Taxpayers lose a fortune on the Northern Rock bailout
Nov 2011 17

It is a long time since Northern Rock was last regularly hitting the headlines, as its funding dried up at the start of the credit crunch.  Then politicians were busy playing down the cost of the bailout.  But we weren’t convinced.  TPA Research Fellow Mike Denham argued that we would be left with a hefty bill for the poor quality assets we had taken on.

And I looked at the extent to which politicians were “committing taxpayers money to the risky venture of trying to revive Northern Rock instead of taking the more cautious approach of trying to get value from the assets as they stand”.  Now part of the bank is returning to the private sector and the losses on the bailout are starting to be crystallized: the BBC reports that we are down £400 to £650 million.  But that’s just the start.

The big money is in the bad bank.  Again the BBC reports that the losses there could be as much as £21 billion.  That’s over £800 for every family in Britain.

And even more of our money is at stake in the other nationalised banks; particularly RBS and the Lloyd’s Banking Group.  It wasn’t so long ago that they were worth more than they are today, but wise commentators were telling us that we needed to hold on to those shares so we could enjoy the gains as their prices inevitably rose.

Now, with their talent for identifying every possible opportunity to lose huge amounts of money, and the unfolding eurozone crisis, it is possible that RBS could even need another bailout.  At that stage, surely we would need to finally put the bank out of its misery and look at bail-ins of the kind envisaged in the Vickers Report instead of putting yet more of our money on the line.

The deal today will at least create more competition for high street banking and get some money back.   Ed Balls suggesting after three years that we should keep holding on in the hope of a turnaround is ridiculous.

The critical mistake that politicians have made at every stage in this crisis is to think they know best, that they can see a safe opportunity for profits where people playing with their own money can’t.  Taxpayers weren’t queuing up to put their money into Northern Rock, quite the opposite, but politicians did so on our behalf.  The best guess as to the long term value of the taxpayers’ shares in the nationalised banks is their market price.  Now we are starting to pick up the bill for the politicians’ hubris.

Matthew was the Chief Executive of the TaxPayers' Alliance, author of Let Them Eat Carbon and editor of How to Cut Public Spending (and still win an election)

  • Anonymous

    Well Matthew Sinclair aren’t you lucky that you can write with the benefit of hindsight. Hubris if the get it wrong, foresight if they get it right. I know the banking industry inside out and whilst unhappy how Lloyds were ‘bounced’ into taking on HBOS was confident that, once cleaned up, it would be a great investment.

    No one, Banks, Governments, Investors could have predicted the strength and length of the firestorm caused by the Euro nor the uncertainty caused by the  Banking Commission and additional taxes, more for political ‘punishment’ reasons ignoring commercial consequences, enhanced capital requirements, threats of a Tobin tax etc.

    Your article is from a one eyed TPA position. You do a great job but this doesn’t do you any favours.  

    • Orac54

      Personally, I was reading forecasts of exactly what was going to happen as far back as 2006, in the Daily Telegraph, Financial Times etc. You only had to open your eyes, as opposed to closing them while listening to Gordon Brown.

    • Matthew Sinclair

      We did say the Northern Rock bailout would be a disaster, repeatedly.  And, when the nationalised bank shares were nearly worth what we paid for them briefly, that we shouldn’t assume they would keep rising.  This isn’t about hindsight.  It’s about not assuming that there are risk-free gains that politicians can make by sitting on shares the market is wary of for good reason.

  • Jonathan Munday

    Except that the issue of picking winners is not the one here.
    Having made the wrong descision to support Northern Rock it merely compounds the mistake to sell off the profit making assets whilst being left with the toxic ones. Instead of using profits to defray the costs already spent or making the purchaser take on (some of) the loss making assets too.
    All Osbourne has done is to crystallise a loss on the original mistake.
    Labour did it to save their Newcastle seats. What is Osbourne’s excuse?

    • Sad But Mad Lad

      Osbourne’s excuse is that his hands were tied by Labour’s secret deal with the EU to sell the bank by 2013.

  • Anonymous

    The people paying the price for bad management at NR should be the directors, shareholders, staff and customers. They assumed the risk and they made the decisions. Their mistakes shouldn’t become the problem of the rest of us. If it had been allowed to collapse, it would have sent a valuable message to customers (be careful where you save) and to bosses (be careful where you invest). That lesson hasn’t been learned which is why this will happen again.

  • jr bearbull

     N-RAM was formed of a portfolio of c£50bn or mortgages and unsecured loans and was backed with a loan of £26bn from HM Government (or, as I prefer to call it, you and me).  In the past few years it has declared the following statutory profits (losses)

    2009 – (£257.5m)
    2010 – £400.5m
    2011 – £291.5m (interim profit for 6 months end June 2011)

    In addition the amount of outstanding loans have been reduced to £20.7bn.

    Could we lose a few billion if lots of people default on their mortgages and loans, especially given the renewed economic difficulties?  Of course we could.  Could we make some profits?  Possibly, N-RAM have been making profits for the past year or so as well as repaying loans and if this continues we could end up with a profit.

    Are we, as this article and the BBC suggest, sitting on a potential £21bn loss?  Well if everyone defaults immediately, today, then we would.  But I would describe that to be so unlikely as to be sensationalist.

  • Anonymous

    What is Osbourne’s excuse?

    He’s desperate for cash to keep the Ponzi going. So he has sold off NR. At the current rate of overspend, its plugged the gap until midnight tomorrow. 

    In other words, he has just frozen the debt for under two days.

    How’s he going to close the gap once the money is gone?

    He isn’t  That’s why we are going the route of Greece. All the Bernie Maddoff debts, hidden off the books and from the public. 

  • Blarg1987

    Its a shame the goverment sold of the bit that wasn’t the bad debt, I wonder how many MP’s and senior civil servents who approved this will be on the board of directors / non executives of Virgin Money after this Parliament it will be an interesting observation and I hope the TPA will monitor this?
    In reality we should have just renationalised the deposits and let the investments side fail that way mortages would be secure and hold on to it untill the whole things returns a profit for the tax payer then re sell it.
    Alternatively if we had the good and bad debt we should have held onto it untill all debts were repaid, grasntedit may take over 10 years but could have been a good long term investment for the tax payer.

  • malcolm

    It should never have been bailed out in the first place but as it was based in Labour heartland Gordon Brown saw votes in a bailout.
    Only time will tell whether the decision to sell it now was the right one.