Why Branson is less than Rock-solid

Sir Richard Branson should take heart from the attack launched on his personal integrity in parliament. It’s a kind of backhanded compliment, a way of saying he’s being taken very seriously as the future owner of stricken mortgage bank Northern Rock.

The attack, instigated by Lib Dem acting leader Vincent Cable, suggested that Branson was not a “fit and proper person to run a public company, let alone a bank, let alone to be responsible for £30bn of taxpayers’ money.”

There we are. Cable, with his uncanny knack for shooting poison into the Achilles’ heel of the apparently invulnerable, has done it again under cover of parliamentary privilege. We’ve long harboured suspicions that Branson’s a wee bit sharp about the way he shelters his fortune from the taxman (the group’s not named after a tax-haven for nothing), and here’s Cable reminding us that he once nearly got done for tax evasion after dodgily reimporting some records from France. Cable didn’t actually mention the two dreaded words “Robert Maxwell”, but he might just as well have done so when he invoked the description “not a fit and proper person to run a public company.” And the beauty of it all is, Branson can’t – for once – sue.

All the same, he won’t be losing much sleep. Just look at the unappetising alternatives confronting beleaguered chancellor of the exchequer Alistair Darling, who must play Solomon with the bank’s fate.

Let’s start with Cable’s own hobbyhorse, nationalisation. The odds of this being the eventual outcome are not to be belittled. Indeed, the longer the parties to a negotiated commercial settlement of the bank’s future dicker, the better those odds become. But, even though the Treasury is drawing up plans for this eventuality, it’s not an outcome the Government relishes. And for very good reasons.

The unacceptable alternatives
First of all, as Lord James – the man who eventually salvaged the Dome – has pointed out, there would be a massive conflict of interest in the Government’s simultaneous role as financial regulator and owner of a UK bank. What would happen to the credibility of Britain’s financial system if ‘Gosbank’ (as we might call the state-owned Northern Rock) were in any way believed to enjoy competitive advantages not shared by the private sector?

There are already issues over the way the Government has, for mainly political reasons, offered guarantees to Northern Rock savers exceeding the protection offered to savers anywhere else. This, it could be argued, is a form of moral hazard – unjustly rewarding people who took advantage of the better rates at Northern Rock without sufficiently evaluating why they were that much better in the first place.

That aside, the translation of a commercial into a state enterprise is no light, or short-term, undertaking. The payback to taxpayers could take decades. In the meantime (as the Railtrack episode demonstrated) there might be ample opportunity for litigation from disgruntled shareholders who feel (however unjustifiably) that they have been hard done by. And if not shareholders, why not the European Commission, which takes a very dim view of long-term state financial intervention in lame-duck enterprises?

No, much better that there be a short, sharp solution to the matter. Such as putting the bank into administration.
Because the balance sheet is still relatively strong, the Government could reclaim the £30bn relatively quickly and relatively easily. True, there wouldn’t be much left over, which might seem a little heartless towards everyone else. But, hey, the shareholders’ interests have been propped up by speculation anyway and they can’t legitimately complain about due legal process from the receiver, even if it does give them a stuffing.

There are two big drawbacks with this route, however. The first is the possibility of another run on the bank by frightened depositors (don’t even think about it). The second is mass redundancy. There are 7,000 or so reasons why no sane politician, especially a Labour one, would ever want to consider such a remedy. Northern Rock is not just a bank; it’s a Tyneside institution and its staff and their families span a large part of the North East. Out of the 30 or so North-Eastern parliamentary seats, all but a couple are held by Labour. Of these, at least seven are highly vulnerable marginals. And that’s before we consider any collateral damage that might occur at the town-council level.

So, back to a commercial solution – the best way the Government can make the unpleasant issues outlined above someone else’s responsibility.

The only other private sector contender for the bank, Luqman Arnold’s Olivant private equity consortium has just played a blinder. The other day it said, in effect: unless you give us carte blanche to install our own management team immediately, we’re going to walk away. As a negotiating tactic, this was pretty risky. But now, against the odds, we find the tantrum has paid dividends. Olivant’s bid has been conceded equal status to Virgin’s. And on paper, at least, it is more attractive to both Government and shareholders.

Bridesmaid at someone else’s wedding?
So where does this leave Branson? He’s practically a national institution in his own right, capable of capturing the popular imagination with the strength of his ideas in a way not matched by any other businessman. His flaw is that the detail often does not come up to scratch. It let him down when he bid for Channel Five. And famously he was bested at the last minute by Dianne Thompson and Camelot over the National Lottery. The jury is still out on Virgin Media. But Sky does seem to be getting the better of the contest; and the deepening corporate mess (NTL/Telewest) to which he attached the Virgin brand suggests that Branson didn’t do his homework thoroughly enough in the first place. Is Northern Rock to be yet another episode in the same story: Branson the bridesmaid at someone else’s wedding?

It’s small consolation to say that Northern Rock probably would be better off rebranded as Virgin Money. Branson’s track record with innovation, particularly the pioneering Virgin One offset mortgage, is noteworthy. Whereas Arnold, accomplished investment banker though he is, made rather a mess of things when he strayed into the retail banking area with Abbey National. But we’ll probably never have the opportunity to judge.
The longer the various stakeholders – Government, shareholders, Northern Rock board and the commercial consortia themselves – dicker over how to play their poker hands, the less the chances of a private sale going through. Money’s getting tighter all the time: by mid-January the credit either bidder needs to succeed may be stretched to bust.


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