Belfast Telegraph

Monday 22 September 2014

Why we haven't hit Rock bottom

Northern Rock was sold to Virgin Media

David Prosser probes the machinations between the sale of Northern Rock to Richard Branson's Virgin Media

Before we all get too upset about the losses to the taxpayer - up to £650m at the prices agreed - on the sale of Northern Rock, it is worth remembering that only part of the bank nationalised three and a half years ago was sold.

Virgin Money is buying Northern Rock, but not Northern Rock Asset Management, the so-called "bad bank" that will remain with the taxpayer for the foreseeable future - probably until around 2050, when the final mortgages in the business are due to be repaid.

We will not know for several decades yet, in other words, what the true loss to taxpayers has been from Rock. Indeed, it is still possible that we will turn a profit on the rescue.

Ironically, the bad bank, into which Bradford & Bingley's toxic loans have also been injected, has been a much better performer than "good Rock" over the past couple of years - booking profits at a time when the entity just sold was loss-making. Even more happily, its mortgage arrears rates have been coming down, suggesting that the loans it holds, including those infamous 125% Together mortgages that Rock once shifted by the bucketload, are not quite as toxic as previously thought.

That may yet change, of course, but the bad bank has been quietly making profits for the taxpayer and repaying debt steadily. So much so that its £50bn mortgage book, set against an effective loan from the taxpayer of £22.5bn, produces enough to compensate us all for the loss crystallised by yesterday's sale of its other half.

If so, the promise made by Alistair Darling, the then-Chancellor, four years ago, that taxpayers would not in the end lose out from the nationalisation of Rock, will be kept. Not that Mr Darling had any choice but to take over the bank - whatever its shareholders tried and failed to claim subsequently.

Against all that, we can only speculate about the returns to come. What we know for sure is that the taxpayer is today booking a loss from the Virgin sale. Naturally, that begs the question - posed, but not actually answered, by Labour's Ed Balls - of whether George Osborne has got the timing of this deal right.

Certainly, there is a natural suspicion that political motivations have played their part (just as they nearly did when Gordon Brown considered getting shot of Rock prior to the general election last year). Given that all the fiscal traffic has been one-way in recent months - heading towards missed borrowing targets, that is - the Chancellor will no doubt enjoy cashing the cheque, even if the windfall will make only a tiny dent in the deficit. Mr Osborne can be forgiven too for wanting to get on the front foot for once.

Would the Government have got a better price by biding its time? In truth, probably not, unless it was prepared to play the really long game. In this low-interest-rate environment, running a small retail banking business focused on UK savers and borrowers means coping with low margins and a tough competitive environment. In that context this is not a business that has been sold on the cheap.

Nor, moreover, is this a business that belongs in the public sector. Even those who make the case for using the public ownership of Lloyds and Royal Bank of Scotland to force those institutions to do more to support business accept that Northern Rock is too small to help with that.

One final thought. Selling Northern Rock may have been a business decision, but it should provide some emotional catharsis too. Amid a eurozone crisis that threatens, in extremis, to prompt another round of bank failures across Europe, there is something to be said for making a statement of intent. The sale of Northern Rock, at the very least, is an advance in the battle to put the banking crisis behind us.

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