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Northern Rock to stay nationalized until market improves

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  • UK finance minister says nationalization is in the best interest of the tax payer
  • Trading in Northern Rock shares suspended on Monday as expected
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LONDON, England (CNN) -- The British government said Monday that struggling mortgage lender Northern Rock would remain nationalized until the current financial climate improves.

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Customers line up to withdraw cash from a Northern Rock branch during the height of the crisis.

UK finance minister Alistair Darling, introducing legislation into Parliament Monday to allow nationalization, reassured savers and borrowers, saying that their money remained "safe and secure," the UK Press Association reported.

Northern Rock, Britain's fifth-largest mortgage lender, has dogged UK Prime Minister Gordon Brown and his government since last September, when rumors of its financial difficulties led retail depositors to line up to withdraw their money in Britain's first run on a bank in more than a century.

Since then, $52 billion -- guaranteed by the government with public money -- has been pumped into the bank to keep it afloat.

The move to temporarily nationalize the bank, a politically embarrassing U-turn for Brown and his government, was announced at a hastily called news conference Sunday by Darling

Don't miss Todd Benjamin's blog Two bidders left for Northern Rock Deadline for Northern Rock rescue bids arrives The finance minister stressed Monday that the government had been correct in its decision to save the bank and there had been "almost universal agreement" to intervene when the bank's problems first came to light in September last year, PA added.

"We could have let the bank go under. But the risks to the wider financial system, for savers and the general public were not acceptable."

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"In deciding which was the best option for the taxpayer it was clear that a temporary period of public ownership was the better option," he told members of parliament according to PA.

Trading in Northern Rock shares was suspended following Sunday's decision. The announcement before the London Stock Exchange opened Monday morning had been expected, The Associated Press reported.

Darling confirmed Sunday that Sir Richard Branson's Virgin Group and Northern Rock's own board had prepared commercial bids to buy the bank, but said the government's advisers at the investment bank Goldman Sachs had concluded "the numbers did not stack up and the better deal was temporary public ownership."

Both schemes, the chancellor said, would have involved an implicit subsidy from the taxpayer, and this was unacceptable.

Darling said Sunday he believed the current difficult market conditions would improve and he hoped Northern Rock could be taken back into private ownership "at the earliest and most prudent opportunity," though he would not say when this might be.

Existing shareholders would receive compensation at levels to be decided by an independent arbitrator.

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The new executive chairman of Northern Rock is Ron Sandler, a veteran of the rescue of the insurance market Lloyd's of London in the 1990s. Sandler said it would be business as usual at the bank, and there would be no government interference, but hinted at job cuts, saying it had grown rapidly but would need to be returned "to a more sustainable size." Northern Rock's current headcount is about 6,000.

In a posting on its Web site, the bank said customers would not be affected by the change. In bold print, it added: "Your savings with Northern Rock continue to be safe and secure, protected by the government guarantee arrangements." E-mail to a friend E-mail to a friend

Copyright 2008 CNN. All rights reserved.This material may not be published, broadcast, rewritten, or redistributed. Associated Press contributed to this report.

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