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Northern Rock sold to Virgin Money for a £400m loss
'Good bank' sold back to the private sector, but taxpayers must keep 'bad bank' and its toxic assets
WHAT'S HAPPENED?
The government has announced it is selling Northern Rock to Virgin Money for £747m. The deal is expected to be completed by 1 January 2012. Chancellor George Osborne said the sale was "an important first step in getting the British taxpayer out of the business of owning banks.
"It represents value for money, will increase choice on the High Street for customers, and safeguards jobs in the North East."
WHAT DOES IT MEAN?
Northern Rock was bailed out in 2008. It was later divided into a 'good bank' called Northern Rock, which took all the safe mortgages, and a 'bad bank' called Northern Rock Asset Management which was saddled with the bad debts, including the notorious 125 per cent home loans. The sale announced today concerns the good bank.
There are certain conditions attached to the deal which could increase its value from £747m to £1bn - but either way it represents a loss for taxpayers who paid £1.4bn to rescue the bank in 2008. This means, according to BBC business editor Robert Peston that "on paper, taxpayers end up with a loss of somewhere between £400m and £650m". They will also have to keep the bad bank, which owes the government £20bn.
According to The Daily Telegraph, there are also conditions that dictate what Virgin Money can do with Northern Rock.
Virgin Money, founded by Richard Branson in 1995, cannot make any compulsory redundancies - apart from the 650 already announced this year - for at least three years. It cannot close any branches and it must establish a new HQ in Newcastle.
The Wall Street Journal observes that the deal is a "coup" for Virgin Money which has been trying to gain a foothold in a UK retail banking sector dominated by just five major banks.
WHAT'S NEXT?
David Clementi, chairman of Virgin Money, says he intends to float his new bank on the stock market within five years. One of the conditions of today's sale is that if Northern Rock is listed within that time scale, the Treasury will get another £50m to £80m. ·
