Investors who lost billions of pounds when Northern Rock was nationalised to save the banking system from collapse will go without a penny in compensation after the Court of Appeal ruled by a majority that their shareholdings were justifiably valued at nil on the basis that the bank would have been worthless without state support.
New York-based hedge fund, Harbinger Capital Partners, had fought a marathon campaign to prove that its very substantial shareholding in Northern Rock was at least worth something when the government stepped in to take the bank into state ownership at the height of the financial crisis in February 2008.
However, by a majority, the court dismissed Harbinger’s appeal against a decision of the Upper Tribunal that an independent valuation expert appointed by the Treasury to assess compensation due to the bank’s shareholders had employed a rational method in assessing their entitlement at nil.
Prior to nationalisation, the bank had received £27 billion in Bank of England loans and another £29 billion in Treasury guarantees for retail depositors. However, Harbinger insisted that the reality was that its balance sheet still showed that its assets exceeded its liabilities when it was taken into state hands.
The hedge fund argued, inter alia, that Northern Rock had ‘paid in kind’ for the state’s assistance by transferring its assets to the government at book value. It was also submitted that, had there been a ‘fire sale’ of the bank’s assets, at least something would have been left over for shareholders.
However, the court upheld the validity of the valuation method employed by the independent expert and noted that, on the assumption that all the government’s financial assistance had been repaid prior to nationalisation, the bank would have ceased to be a going concern and its shares would have been worthless.