin, it has threatened to walk away – unless Arnold himself is immediately appointed executive chairman of the Rock.

2) Adam Applegarth has quit as chief executive of the Rock some six weeks earlier than expected. Although he’s been replaced temporarily by another Rock executive, Applegarth’s departure will simply add to the sense that bits are still falling off the Rock edifice.

3) A pair of powerful hedge funds, SRM Global and RAB Capital, are moving full steam ahead to summon an extraordinary meeting of the company, at which they will endeavour to impose restrictions on the room for manoeuvre of the current board.

4) The Treasury believes it can nationalise the Rock at any time, with emergency legislation that could be rushed through Parliament in a matter of an hour or so (and apparently there is a device for doing this, even during the Christmas recess). If the Treasury felt the continued uncertainty around the Rock’s future were damaging the interests of depositors and increasing the risk of losses on taxpayer-backed loans that are now well over £25bn, it would press the nationalisation button.

5) Some Rock shareholders seem to believe that the Treasury would not dare to seize their company. However I’ve spoken to senior Tories, LibDems and ministers about what the Government should do, and none of them evince much support or sympathy for the investors. The politicians aren’t enthusiastic about nationalisation, but they appear reconciled to it as a possible necessary evil.

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