Northern Rock split 'could leave taxpayers with £2bn bill':
National Audit Office raises questions about Treasury decision to split the Newcastle-based bank in two in 2009
Taxpayers face losses of at least £2bn on the continued state ownership of Northern Rock, the National Audit Office (NAO) has concluded as it raises questions about the decision by the Treasury to split the Newcastle-based bank in two in 2009.
The lender was split into Northern Rock plc, which resumed lending and was sold to Virgin Money at the start of this year, and Northern Rock Asset Management, the "bad bank" which remains in public hands.
The NAO agrees the sale to Virgin was the best way to prevent more losses and concludes that UK Financial Investments (UKFI), which controlled Northern Rock from 2010, had handled the sales process well.
But it said the Treasury, when Labour's Alistair Darling was chancellor, "would have benefited from more effective arrangements for internal challenge of its plans in 2009" to split the bank up.
Under the terms agreed with the European Commission to split the bank, at least 50% of Northern Rock plc had to be sold by a by a "confidential deadline" of 31 December 2013, the NAO said.
But while the spending watchdog points out that the Treasury did not consider alternatives to splitting Northern Rock, it acknowledges that decision to create a new mortgage lender was taken at a time when lending was falling and that the rejuvenated lender provided 22% of all net lending on mortgages during 2010-11.
It said: "The alternative of selling the deposits and closing down the business was, however, unlikely to have been significantly better in financial terms and would not have delivered mortgage lending."
Amyas Morse, the auditor general, said: "Amidst the serious economic turmoil of 2009, it was a 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.
"A sale of Northern Rock plc at the earliest opportunity was the best option to minimise losses on the £1.4bn of public money invested in the bank."
However, he said the continued state ownership of the "bad" bank would present costs for the taxpayer: "Most of the former Northern Rock's assets will be in public ownership for many years to come and there could be a net cost for the taxpayer of some £2bn by the time these assets are finally wound down."
This is based on assumptions that a private investor would demand a higher return on its investment of the 3.5% to 4.5% which UKFI has assumed would be a return for the Treasury.
"Applying a higher discount rate of 6% a year to the cash flows implies that there may be a net present cost for the taxpayer of some £2bn by the time the assets are fully wound down," the NAO report says.
Margaret Hodge, the MP who chairs of the public accounts committee, said: "Given the scale of the crisis, we are fortunate that the net present cost to the taxpayer is potentially not more than £2bn. But this is perhaps more by luck than good judgement.
"Although forced to act swiftly at a time of great financial instability, the Treasury took a big risk with taxpayers' money by going ahead with the decision to split the bank without undertaking due diligence or carrying out a proper analysis of the potential consequences for the taxpayer."
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National Audit Office raises questions about Treasury decision to split the Newcastle-based bank in two in 2009
Taxpayers face losses of at least £2bn on the continued state ownership of Northern Rock, the National Audit Office (NAO) has concluded as it raises questions about the decision by the Treasury to split the Newcastle-based bank in two in 2009.
The lender was split into Northern Rock plc, which resumed lending and was sold to Virgin Money at the start of this year, and Northern Rock Asset Management, the "bad bank" which remains in public hands.
The NAO agrees the sale to Virgin was the best way to prevent more losses and concludes that UK Financial Investments (UKFI), which controlled Northern Rock from 2010, had handled the sales process well.
But it said the Treasury, when Labour's Alistair Darling was chancellor, "would have benefited from more effective arrangements for internal challenge of its plans in 2009" to split the bank up.
Under the terms agreed with the European Commission to split the bank, at least 50% of Northern Rock plc had to be sold by a by a "confidential deadline" of 31 December 2013, the NAO said.
But while the spending watchdog points out that the Treasury did not consider alternatives to splitting Northern Rock, it acknowledges that decision to create a new mortgage lender was taken at a time when lending was falling and that the rejuvenated lender provided 22% of all net lending on mortgages during 2010-11.
It said: "The alternative of selling the deposits and closing down the business was, however, unlikely to have been significantly better in financial terms and would not have delivered mortgage lending."
Amyas Morse, the auditor general, said: "Amidst the serious economic turmoil of 2009, it was a 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.
"A sale of Northern Rock plc at the earliest opportunity was the best option to minimise losses on the £1.4bn of public money invested in the bank."
However, he said the continued state ownership of the "bad" bank would present costs for the taxpayer: "Most of the former Northern Rock's assets will be in public ownership for many years to come and there could be a net cost for the taxpayer of some £2bn by the time these assets are finally wound down."
This is based on assumptions that a private investor would demand a higher return on its investment of the 3.5% to 4.5% which UKFI has assumed would be a return for the Treasury.
"Applying a higher discount rate of 6% a year to the cash flows implies that there may be a net present cost for the taxpayer of some £2bn by the time the assets are fully wound down," the NAO report says.
Margaret Hodge, the MP who chairs of the public accounts committee, said: "Given the scale of the crisis, we are fortunate that the net present cost to the taxpayer is potentially not more than £2bn. But this is perhaps more by luck than good judgement.
"Although forced to act swiftly at a time of great financial instability, the Treasury took a big risk with taxpayers' money by going ahead with the decision to split the bank without undertaking due diligence or carrying out a proper analysis of the potential consequences for the taxpayer."
guardian.co.uk © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds
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