Northern Rock Bills Now Coming In

Financial engineers sort out Northern Rock



The government likes to pretend the Crock rescue won't cost taxpayers a bean.


Thus yesterday, Chief Secretary to the Treasury, Yvette Cooper, toured the studios (eg here) telling us that the government guarantees given to Northern Rock "have not been called upon, so they've not actually created any cost for the taxpayer".


So we've guaranteed large chunks of the Crock's liabilities (see here), but because we haven't had to pay out yet, it's been costless.


In which case, you might ask why insurance companies bother to go through all that tedious reserving stuff when they take on risk? Surely, unless and until they have to pay out, their business must be money for nothing. And what about those monoline bond insurers? Until the late unpleasantness with all that sub-prime debt they were creaming in premiums and not having to part with a cent. It was a costless business... well, costless until the claims arrived, anyway.


Does Cooper actually believe this stuff? She's meant to be quite bright, so possibly she doesn't believe it herself but knows that financially illiterate interviewers will never pick her up on it.


On the other hand, she's in the team that's so far managed to dig us in for a hundred billion, so it's quite possible she's just repeating the groupthink. As long as they keep the guarantees in place then they will never be called on and will never give rise to any costs. Simple.


It reminds us of all those fearfully clever international bankers who used to tell themselves modern states couldn't go bust, and therefore Latin American countries would always repay their debt, no matter how monstrous. Wonder what happened to them? After Mexico went bust in '82 they went a bit quiet.


Inconveniently for the government, the real underlying costs of the Crock debacle are becoming visible. This morning we've had more detail of the charges and fees levied by banks, lawyers and other assorted advisors. The total bill so far is £100m, including:


"Goldman Sachs, the investment bank, and Slaughter & May, the legal firm, stand to share between £15 million and £20 million for advising the Treasury on the sale.


Northern Rock – and therefore the taxpayer – is also set to pay its bankers at Blackstone, Citigroup and Merrill Lynch, and its lawyers Allen & Overy and Freshfield Bruckhaus Deringer, about £75 million in fees, including a £25 million success fee.


Sir Richard Branson’s consortium and a management team that also bid for the bank will each receive £5 million from the Treasury to cover part of their costs. There was also the prospect of further legal bills for the public purse."


Cooper ludicrously insisted on yesterday's Newsnight she didn't know the details, and that anyway the fees incurred by the Crock itself were not down to taxpayers. But we can all recognise a feeding frenzy when we see one.


And it's by no means over. Apart from anything else, Ron Sandler's job (hopefully) is to run down NR and sell off all the good bits- just like has already happened with that £2.2bn equity release portfolio sold to JP Morgan (see this blog). But even assuming he gets a good price for all of that, we can expect further chunky advisory fees.


Worse, somebody's going to be left with the stuff that nobody else wants. The assets that turn out to be worthless. Guess who that will be.


PS For an overview of the £3bn pa the government already spends on external advisors of various kinds, see this blog.

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