From Riches To Rags: The Northern Rock Story

Published in Investing on 18 November 2011

It all came to an end this week, but have taxpayers been fleeced?

The big banking news this week has been the buyout of Northern Rock by Virgin, for the not so jumbo sum of £747m.

The takeover, which will see the bank become part of Virgin Money, will realise Virgin's long-held ambitions to expand its exiting credit card, insurance and investment business into retail banking, and adds bank accounts and mortgages to its range of offerings.

There will be some debate over the timing and the price, and disagreement over whether it would have been better to wait for a hoped-for banking recovery that would increase the chances of our public coffers breaking even, but it's a done deal now.

Promises, promises

Pending regulatory approval, the sale is expected to be completed by January 1, 2012, with Virgin promising to keep its headquarters in Newcastle, not close any branches -- in fact, it has said it plans to open more when conditions allow -- and maintain Northern Rock's charitable activities for a year.

As things are, there is potentially a further £280m that might come the Treasury's way over the next few years -- one of the provisions, for example, is that more cash will have to be paid should the company be sold or floated within 5 years. But taxpayers have pumped £1.4bn into the Northern Rock rescue, and so the sale price represents a thumping loss.

And the slightly elephantine room occupant is Northern Rock (Asset Management), the part of the now-split company that will not be sold -- its job, apparently, is to just sit there and manage debts of probably around £20bn.

The crisis erupts

Northern Rock, which floated as a public company in 1997, hit the headlines in ignominious fashion in 2007 when the news filtered out that it had tapped up the Bank of England for emergency support. The securitised mortgages market, in which it was heavily invested, had started to dry up, and it found itself unable to cover its debts.

That led to the first UK bank run in 150 years, with long queues forming outside branches as scared savers rushed to get hold of their hard-earned cash and stash it somewhere safer. Little did we know at the time, but Northern Rock was just the tip of the sub-prime mortgage iceberg.

Virgin expressed an interest as early as November that year, but in the absences of commitments to fully repay taxpayers' money within three years from any of the potential suitors, Northern Rock was nationalised in February 2008.

In December 2009, Northern Rock became a double act, with all the nasty bad debts tossed into the aforementioned Northern Rock (Asset Management), and with the remainder of the retail banking business designed to be attractive to a new owner.

And now we know who that new owner is.

But there are still a lot of questions to be asked -- in particular, what will it mean for consumers, and have taxpayers been sold short with a bargain-basement sale price?

Safety for savers

On the first question, expanding high street competition has to be good for savers and borrowers -- despite extensive quantitative easing, lending is still stagnant, small businesses are finding it hard to get the funds they need, and the mortgage market is less than ebullient.

And for those concerned about compensation scheme limits, the new Northern Rock will have its own banking licence, separate from Virgin Money, which means that people with savings in both will have each chunk of cash protected up to the current £85,000 limit (£170,000 for joint accounts).

But why sell it now and at this price? Well, the government is certainly not getting a high price for its investment -- in fact, Mr Branson's outfit seems to be getting quite a nice bargain. And that's not usually the reason we sell things. Would we taxpayers have got a better price had we hung on until better times? That does seems likely.

A political move?

Northern Rock is surely being sold now for reasons of political expediency, and perhaps to raise some short term cash. After all, the move does seem to have pleased a lot of people, including the board of Northern Rock, Newcastle City Council, and the Unite trade union.

But what do you think? Is this exactly what we need, or have taxpayers had the assets they own sold off too cheaply? Do share your thoughts, below.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Vikingdon1 18 Nov 2011 , 2:06pm

Yes, but what about the previous shareholders?

LateDeveloper 18 Nov 2011 , 2:06pm

Lets face it, this is another Conservative led Government, and we all know that they will sell off anything they can at a loss, for short term gains. The last Con Government did it and this lot will do it, Guess the leopard just can't change its spots.

UncleEbenezer 18 Nov 2011 , 2:17pm

How much better-off might the taxpayer be if Virgin (or one of the other suitors) had been allowed to buy it in 2007 (or at worst 2008)? Not only could we have saved the direct losses that have just been crystalised in Northern Rock, we'd have avoided a round of messing up the whole of UK banking with moral hazard and perverse incentives.

vinchainsaw 18 Nov 2011 , 2:20pm

LateDeveloper,

Not one for politics myself, I dont even support a party or normally vote, but your post in full of bile.

Anyway, who was it that spent the money in the first place?
Do we also need to yet again mention the Brown bottom if youre intent on bringing up public asset sales?

The only thing we can take from this is that there's a reason these guys are in politics and not business.
Pretty much the same reason the economy looks like it does.

fedupwithbanks 18 Nov 2011 , 4:03pm

LateDeveloper:

Nothing will ever eclipse that economic sage Gordon Browns sell off of 400 tons of our Gold reserves at $236 an ounce to pay for labours profiglate tenancy. Prudence indeed???

The man was brilliant, in calling the bottom of the market in Gold. What would that Gold have done for us now?

ElCid103 18 Nov 2011 , 5:19pm

Fedupwithbrown

Brown did not call the bottom - he created it. By announcing in advance that he was going to sell the gold, he guranteed that he would depress the price for the duration of the sale.

He is the patron saint of bullion dealers.

vinchainsaw 18 Nov 2011 , 7:01pm

Back of a fag packet calculation... 32,000 ounces in a ton... 400 tons... equals 12,800,000 ounces... price today is c$1,722 and it was sold at $236 an ounce.
Thats roughly $19,020,800,000 at todays prices.

That buys a lot of Northern Rocks!

ANuvver 21 Nov 2011 , 9:17am

Have to say, Rock were consistently top of the tables for best deals on mortgages, savings and current accounts for most of the last decade.

Didn't understand it at the time. Do now.

innocentatlarge 21 Nov 2011 , 6:14pm

If the Virgin price is roughly half the £1.4 bn the taxpayer laid out the asset management outfit would only have to realize 5% of the £20bn poison assets to make a positive return. At face value that doesn't seem a hopeless task.

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