Northern Rock 'could cost taxpayers millions'

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The Independent Online

The rescue of the embattled Northern Rock could cost the taxpayer millions of pounds, thrusting the Chancellor, Alistair Darling, into the spotlight once more over his handling of the banking crisis.

As 21 per cent was wiped off the bank's share values, Mr Darling came under sustained fire in the Commons yesterdaywhen he faced Opposition accusations of "incompetence and weak leadership" in the management of the UK's first run on a bank for nearly 150 years.

George Osborne, the Shadow Chancellor, said Mr Darling's job was "on the line" as the Chancellor made a statement to the Commons. Brushing aside the criticism, Mr Darling said the Government would have a veto over any rescue plans for the mortgage lender which sought emergency funding from the Bank of England in September. Treasury officials said that "nationalisation" of Northern Rock had not been ruled out, but signalled a buy-out was the preferred option.

Vowing to protect the interests of both taxpayers and savers, a defensive Mr Darling refused to admit how much of taxpayers' money was at risk, although he did deny reports that it could be as much as £500m,

"The sum concern is nothing like that," he said. "It is a very small amount of money."

Senior Treasury officials, however, did not deny the sum at risk could run into hundreds of millions of pounds. The money is owed to the taxpayer for interest at penalty rates on the £24bn loan provided by the Bank of England to prop up Northern Rock because of its exposure to sub-prime loans in the US.

The bank's share value plummeted after the Newcastle-based lender revealed it had received bids from would-be suitors including Richard Branson's Virgin group which were "materially below" the value of the company.

Mr Darling said the Bank of England bail-out had given Northern Rock a chance to "consider its strategic options".

He was criticised by the acting leader of the Liberal Democrats, Vincent Cable, who said one Northern Rock executive had enjoyed a £2m pension underwritten by the taxpayer.

Mr Darling said the consequences of letting Northern Rock fail "would have been immensely damaging" for the country's financial institutions and said it was "not in the public interest" to reveal the terms of the lending to the bank.

The Treasury warned that potential bidders and Northern Rock "should not assume" that the Bank of England's emergency funding facility would be in place after February. It also warned that bidders dependent on any extra public funding would be likely to breach European rules on state aid.

The Chancellor limited his promises to getting the "best possible deal" for the taxpayer. That raised suspicions some of the interest payments could be written off if the bank is sold because they take lower priority than the loan which is guaranteed.

How the numbers add up

About £24bn has been lent by the Bank of England to Northern Rock, with a further £14bn that has been guaranteed to depositors: a potential loss of £38bn, or £1,300 per taxpayer. Against that is the Rock's loan book, worth £100bn. Half of that has been "securitised" – sold off. The remaining £37bn of lending might yield about £25bn on liquidation. That leaves the taxpayer with a £13bn hit if the Rock were broken up; 2p on the basic rate of income tax, or the Department of Transport's budget for 2008/09. Nationalisation is cheaper. It would cost £450m at current share prices.

Sean O'Grady

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