Rock may leave a £1bn hole

Public ownership of Northern Rock could cost taxpayers well over £1bn, according to the latest estimates...

by
Last Updated: 31 Aug 2010

It emerged this weekend that Goldman Sachs, which is advising the Treasury on the Rock fiasco, reckons that the Government could be looking at a loss of up to £1.3bn on its ownership of the failed bank – and that’s assuming the economy doesn’t get any worse than it is already. Alistair Darling has been banging on about the high quality of the Rock’s mortgage book, arguing that nationalisation offers the best opportunity for taxpayers to share in any upside from a Rock recovery – but this suggests there’s unlikely to be one. Fancy that.

The Goldman figures, which were given to the Government back in February ahead of its decision to nationalise the lender, were apparently cited by senior Treasury official John Kingman in a submission to the ongoing judicial review. Goldman told the Treasury that even on a best case scenario it would probably be left sitting on a £450m loss from its ownership of the Rock, while the more probable ‘base case’ scenario is a loss of up to £1.28bn. And of course if the economy really tanks over the next year or so, and the fall in house prices turns out to be bigger than expected, the shortfall could be even bigger. One thing’s for sure: the chances of our Rock ‘investment’ turning a profit are very remote indeed…

However, the Government clearly wants us to believe that things could have been a lot worse: reports today suggest that if it had sold the Rock to Virgin or another private bidder, the Rock would have required a state subsidy of up to £2bn – and the potential taxpayer profit of £230m would only have happened if the private bidder made ten times as much. Kingman argued that this would have saddled the Treasury with a disproportionate amount of risk, leaving nationalisation as the most sensible choice. Although of course, he would say that…

If you’re wondering why these figures have suddenly emerged now, six months after the Government received them, look no further than the current row over compensation with hedge funds SRM and RAB Capital, both of whom lost a fortune on Rock stock when the lender was nationalised. They’re naturally arguing that the government stitched them up so it could keep all the financial rewards for itself – and the timing of this weekend’s leak suggests the Government is keen to persuade us otherwise…

Then again, perhaps it shouldn’t have bothered. We imagine most voters will positively welcome the idea that Darling trampled over two rich hedge funds in order to make a few quid for the taxpayer – even if it never actually happens...


In today's bulletin:
Bovis and Rio in a tale of two corporates
Editor's blog: Safety concerns add to airlines' woes
Rock may leave a £1bn hole
TUC argues for 'Community Day'
Books Special: Kaplan and Norton on The Execution Premium

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