It was anticipated, if not necessarily expected.
It was anticipated, if not necessarily expected. Hedge funds have been known to come down hard on underperforming corporates and financial institutions, and are now eyeing bigger targets – this time, the UK government.
SRM, the hedge fund that was the biggest shareholder of Northern Rock, the mortgage bank that had to be rescued by the government when the wholesale market funding it relied upon for financing dried up, has joined forces with 150,000 small investors to mount a legal action over its nationalisation.
The Monaco-based fund and the UK Shareholders Association have requested a judicial review of the government’s compensation scheme for shareholders, which they argue has been rigged to leave investors with nothing.
The shareholders argue that it is unprecedented for a solvent bank to be nationalised after receiving lender-of-last-resort support. They accuse the government of seizing the bank for commercial gain in a move without parallel in developed markets.
In the face of this vigorous legal challenge, with transparency becoming the order of the day amid the global credit crisis, the government might find it harder than usual to counter some of the plaintiffs’ tactics.
This means that a request for the publication of minutes of meetings between the public bodies involved, as well as the report on Northern Rock produced by Goldman Sachs for the Treasury, will probably be granted.
This litigation is set to cause a fresh furore over Northern Rock after the near-collapse of the bank during the credit crunch last September, leading to its eventual nationalisation in February this year.
Hedge funds are powerhouses in activism, as can be seen by their precipitation of the sale of ABN Amro last year. Now they are willing to pose legal challenges to governments. Should the litigation reach court, it is certain to be followed avidly.
