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Taxpayer-owned Northern Rock Sold to Virgin Money at a Loss; Osborne Says Good ‘value for Money’

Posted on the 17 November 2011 by Periscope @periscopepost

Taxpayer-owned Northern Rock sold to Virgin Money at a loss; Osborne says good ‘value for money’

An English style "run on the bank" in September 2007. Photo credit: Dominc Alves,

Chancellor George Osborne announced Thursday that government-owned Northern Rock is being sold to Virgin Money for £747 million – a significant loss, given that the government used taxpayer money to purchase the troubled bank for nearly twice that at the start of the global credit crunch in 2008.

The Treasury claimed that the sale is in “the best interest of the taxpayer”, characterizing the move as “a significant step in returning public sector stakes in banks to the private sector” and creating a new competitor in the retail banking sector; the Government also claims that it will only see £747 million at the sale, it could stand to earn more than £1 billion in total, off the £150 million in capital notes. Said Chancellor George Osborne, “The sale of Northern Rock to Virgin Money is an important first step in getting the British taxpayer out of the business of owning banks.  It represents value for money; will increase choice on the high street for customers; and safeguards jobs in the North East.”

Observers and, unsurprisingly, political opposition, however, aren’t totally buying it.

A loss is still a loss. “It is a strange definition of ‘value for money’ that says £747 million, rising to a possible £1 billion, represents an attractive price at which to sell Northern Rock. Some £1.4 billion of public money was injected into the bank in January 2010,” declared Nils Pratley at The Guardian’s finance blog. “A loss is a loss.” Osborne would have been better off acknowledging that it’s more a case of not as bad as it could have been.

The BBC explains Northern Rock’s “good” and “bad” sides after the Government split the bank into two in 2008.

This is a ‘terrible’ deal. Actually, it’s “a terrible deal” for taxpayers, TaxPayers’ Alliance director Matthew Sinclair told The Press Association, declaring, “Taxpayers will be disappointed and angry that so much of the money put into Northern Rock has been lost after too many politicians tried to pretend the bailout would be almost free or even turn a profit.”

How does this affect you? Well, if you’re a Northern Rock saver or borrower, you’ll now be doing your banking with Virgin Money, so expect to see new cheque cards. Virgin currently offers rather uncompetitive savings rates, but that may change with the combined entity. But beyond that, not much else will change, the Financial Times reported: Your money is no less safe than it was before.

What does Sir Richard Branson get out of it? A new space shuttle. No, not really – but the Virgin impresario does, The Telegraph’s Harry Wilson reported, stand to become a major force on the high street banking scene. But, Jonathan Guthrie at the Financial Times’ Lombard blog warned that Branson is risking a bit of “Northern exposure” with the deal because the bank has been “prettified for sale”: “The Geordie institution has divested its bad subprime assets into the dirty laundry basket that is UK Asset Resolution.”

So actually, the Government did pretty well out this deal. Continued Guthrie, “UK [Financial Investments] has almost certainly done better by selling to Virgin Money, supported by US distressed assets maestro Wilbur Ross, than to any established bank. Foregone synergies notwithstanding, Virgin has a hunger for brand values and foothold that an incumbent would not. Moreover, the transaction introduces a disruptive, albeit small, private competitor into oligopolistic high-street banking…. So well done, Mr Budenberg and well done, George Osborne. That was the easy bit. You still have large stakes in Lloyds and Royal Bank of Scotland to offload.”


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