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Yes, Prime Minister: the Northern Rock Episode

This week saw the first discussions of a possible sale of Northern Rock back into the private sector.

This is the bank that signalled the real start of the credit crisis when it went under during the summer of 2007 and had to be nationalised.

Interestingly, the press have all started speculating who is going to be the potential buyer, and roll out the usual suspects such as Tesco and Virgin. Neither of these will buy Northern Rock as Tesco don’t need the branches and Virgin, having made a bid in 2007, will now want to grow their business for their style of customer, not these ones.

Similarly, NBNK – Lord Levene’s New Bank – has been muted, but they’re barred from bidding after poaching Northern Rock’s Chief Executive, Gary Hoffman, to be their CEO.

So the question is: who would buy Northern Rock?

Now I’ve already had one go at this, based upon the “Girl With” series of books by Stieg Larsson when Northern Rock was split into the good and the bad bank.

This time I think it’s worth a little bit of “Yes, Prime Minister” (a classic British comedy) as David Cameron debates the merits of a sale with his Permanent Parliamentary Secretary Sir Gus O’Donnell.

 

David Cameron (DC): Now then Gus, what’s all this about Northern Rock.

Sir Gus (GO): Well Prime Minister, it appears we can now sell it.

David Cameron (DC): Oh good, does that mean we’ll get some cash back?

Sir Gus (GO): Yes Prime Minister, although I don’t think it’s quite as simple as that.

DC: Well how complex can it be?

GO: Well Prime Minister, you have to remember the circumstances under which the bank collapsed.

DC: Of course I remember that Gus. It’s only a few years ago under the watch of those awful Blair and Brownites.

GO: Yes, but it’s now under your watch and people will remember what happened.

DC: What are you saying Gus?

GO: Well, in the fullness of time, given all the circumstances and in the balance of probabilities …

DC: Please just spit it out.

GO: OK, Prime Minister.  When Northern Rock collapsed, the government intervened and took over. They had to. But there’s an issue here, which is that the shareholders of the bank were never recognised for their stake. The shareholders’ believe that the UK Government stole their shares as there were a couple of good private sector bids for the bank at the time. Virgin and others wanted the bank you see, and that could have allowed the bank to recover and repay its debts, and keep some shareholder interest.  Instead, the position today is that the shareholders have lost everything.

DC: You mean we’re not going to give them any money back?

GO: Well they want recognition and the government did promise to pay them some compensation, but they claim that the valuation of the bank has been rigged so that shareholders are likely to get nothing at all.

DC: And are they?

GO: Are they what Prime Minister?

DC: Are they going to get any money back?

GO: Well, we made some promises but, when the independent valuation panel assessed how much they were due, they found it was nothing.

DC: Nothing?

GO: Yes, nothing. Nada. Zilch. 

DC: Oh, so we’re free to sell it now are we?

GO: Yes, Prime Minister.

DC: And keep all the cash?

SH: Yes, Prime Minister.

DC: Without having to pay the shareholders anything back?

SH: Yes, Prime Minister.

DC: And it's all legal?

SH: Yes, Prime Minister.

DC: Oh good. And how much might we get?

GO: About £1.5 billion, Prime Minister.

DC: Oh good. After all Sir Gus, we need the money in these days of austerity and all that.

GO: Absolutely Prime Minister, which is why we will sell the bank and keep the cash.

DC: Good. So what is it we’re actually selling here and how?

GO: Well, we’re selling the good bit.

DC: The good bit?

GO: Yes, Prime Minister.

DC: What do you mean by ‘the good bit’?

GO: Well, there’s a good bit and a bad bit of the bank.

DC: I don’t understand Gus. Can you explain?

GO: Of course sir.  As you say, under that awful Blair and Brownite regime, the government had to rescue the bank and, as such, made a significant investment into it. According to the National Audit Office report, there was about £50 billion of public support provided to the bank which could have been lost if not for the actions of the government. And there’s still major potential losses as the taxpayer has invested £1.4 billion in the good bank and over a billion in the bad bank.

DC: What?

GO: You know Dave. The good bank and the bad bank.

DC: You still haven’t explained that bit Gus. That’s what I’m asking about.

GO: Well, we’re now ready to sell the good part of Northern Rock to someone, and the government gets to keep the bad part.

DC: Why would the government want the bad part?

GO: Because no-one else wants it.

DC: I still don’t get it Gus.

GO: Well, a year ago we split Northern Rock into a good bank and a bad bank. The good bank is the bit we think we can make the money out of, and the bad bank we will just have to write off.

DC: And what is the ‘good’ bank and the ‘bad’ bank all about?

GO: Oh, I thought you knew Prime Minister.

DC: No. I keep telling you that Gus.

GO: Well, the good bank is the bit that has deposits and accountholders who are of a good quality. It’s not making any money of course, but it’s a good bank.

DC: How can a good bank be one that makes no money?

GO: Because it’s not handed out crappy loans to every Tom, Dick and Harry who may never pay them back.

DC: Huh?

GO: Well it’s like this Prime Minister. The bad bank is making a profit because it has lots and lots of loans that need paying back, and the bank makes a profit on loans. This is why, when the last government separated the parts of Northern Rock into good and bad bits, the bad bit made a profit of around £350 million in the first half of last year, whilst the good part made a loss.  This is because the good part has fewer loans than deposits and therefore has to pay out more in interest to deposit holders than it earns from loans. Hence, it makes a loss.  In the bad bank it’s the opposite case, as there’s around £50 billion of risky loans and mortgages that earns lots of interest and that’s the bit we’re keeping.

DC: So we’re selling the bit that loses money and keeping the bit that makes money?

GO: Exactly Prime Minister.

DC: Doesn’t make sense to me.

GO: Well sir, banking doesn’t make sense to most people.

DC: And who would buy this loss-making bit?

GO: Good question sir. We think there are lots of people who might buy it.

DC: Such as?

GO: Lots of people.

DC: Can you name one Gus.

GO: One what sir?

DC: One buyer.

GO: Oh yes.

DC: Well …

GO: Well what sir?

DC: Name one then.

GO: Oh. Well, we have an advisor being appointed to sort that out.

DC: An advisor.

GO: Yes sir.

DC: And who’s that.

GO: Goldman Sachs

DC: What? I thought they were meant to be some money grabbing organisation we hated with a vengeance.

GO: Oh no sir, we like Goldman Sachs.

DC: We do?

GO: Yes sir.

DC: How come?

GO: Urrmmmm … because they have us by the short and curlies Prime Minister.

 

Scene fades …

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Jacques Bayens
  • Brilliant piece of writing!
    The reality is that whilst the government might wish to shop around for interest in Northern Rock, it is unlikely that anyone will want to put a serious bid in before they understand the direction of travel of the Independent Commission on Banking, since until that is known it is difficult to put a valuation on Northern Rock.
    Even if someone makes a bid, then it could be up to two years before the new owners (if they aren’t an existing bank) can really take control given that it will take to get through the FSA processes and put in place the necessary organisation, as detailed in the blog:
    http://www.itsafinancialworld.net/2011/01/why-2011-will-not-be-year-of-new.html#

  • Chris Hulme

    Interesting dialogue and so true but who will buy the bank? or more importantly, who will the government want to sell it to?
    The Private Investor, the small shareholder, the very group of individuals who capitalised businesses such as NRK, RBS, LLOY through their investment (and Rights Issues) only to have it cruelly and immorally taken away with no compensation.
    Sir Humphrey Appleby & Co at their best.