It is a strange definition of "value for money" that says �747m, rising to a possible �1bn, represents an attractive price at which to sell Northern Rock. Some �1.4bn of public money was injected into the bank in January 2010.
It is a strange definition of "value for money" that says �747m, rising to a possible �1bn, represents an attractive price at which to sell Northern Rock. Some �1.4bn of public money was injected into the bank in January 2010. A loss is a loss. Chancellor George Osborne should choose his words more carefully. A better description would be: "not as bad as it could have been."
How so? Well, the net asset value of Northern Rock ? the so-called "good" part of the lender being sold to a consortium led by Virgin Money ? had dwindled to �1.12bn at the end of June. What's more, banks these days tend to be valued at less than their book value because of the expectation that more bad loans will appear in time (though the Rock, with its historic loan book removed, shouldn't suffer too badly on that front) and because of the difficulty in generating healthy returns on capital. So a sale price of 0.7 to 0.9 times book value should be considered merely a par score.
From Osborne and taxpayers' point of view, there is reasonable confidence that �747m will become at least �900m. The government is being handed �150m in capital notes. These carry a juicy annual coupon of 10.5%, thereby encouraging Virgin to redeem them asap ? the new owner is aiming for a flotation or sale of the bank within five years. If the sale does indeed happen profitably within that timetable, the government will collect a few more quid ? �50m if between 2014 and 2016; more if earlier.
There are also 'soft' considerations. Jobs were saved in the north east by resuscitating the Rock (limiting the local electoral damage for the last Labour government, a cynic might add). And a beefed-up Virgin, in theory, adds some much-neeed spice to competition in UK retail banking. Quite how much remains to be seen since even a Rock/Virgin combo (with the Rock brand to be killed) will remain well outside the premier league in terms of size. "It is our intention to build a significant banking competitor in the UK," says Virgin Money chairman Sir David Clementi. Fine words; let's see what follows.
But if one really want to give weight to 'soft' considerations, there's a fair argument (advanced by my colleague Patrick Collinson) that the government should have accepted a lower price from a building society rather than sell to a couple of billionaires. After all, it was as a mutual that Rock prospered.
One other point should be made about the "value for money" boast. The numbers on the 'bad' bank part of the Northern Rock ? Northern Rock Asset Management, containing the old loan book ? are much larger. That part is now is in run-off. There have been few unpleasant surprises to date, and an extended period of ultra-low interest rates may ensure that remains so. But come back in a decade's time to see the real profit/loss tally for taxpayers from the nationalisation of Northern Rock.
Source: http://www.guardian.co.uk/business/nils-pratley-on-finance/2011/nov/17/northern-rock-deal-loss
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