Wednesday, 29 February 2012

How much profit will the sale of Northern Rock make?

Short Answer, approximately £0.

So the UKFI argue that the sale will be completed for somewhere between £46-48bn, and that the cost of the bailout was £37bn bailout. Sounds like everyone's a winner, right?


Now, before I go any further, I want to make it clear that I don't see this analysis as having any normative significance. I don't think the fact that the sale won't generate a profit means that the bailout should not have occurred. As for whether the sale to Virgin should have occurred, (its worth noting all the 'profit' -ie where the return to the Govt exceeds what the Govt put into it-comes not from the Virgin sale but from winding down the rest of the company) I gather from scanning the report that there were other complicating factors involved that required the Govt to make a deal.

The point is this: an £11bn return after a 10 to 15 year period on an investment of £37bn... looks a lot less attractive than before. On page 6 of the full UKFI report, we see:
"However, this cash is expected to be returned over a period of around 10 to 15 years from 2012 as
Northern Rock (Asset Management) plc is run-down and the remaining Government loan is repaid. This
is equivalent to receiving an annual rate of return on the Government’s intervention of 3.5% to 4.5% per
year and compares to the Government’s estimated notional annual funding costs during the period of
intervention of 3.9%"

In other words, the rate of return is about the same as the interest we've paid on the debt we borrowed to pay for the purchase. So we took on a huge risk, and have no profit to show for it.

(But, to be fair of course, letting Northern Rock go bankrupt would have been worse. However, anyone who tries to spin this as a huge victory for the government is clearly being deliberately deceptive).

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