Taxpayers face £1 billion loss due to nationalisation of Northern Rock

| August 26, 2008 | 0 Comments

The Government’s own advisers, Goldman Sachs, have warned that taxpayers could lose up to £1.28 billion due to the nationalisation of crisis-torn Northern Rock.

Northern Rock was nationalised in February after the Government rejected takeover bids from the board of Northern Rock and a consortium led by Sir Richard Branson’s Virgin Group.

A judicial review into the decision to nationalise the lender has been submitted.

Chancellor, Alistair Darling, has defended the nationalisation and stated that the taxpayer’s exposure to Northern Rock is secured against a high-quality mortgage book.

However, according to John Kingman, the senior Treasury official in charge of Northern Rock, officials did not take into account falling house prices. Should prices fall by 15%-25%, Northern Rock’s mortgage book would be put into danger.

Since it was nationalised, Northern Rock has repaid £9.4 billion of its £26.9 billion loan from the Bank of England loan, bringing its outstanding debt down to £17.5 billion.

The repayment is ahead of schedule, however, there are concerns it will find it increasingly difficult to raise money by offloading mortgage customers on to other lenders.

It is scaling back its mortgage range after reducing the number of its mortgage accounts by 15%, to 662,000 at the end of June compared to 777,000 at the end of 2007.

Furthermore, loans and advances to customers have also been trimmed back, by £14.5 billion in the first six months of 2008 to £84.4 billion.

The new evidence from Mr Kingman follows claims made by SRM Global and RAB Capital, hedge funds that were Northern Rock’s largest shareholders at the time of its demise.

SRM and RAB have alleged that one of the reasons Northern Rock was nationalised was because ministers knew they could profit by selling it back to the private sector at a later date.

The evidence also claims that both rejected takeover bids could have reaped profits for the taxpayer of up to £230 million, via a profit-sharing scheme.

Goldman Sachs, which advised the government on the best way forward for Northern Rock, told the Treasury that the nationalisation would likely cost the taxpayer at least £450 million in the most ‘optimistic scenario‘ and up to £1.28 billion.

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