The Treasury’s hesitation in nationalising Northern Rock ensured there were losses at the lender, according to the Permanent Secretary to the Treasury.
Sir Nicholas Macpherson criticised the Treasury’s slow response time in giving evidence to the Public Accounts Committee last week, along with representatives from UK Financial Investments Limited.
UKFI managed the Government’s 100 per cent shareholding in Northern Rock plc from its formation on January 1 2010 up to its sale to Virgin Money on January 1 2012. The Committee is investigating a potential £2bn loss on the assets that remain in public ownership.
Macpherson said: “The main damage which was done on Northern Rock goes back to 2007/2008. With the benefit of hindsight, the Treasury was slow off the mark in terms of addressing the problem. From the point where there was a run on Northern Rock in September through to nationalisation there was a five month period of drift. That made it quite likely that we would lose money on Northern Rock in a way which certainly wasn’t inevitable at the point where we took a majority holding in RBS.”
Committee chair Margaret Hodge asserted that there has been a loss of £0.5bn to the taxpayer so far. Head of Wholly Owned Investments Keith Morgan responded by saying the bank had stayed ahead of the £224m in projected losses during the first year but that second year projections deteriorated based on the interest rate environment.
Northern Rock was forced to seek government assistance in September 2007 and was nationalised in February 2008.
When asked whether it would have been better to follow Iceland’s example and close the bank altogether, Macpherson defended the decision to split it into a good and bad bank, citing projected losses of between £5bn and £6bn had it been subjected to a fire sale.
The bank was split into two separate divisions, Northern Rock plc and Northern Rock Asset Management in 2010, accounting for £10bn and £54bn of mortgages respectively. Virgin Money purchased Northern Rock plc for £747m in January this year, leading to critics to forecast losses of between £400m and £653m on the £1.4bn extended in financial assistance.
In a report on the creation and sale of Northern Rock in May, the National Audit Office warned of a potential cost to the taxpayer of £2bn. The report says: “UKFI currently expects that the taxpayer will recover all of the support provided, including the losses associated with Northern Rock plc, as these assets are realised. However, if account is taken of the timing of the expected receipts and risks taken on, there may be a net present cost for the taxpayer of some £2 billion. This should be seen as part of the overall cost of securing the benefits of financial stability during the financial crisis.”