Northern Rock, the troubled regional mortgage lender, said on Monday that it had received a number of disappointing takeover proposals, increasing the pressure on the British government to either find a solution or consider nationalizing the bank.
The government has lent more than £20 billion (US$$40 billion) over the last two months to secure deposits at Northern Rock, many of them pension savings, and to end the first run on a bank in the country since 1866. But it is coming under increasing pressure to ease the burden on taxpayers while avoiding job losses.
"If a significant proportion of the government money is lost, it will be extremely bad for the government and undermine Labour's economic competence," said Peter Kellner, president of the political polling institute YouGov in London. "It may not matter for the greater public what will happen, but the issue is: Can the government get that money back?"
Bank of England Governor Mervyn King, Chancellor of the Exchequer Alistair Darling and Financial Services Authority Chairman Callum McCarthy have all faced criticism about how they have handled the Northern Rock situation.
The trouble began when the bank could no longer raise enough money after the turmoil in the US subprime mortgage market pushed up credit costs.
Now that it has become clear that no potential bidder is able or willing to refinance the entire sum lent by the Bank of England, the government is faced with the choice of selling the loan at a discount or nationalizing the bank, some analysts said.
The Treasury said on Monday that no bidder for Northern Rock should assume that the current Bank of England loan arrangement would be extended beyond February or that the government would favor the bid that required the least government money. But with proposals coming in "materially below the market price," the choice could be difficult.
The government has already warned shareholders that they might lose, no matter what offer is accepted. Northern Rock shares dropped 22 percent to £1 on Monday in London.
The market value of the bank fell 55 percent in two days in September, when it announced it was in trouble.
Employees and taxpayers are also concerned. While the government will continue to guarantee the savings deposits of Northern Rock's customers, a sale or liquidation of Northern Rock could lead to job losses in the northeast, one of the poorer regions of the country and the home to many supporters of the Labour government.
A sale might help save some jobs, but that would risk alienating taxpayers, who might have to continue supporting the business, according to a memorandum by the investment banks managing the sale that was leaked to the media last week.
Declared bidders include the private equity firm J.C. Flowers & Co; Richard Branson of the Virgin Group, who hopes to integrate Northern Rock into the Virgin Money brand; the private equity company Cerberus; and Olivant Advisers of London.
"It will be really tricky," said Patrick Dunleavy, a professor of government and public policy at the London School of Economics. "On the one hand, you don't want to spend billions and play into the hands of private capitalism. On the other hand, you don't want to be accused by the opposition of socialist actions if you nationalize it."
In addition, the government may face regulatory restrictions on its decision. The treasury said on Monday that money supplied to Northern Rock so far would be regarded as state aid under EU law but that any further help would need the approval of the European Commission.