Bailed out by taxpayers, bank raises dividend, continues CEO's huge salary

Anger as Northern Rock Plans Dividend

By Philip Aldrick and Harry Wallop
The Telegraph, London
Tuesday, September 25, 2007

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/25/cnrock...

The Government has hired investment bank Goldman Sachs to advise it on options for Northern Rock amid fading hopes of a rescue and growing anger at the beleaguered mortgage lender's decision to pay shareholders a dividend.

Goldman was brought in after the Treasury guaranteed Northern Rock's debts alongside savers' deposits. It will advise on implications for taxpayers of any rescue plan, while considering alternative scenarios and working through the detail of the guarantee.

For the time being, Goldman will take a back seat, leaving the rescue plan to Merrill Lynch, which is advising Northern Rock's board. Merrill Lynch is seeking a buyer, but banks appear to have balked at the lender's potential L20 billion funding liability. The shares fell a further 22 to 172p yesterday as bankers said a white knight was unlikely to emerge.

Northern Rock's growing troubles have led to resentment that shareholders will profit from the taxpayers' guarantee. The bank plans to pay a L59 million dividend next month to everyone on the share register this week, despite having drawn L2.9 billion from the Bank of England's emergency facility just to keep the business running.

Professor Andrew Clare at Cass Business School, said: "Had the Government not stepped in, there would be no dividend and no company. ... I'm sure it wasn't the Government's intention for the dividend to be paid."

The Taxpayers' Alliance pressure group added that the payment set "a very bad precedent."

A spokesman for the bank said: "We confirmed on September 14 that the intention was to pay the dividend. If there is anything new to announce on that then we would make that announcement."

Matt Ridley, Northern Rock chairman, also appeared to defend the dividend policy in a letter sent to almost 100 MPs yesterday. He wrote: "The board is well aware of its responsibility to its many shareholders, including tens of thousands of small shareholders, as well as to our largest shareholder, the charitable Northern Rock Foundation. The board fully acknowledges its responsibilities and stands ready to account for its actions."

The Prime Minister yesterday issued a thinly-veiled rebuke over Adam Applegarth's L1.3 million pay. Gordon Brown told Radio 4's Today programme: "A company doing badly cannot afford to pay its executives exorbitant salaries or even high salaries."

Goldman Sachs' appointment is a clear signal that the Treasury is ready to seize control of the lender. Bankers say if a buyer cannot be found soon, the Treasury may wind up the bank, leaving shareholders with nothing. They added the lender's L113 billion of mortgage assets are unlikely to be sold as, at present prices, buyers would demand a 5 percent discount that could mean a L5.65 billion loss. With just L2.35 billion of net assets, the bank would then be insolvent.

A Treasury spokesman said: "We do not comment on or disclose advice provided by external advisers." Goldman Sachs declined to comment.

* * *

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.