David Prosser: The danger of selling Rock on the cheap

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Outlook There is a certain irony in the fact that, in order to turn the corner on Northern Rock, taxpayers are going back to square one in terms of getting their money back. It cost us £27bn to stop Rock collapsing, of which the bank has so far repaid getting on for £12bn. But as part of the split unveiled yesterday, Rock is borrowing a further £8bn and has a facility to draw down £3bn of capital. That takes its total debt back close to the £27bn mark.

Chief executive Gary Hoffman reckons it could take another decade for Rock to pay off its debts. But Mr Hoffman is being optimistic. The proceeds from the sale of the decent bit of the bank – "good Rock" – will help reduce the debt, but banking analysts reckon £1.5bn to £2bn is as much as the taxpayer can hope for from this sale. It is possible there might be further asset sales in the future, but the vast majority of the outstanding debt will have to be repaid as borrowers pay off the loans held by the dodgier bit of the bank – "bad Rock".

In practice, that means there is a strong chance the taxpayer is going to face a pretty nasty loss. Mr Hoffman wasn't keen to talk about the bank's mortgage book yesterday – it is due to give a trading update next week – but the most recent figures it has provided suggest that 10 per cent of bad Rock's loans are already non-performing.

Call it a back-of-a-fag packet exercise, but bad Rock's loan book is worth a theoretical £50bn. With a default rate of one in 10, that comes down to £45bn, and the bad debt problem may actually be much worse – we will find out next week. Let's be charitable and assume good Rock sells for £2bn (cross your fingers for a bidding war between Tesco and Virgin), but that doesn't begin to cover the losses we already know about. If the default rate rises – and there's reason to think it will given the crud in bad Rock – the margin for error soon begins to shrink

It is against this backdrop that critics, such as the Liberal Democrat Treasury spokesman Vince Cable, are anxious about the process the Government announced yesterday. Mr Cable worries that the decent bits of Rock will be sold too cheaply and that the assets remaining in bad Rock will turn out to be even more toxic than feared.

You can see his point. There can be no denying that the timing of the break up of Rock is political rather than economic.

The Government is splitting the bank now in the hope that it will be able to sell good Rock in the new year, with a deal completed before the election. In order for the Prime Minister to be able to campaign on the basis that he successfully nationalised and then privatised Rock in order to save it, the sale must be completed by June at the absolute latest, but probably more like March or April.

There are two dangers that follow. The first is the one that Mr Cable alludes to – in rushing through a sale, the Government may not raise as much as it might do if it were to hold fire on flogging good Rock until market conditions improve, or at least until potential buyers don't feel you're desperate.

The second worry is that this process will damage other players in the mortgage market, quite unfairly. Under the terms of the deal with the European Union, good Rock will operate under certain constraints, in order not to have an unfair advantage over its competitors. Has the Government pushed for these to have been as relaxed as possible in order to help the sale process? The commitments that the bank will restrict lending – to £9bn next year, for example – and avoid being the most competitive player in the market, are not enough for some rivals, who complain they will be squeezed out.

There was a time when the Government could claim the mortgage finance Rock is providing was necessary to underpin the housing market. But, for now at least, house prices are rising again and transaction levels are picking up. The biggest credit shortages in the UK right now are in the business sector; home loans are more widely available once again.

We are looking at a politically motivated sale, then. We must hope that the results do not undermine the good work done on Rock so far. And good work it has been – Gordon Brown was quite entitled to claim at Prime Minister's Questions yesterday that he had made the right decisions about Rock, even if finally nationalising the bank went against every instinct he had. Still, on the plus side for the Government – and its successor for that matter – the day of reckoning remains a good 10 years away.