Virgin Buys Northern Rock

by Mark Johnston

Due to financial problems caused by the sub prime mortgage crisis the Northern rock bank was nationalised in 2008 by the government using approximately £1.4 billion of the tax payer’s money.

This move to nationalise the bank signalled the start of the financial crisis.

The bank it seems was more vulnerable to a credit crunch than most, this was mainly due to its ‘high risk’ business model which depended on funding from the wholesale credit markets, with 75% of their funding coming from this source.

Lehman Brothers and Bradford & Bingley tabled bids for northern rock, however both of these bidders also later fell victim themselves to the banking crisis.

It then appeared that people again began to see Northern rock as a safe to put their money, given its status as a nationalised bank and there was a subsequent surge in the number of accounts opened.

Official figures reveal that the nationalisation of Northern rock added approximately £87 billion to the public debt.

During 2011 the government again encouraged another round of bidding for the bank, and in November 2011 it was announced that Virgin money holdings was to buy the bank for a figure of around £747 million.

When the bank went in to public ownership it was spilt in to 2 separate companies; the first (the ‘good’) contained the banks retail and wholesale deposit business and offered new savings and mortgage products. The second (the ‘bad’) retained the balance of the banks more risky mortgages, the government loan and other borrowings.

The sale of Northern rock to Virgin went through in January 2012 (subject to approval, it was only for the ‘good’ part however with the ‘bad’ still owned by the tax payer and the treasury, who says it has no plans to sell.

While Virgin is paying a massive £747 million for the bank it is far below the £1.4 billion of the taxpayer’s money which was used to bail out the bank in the first place. The expected £400 million loss is the equivalent of £13 for each of the nation’s 30.6 million taxpayers.

George Osborne has welcomed the sale and said it was ‘an important first step in getting the British taxpayer out of the business of owning banks’.

The treasury added ‘the sale was in the best interest of the taxpayer, not least in that it created a high street competitor for the big banks’.

The deal includes 2,100 staff, 75 former Northern rock branches and a £14 billion mortgage book and £16 billion of savings.

A spokesman said that there would be no changes to terms and conditions for Northern rock customers.

Virgin money has pledged to shake up the banking market with the deal.

Northern rock is the first nationalised bank to be returned to the private sector.

Although the deal means the government are to loose hundreds of millions on the deal, they still claim that it represents the best deal for the tax payer.



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