The sale of Northern Rock to Virgin Money was announced during the mini-parliamentary recess in November and buried in the news by the crisis in Europe and the chancellor’s autumn statement, was. Setting to one side the scant regard the government gave to a mutualisation option, there are some very serious questions emerging around this deal which deserve real scrutiny.

On the timing of the sale, the government had at least until the very end of 2013 to secure a sale under EU rules – and it is obvious that they could have got an extension to this deadline. Yet with our economy flatlining, the eurozone crisis deepening and bank shares falling, George Osborne decided to go ahead when the proceeds for the taxpayer look decidedly small. Either the government thinks sale conditions might get even worse and just had to get on with things – suggesting that even they have doubts about our economic prospects – or they genuinely feel this was a great deal, which must raise questions over their stewardship of the taxpayer’s best interests.

Although Richard Branson was publicised with Virgin Money as the ‘public face’ buying out Northern Rock, the reality is that out of around £900m of proceeds, Branson invested only £50m himself – with £150m stripped out of Virgin Money’s existing capital reserves to add into the mix. The biggest investor is US financier Wilbur Ross who put in £250m, with a further £50m from an Abu Dhabi sovereign fund. But with only £400m of cash from new investors, where is the rest coming from? Here is the really tricky manoeuvre; the consortium couldn’t give the full £900 million in cash so they paid £150m in ‘convertible debt instruments’. In other words, a form of IOU. However, rather than receiving something that could be sold by the Treasury on the market, the consortium effectively asked the government to underwrite this element of the deal. In short, there are no hard and fast guarantees that this will be returned to the taxpayer in this parliament. And then comes the ‘clever’ bit. The final £250m of the deal was paid for with Northern Rock’s own money, using the capital assets of the entity they are buying in a complex financial ‘swap’ deal. It’s the equivalent of selling your house and allowing the buyer to sell your furniture and car to pay for it.

There are, moreover, further problems with the deal the government has come to. By dipping into Northern Rock’s core capital reserves to help pay for the sale, it has reduced the ability of Northern Rock and Virgin Money to provide significant credit in the mortgage market, while at the same time potentially increasing risks should there be another financial crisis. The post-sale capital ratio will fall to 22 per cent – which is still some way above the 15 per cent minimum required by the regulators. Following this announcement, the Standard & Poor’s ratings agency placed its ‘A-‘ long-term counterparty credit rating on the bank on ‘credit watch’ with negative implications.

Perhaps most worryingly, when the Northern Rock sale is completed the Financial Services Authority may not have the power to stop the Virgin consortium stripping away this further capital buffer down to the minimum 15 per cent – which would deliver an instant £345m to the buyers. In other words, on 1st January 2012 the three investors could get virtually all the money back that they paid for Northern Rock, in effect owning it for free. Christmas appears to have come early for these investors, although not for British taxpayers. When most people head out for the January sales to find a bargain, it seems the best deal on the high street may have already gone.

Though buried by disastrous economic news for the UK at the time it was announced, the nature of the sale of Northern Rock is nothing short of a scandal. The Labour party must never let the Conservatives, the Liberal Democrats and, crucially, the public forget it.

—————————————————————————————

Chris Leslie is MP for Nottingham East and shadow financial secretary to the Treasury

—————————————————————————————

Photo: Dominic Alves