Business Stripped Bare (27 page)

The hedge-fund investors – who had been betting on the share price – were livid at the prospect of us taking over. As we approached Christmas, the credit squeeze was getting tighter and tighter. All over the City, major banks were announcing problems caused by a lack of liquidity. While our lines of funding with RBS and their partners were still open, the cost of that funding was getting more expensive. We began to look at our numbers and we all agreed it was becoming too expensive to borrow. It was starting to look unattractive for us – and we considered withdrawing. It was then that the Bank of England and the government stepped in and offered support by suggesting 'wrapped sovereign bonds'. These were bonds or gilts issued by the government and paid for at a commercial price. All of the bidders would have access to this funding, and so the merits of each proposal could at last be considered with a degree of objectivity.

This would certainly ease the pressure on us, because we knew our bid was already in very good shape.

True, we would as a consequence face stringent European Union restrictions on fair trading. If we were getting government-backed bonds, this would give us an advantage over commercial banks, and we would have to be restricted when competing with them, until we'd paid these loans back. This was only fair, and we had no problem with it. The government said that there would be no dividends until the UK taxpayer was paid back. This, too, was only reasonable: Virgin would have repaid the money back to the taxpayer before we took anything.

The Virgin team were interested and waiting for a term sheet to come out from Goldman Sachs just as I was heading out to China on a high-level business trip with senior British business figures and Gordon Brown, the prime minister.

We were delayed in leaving because of the emergency landing of British Airways' Boeing 777 at Heathrow. They had lost power in both engines as they descended, and through the immense skill of the pilot the plane had crash-landed on the grass before the runway saving everybody on board. I've had my run-ins with BA over many years but you have to hand it to them: they employ first-rate flight crews. The atmosphere on our flight was one of quiet elation, the surroundings reminding us of the life-saving efforts of the 777's captain and first officer.

When we arrived in Beijing, I phoned Jayne-Anne asking if the Goldman Sachs package had come in yet.

'Yes, it's just come through.'

'Good,' I said.

'What's been happening on the flight?'

'What do you mean?'

'It's all over the news that you and Gordon Brown have been having private talks about Northern Rock.'

'Ha ha.'

'No. Not "ha ha". What are you up to?'

There was a long pause.

'Jayne-Anne, please tell me you're joking about this.'

'It's on the news now,' she said.

There were forty journalists at the back of the plane, and one of the rival consortium's PR advisers. Gordon Brown had passed through the plane to talk to them, pausing to tell me what he then told them: that he'd be issuing the Goldman Sachs term sheet to all the bidders within the next twenty-four hours.

That was it. Nothing else. At any time. Never mind in front of forty journalists and a pack of hedge-fund managers who wanted me out of the picture!

Yet the entire China trip was to be coloured in the British media by a supposed 'sweetheart deal' between me and Gordon Brown. The herd instinct of the British media did lasting damage to our chances. There were even cartoons of Gordon Brown being in my pocket – and I being in his. Whether it was malicious or simple over-exuberance, I'll never know. We were told that the prime minister and the Treasury still favoured a private sector deal, but I think the whole Chinese episode must have influenced his team's eventual thinking.

The media played a major role, even beyond the China trip, in the whole evolution of the Northern Rock story. During the crisis, Bryan Sanderson, now Northern Rock chairman (after Matt Ridley's resignation), told Jayne-Anne that every paper had a journalist dedicated to the story and that they were being told to come up with a new story every day – that made for too fertile a field of gossip!

The Treasury didn't help matters when it started negotiating in the press, too. John Kingman, the civil service power broker in the Treasury charged with running the show, actually told our team that, in any decision made, the government would have to take account of the view of Robert Peston, the BBC's business editor. Now Robert is a very likeable guy and a good journalist, but we thought it was odd that he often had information about our proposal before we were told!

The most bizarre coverage for Jayne-Anne followed an early-evening call she had with Kathryn Griffiths at the
Daily Telegraph
. Like everyone else, Griffiths wanted to know how much Virgin would earn out of brand licence fees. She was told that it would be an arm's-length amount similar to that charged at other companies – including Virgin Media. That meant about 1 per cent of income – which, given the problems with Northern Rock, amounted to very little each year for years to come. Next morning the
Telegraph
Business-page headline screamed: 'B
RANSON TO MAKE £200 MILLION FROM FEES FOR
R
OCK
'. Our press team asked them how they had concocted this figure, and were told it was calculated over twenty-five years! It all contributed to the idea that I was trying to make a fast buck. When Jayne-Anne later went to Newcastle and talked through the numbers with the Northern Rock management team, David Jones, the finance director, asked why we had excluded the licence fee for using the Virgin brand. But we hadn't! He just couldn't believe the amount was so tiny as to be irrelevant. Even Sir Brian, in his interview with the
Financial Times
in early February, stressed the returns would be unexciting and that nobody 'will make a killing'.

He went on to say: 'We've satisfied ourselves that with the capital we are putting in we'd have enough pure equity in this thing that, if the worst came to the worst, the shareholders would lose money, not the taxpayer.' Yet the whole Branson–Brown 'sweetheart deal' notion began to grow arm and legs. It even reached Prime Minister's Questions in the House of Commons on Wednesday 23 January.

David Cameron, the leader of the Conservative Opposition, asked Gordon Brown about the taxpayers' exposure under the prime minister's bond scheme. It became part of a political boxing match between a new prime minister on the ropes and an Opposition leader determined to throw some mischievous punches.

'Let us be clear: the rescue package is as much for his reputation as it is for the business. If the bonds are not paid back, and if Northern Rock fails to meet its obligations, what is the total exposure? How much?'

'The loans and bonds are secured against the assets of Northern Rock, which, as everyone understands, has a high-quality loan book. It is our intention to get the best deal for taxpayers: they will get their money back, and make a profit,' said the prime minister.

Cameron then claimed the figure was £55 billion – a neat rhetorical trick, achieved by lumbering every household in the country with a hypothetical second mortgage!

If the press around that China trip was extremely damaging to our bid (and it was) so was the political point-scoring in Parliament. The Liberal Democrats were particularly aggressive, hiding behind parliamentary privilege to insult and belittle us.

Vince Cable, the MP for Twickenham and deputy leader of the Liberal Democrats, sounds an amusing guy and he's been an excellent performer in the House of Commons. His sound bites have enlivened proceedings in the British Parliament, but then, in the House of Commons, libel laws don't apply: he can say pretty much what he wants to.

And he did: 'Can the Chancellor tell us what Mr Branson is going to contribute? My understanding is that he is proposing to put in £250 million in kind, not cash, to acquire a bank worth £100 billion, or forty times that value.' A bank worth £100 billion!? If so, it certainly wouldn't have been in trouble.

Being able to come out with this sort of thing unchallenged clearly went to his head, because he went on to claim that I had been involved with this 'sweetheart deal' with the government. He talked about 'nationalising the risk, and privatising the profit'. Then he cast aspersions on me personally saying that I was not a fit person to run a bank – and that I had a criminal record gained when I was nineteen. This was untrue, of course, and the only reason he knew of my stupidity was because I'd chosen to be open about the story in
Losing My Virginity
some forty years after it had happened. I do hope he paid the full cover price for his copy.

I appealed to Nick Clegg, the new leader of the Liberal Democrats, asking that they depersonalise the campaign. Sir Brian Pitman and Jayne-Anne Gadhia offered to meet Vince Cable – but he refused to see them, insisting on meeting me.

On Monday 4 February, the announcement of Olivant's withdrawal piled more political pressure on chancellor Alistair Darling. His hope for a bidding war between Virgin and Luqman Arnold's private equity group simply fizzled out. The
Financial Times
headline summed it up – 'O
LIVANT ABANDONS
R
OCK AT 11TH HOUR
' – and he was reported to be 'stunned'. Olivant's proposal had attracted the support of Northern Rock shareholders including SRM and RAB, the hedge-fund investors, who had amassed 18 per cent of the bank. They were opposed to the Virgin deal because they simply weren't going to get as much out of it.

At the very last minute, we were asked to increase our government guarantees and add an extra £100–200 million for equity warrants. This was stretching it for us, and in the same week I came across a lot of comments that we were 'getting the bank on the cheap' and 'benefiting from the upside, without taking downside'. This was news to me.

Indeed, towards the end of the whole process, Stephen Murphy spoke to Wilbur Ross who made it clear that as the government were seeking to tighten all the terms, the risks in the deal were getting more substantial while the returns were now becoming marginal. Wilbur warned that he could not accept any further reduction given his responsibilities to his investors. We had to respect this as Wilbur is a hugely experienced investor in international markets, and he and Tosca were our key investor partners. The government was (rightly) seeking a massive amount of new capital to protect the UK taxpayer, but wasn't recognising that this has to be rewarded for the risks involved. That position was never going to work.

In the end, I think the very thought of a business – despite taking the risks – eventually making a return on its investment threw Gordon Brown and his beleaguered Chancellor of the Exchequer into a panic.

The prime minister took the decision to nationalise the Northern Rock bank at 2 p.m. in Downing Street, after he and Alistair Darling concluded there was no other option. Their announcement was not diplomatically handled. Our only surviving rivals for the bid, Northern Rock's own internal management team, were still answering questions about their rescue plan when Gordon Brown declared his decision.

After our disappointment I received a cordial phone call from Gordon Brown, requesting that I didn't make too much noise and nuisance about the decision. He told me that nationalisation was the right option. In the back of my mind I couldn't help but wonder whether the UK's press hysteria about me being on a trip to China with the prime minister had put the kibosh on our chances. Still, I did as I had been asked: I didn't make a fuss. I issued a statement saying we had submitted as strong a proposal as we could, and that I was 'very disappointed'. And I was certainly disappointed enough to feel I deserved those drinks at the Biras Creek bar that night.

On reflection, the whole Northern Rock saga represents to me a case of the government looking for the most politically expedient solution and not planning for the long term. Virgin, as a private company, had been willing to take Northern Rock off the government's hands and make it work again. We could have developed a brilliant bank, the Virgin Bank, out of it, and I am confident we would have generated new jobs by doing so. As it is, the Labour government will be forced to shrink the company quickly, cut the jobs and get the money back to limit any political fallout. There isn't much innovation or product development in this route and certainly not more competition in the banking market – and the poor old taxpayer gets all the downside risk.

But governments and civil servants can't run businesses – that's been proven a depressing number of times all over the world, and for years in the UK we had daily experience of their ineptitude every time we boarded (or weren't able to board) what they laughingly called a 'train'. Business is not in their make-up. To be fair, it's not their job, any more than running a bank single-handedly would ever be mine.

And that, of course, is the point:
I was never going to run the bank.
I know my limitations. I know what I'm good at, and what I'm not good at. I would never pretend that I could run a bank – and that's why we built a credible banking team. Jayne-Anne Gadhia of Virgin Money, Gordon McCallum and Stephen Murphy of Virgin Management, Sir Brian Pitman, Sir George Mathewson, Wilbur Ross, an immensely successful US investor in difficult turnarounds, and advisers such as James Lupton and Peter Norris. We had assembled a formidable team of serious bankers and investors and in the end we were the only real show in town. Our lawyers had a better understanding of the company's legal position than the company's or government's own advisers, while James, Peter and their teams ran rings around their opposition. My vision was to make it possible that the bank could be saved, by finding really good people to run it.