Northern Rock’s collapse was an early sign that everything was going pear-shaped in the financial world back in 2007, but the true cost of bailing it out is going to be bigger than expected according to the National Audit Office. The problem is the return that the taxpayer should have made on its £1.4bn investment in the bank, which would normally be about 6% per year. Without this, and once assets are wound down, it now looks as though the loss will exceed £2bn. The alternative to bailing out Northern Rock, however, was the possibility of complete financial meltdown. Stuck between a Rock and hard place, then.
The salt was rubbed into the wound for critics when Sir Richard Branson swooped in and took the ‘good parts’ of the bank for £747m last year, forming the basis of his Virgin Money brand. The bad parts were consolidated in a new company called Northern Rock Asset Management, and it could take many years to complete the wind-down of its assets. All the while, the ‘investors’ (UK taxpayers) are getting no return, which the NAO is calling a real-terms loss.
But whilst the Branson sale was heavily criticised for being too soon, the head of NAO, Amyas Morse, reckons it was a good move. She said that although it meant a loss of £480m to the taxpayer (and that the decision to break up the bank was based on optimistic forecasts), it was the best way of minimising losses.
Unless you’ve been on another planet, you’ll have noticed that the same financial crisis that caused the first bank run in 150 years on Northern Rock, continues to afflict the global economy. Stock markets saw sharp drops today after credit ratings agency Moody’s downgraded 16 Spanish banks, including the state-owned Bankia that everyone across the eurozone is fervently hoping will not become the next Northern Rock. Shares in Madrid saw a drop of 2%, London 1%, and the US’ Dow Jones, 1.25%.
Meanwhile, Spain has record unemployment, the UK is technically back in recession, and a new Socialist president of France, Francois Hollande, has promised to tear up austerity measures in favour of Keynesian-style financial stimulus. Sacrebleu, c’est vraiment un frisson dans l’eurozone!
The NAO’s report concluded that the ‘net present cost should, however, be seen as part of the overall cost of securing the benefits of financial stability during the financial crisis.’ In other words, even £2bn was a fairly cheap price to pay for keeping the whole financial system up and running.