Treasury chief Alistair Darling said Sunday struggling bank Northern Rock PLC will be nationalized, after the government rejected two private takeover bids.
Darling told a news conference that the ailing mortgage lender would be placed under temporary public ownership because both bids had failed to meet the government's criteria for protecting taxpayers.
"The new board and the company will operate at arm's length from the government, with complete commercial autonomy for their decisions," Darling said.
He said Prime Minister Gordon Brown had agreed nationalization was the best solution available.
"Under the approach we are taking, the taxpayer will see its outstanding loans to Northern Rock repaid in full, with interest — and that the business can be returned to the private sector as financial markets stabilize," he told the news conference.
He said neither of two private proposals — from Richard Branson's Virgin Group and an in-house bid from the bank's management team — "delivered sufficient value for money to the taxpayer."
The government had said more than $49 billion in government loans must be paid back within three years.
Darling said the two private proposals involved risks for taxpayers and very significant government subsidy. Both also involved bidders paying below the market rate while the government continued to provide guarantees and financing.
Branson criticized the government's decision to nationalize the bank.
"We believe nationalization is not the right answer and that a commercial solution would have been the best way forward," Branson said in a statement.
Northern Rock ran into trouble in September because it relied too heavily on short-term money markets instead of deposits for funding. A subsequent profit warning and appeal to the Bank of England for an emergency loan led to the first run on a British bank since 1866.
The government had been in the middle of an auction process to find a private buyer for Northern Rock, with revised bids submitted this weekend by Virgin and the in-house management team.
Darling had a deadline of March 17 to choose between the bids and nationalization. That is the date when he must submit a restructuring plan to the European Union for state aid approval.
Before markets open on Monday, authorities were expected to announce the company's shares will be suspended, Darling said.
Darling said he will announce to Parliament on Monday afternoon legislation enabling the government to acquire the bank's shares and assets. An independent valuer will determine what the government must pay for the company.
Darling said the legislation was drafted to ensure a bank can only be acquired in certain tightly defined circumstances — and that power will only last for 12 months.
Corporate troubleshooter Ron Sandler has been appointed executive chairman of the newly nationalized bank, Darling said. He was due to travel to the bank's headquarters in Newcastle, northern England, on Monday to meet with the bank's employees and management.
An ex-head of Lloyd's of London insurers, Sandler is regarded as close to Prime Minister Gordon Brown. He also has previously helped the Treasury on pension policies.
Sandler told reporters that he expected the bank to be slimmed down to a "more sustainable size," but declined to comment on possible job cuts.