Northern Rock

by Mark Johnston

The UK Financial Investments organisation set up by the Government to manage banking assets, have appointed Deutsche Bank the role of helping Northern Rock back into the private sector.

There is a move to create a specific type of share that would allow the taxpayers to receive a part of all future profits made by the organisation.  Deutsche Bank are investigating different ways to ensure there is a suitable profit sharing programme to generate suitable profits for the UK taxpayers.

The government is desperate to get Northern Rock Plc back into the private sector and back into the black.  Recently, we reported that the Rock were in the process of selecting an institution to help draw up plans to lead to a sale of the Rock to a rival group.  Northern Rock, the first card that brought the whole deck of cards crumbling down, reported a loss of £232 million recently.  The Rock is announcing more cuts and cuts of more significance in a dramatic attempt to get back into the black.

Ron Sandler, the executive chairman, has given no indication of what this means in terms of the number of job losses in the future but based on the 650 staff redundancies last year, we can be assured that the number is expected to be much higher this round of redundancies.

Getting the Rock back into the private sector and one inside source said ‘We are looking at the type of cash flows we could get from a stand-alone mutualisation and comparing that with all the other options,’.  This has the support of many MP’s and the very outspoken member of the Treasury Select Committee, Chuka Umunna. 

While remutualisation would see the bank handed over to the customers, there would be no immediate payment back to taxpayers.

The preferred and main option would be a straight forward cash sale.  Virgin Money looks a good bet or possibly even the US private equity group JC Flowers.  There is even talk of Northern Rock becoming a building society, Yorkshier, Coventry and Nationwide are all waiting in the wings should this happen. 

With the value of the “good part of the bank” being worth only about £2 billion the return for the tax payers will be a long time in coming.  The tax payers have pumped about £49 billion into Northern Rock since the collapse in 2007 so any return to profit or return would be greatly accepted, and the sooner the better. 

Since 2008 there have been significant reductions in costs on the business, this, according to Ron would need to increase.  With the bank setting aside £13.1 million to pay staff bonuses there seems there could be a little reprioritisation of where wealth should be allocated in the future. 

Northern Rock is the fifth largest mortgage lender in the UK and is being run down as the Government is trying to recoup its investment.

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