NAO backs Northern Rock sale

18 May 12
The business plan underpinning the decision to split Northern Rock in two proved to be ‘optimistic’ but the alternative would not have benefited the taxpayer more, the National Audit Office said today.
By Vivienne Russell | 18 May 2012

The business plan underpinning the decision to split Northern Rock in two proved to be ‘optimistic’ but the alternative would not have benefited the taxpayer more, the National Audit Office said today.

The troubled bank was taken over by the last Labour government in February 2008 at the height of the financial crisis. It was subsequently divided into two: a ‘bad bank’, known as Northern Rock (Asset Management), which included all the bank’s toxic assets, and a ‘good bank’, designed to encourage mortgage lending, which is still trading as Northern Rock. The good bank was sold to Virgin Money for £747m in November last year.

Auditors have reviewed the creation, management and sale of the ‘good bank’. Their report, published today, concluded that the Treasury went ahead with the bank split without conducting further detailed analysis of the consequences for the taxpayer.

But the NAO also acknowledged that the alternative of selling Northern Rock’s deposits and closing down the business was unlikely to have been better in financial terms and would not have helped support mortgage lending.

Northern Rock’s financial performance was worse than planned, the NAO said, although this was largely due to persistently low interest rates. But the watchdog backed the government’s decision to sell the bank when it did, agreeing that it was the ‘best way to minimise losses’.

UK Financial Investments, which managed Northern Rock when it was in public hands, ran a fair and transparent sales process, the NAO found. The UKFI also succeeded in making Virgin Money increase its offer in the final stages of negotiations, netting more money for the taxpayer. Despite this, the taxpayer is likely to lose £480m of the original £1.4bn investment in the bank, the NAO said. However, once the value of the ‘bad bank’ assets are taken into account, the UKFI expects the taxpayer to recover its loss on the sale.

Amyas Morse, head of the NAO, said: ‘Amidst the serious economic turmoil of 2009, it was reasonable to create Northern Rock Plc to support mortgage lending. No alternative was likely to have been significantly better. But the Treasury committed itself before looking in detail at the possible consequences for the taxpayer.’

He added that many of Northern Rock’s assets would be in public ownership for many years to come. ‘There could be a net cost for the taxpayer of some £2bn by the time these assets are finally wound down,’ Morse said.

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