Labour was 'lucky' with Northern Rock gamble using taxpayer billions

Treasury lacked 'capacity and expertise' to deal with financial meltdown, auditors' report warns

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The last Labour government took a blind leap into the unknown with taxpayers' money when it split Northern Rock into a "good bank" and a "bad bank" and the Treasury must never again make such careless decisions, MPs were told yesterday.

A damning report by the National Audit Office led the Commons Public Accounts Committee (PAC) to conclude that the previous administration had a "worrying lack of capacity and expertise" to deal with the crisis it faced. In the end, the Tory-Liberal Democrat Coalition sold the good bank to Sir Richard Branson's Virgin Money last year. But, with billions of pounds at stake, only luck meant taxpayers did not lose out.

Even that sale to Sir Richard proved controversial: by injecting a subsidiary into the bank, Virgin was able to realise millions of pounds. Effectively, it part paid for Northern Rock with cash it was able to take out of the bank.

The report shines a new light on the apparent chaos that raged through the Treasury during the maelstrom that engulfed the banking system three years ago. It also serves as a warning about the care the current Government must take when handling the taxpayer's stakes in Royal Bank of Scotland and Lloyds Banking Group.

When gripped by the near-collapse of the nationalised Northern Rock, the Treasury under the then Chancellor, Alistair Darling, failed to carry out the necessary checks on the business before opting to split it in 2009. Instead of approaching the Northern Rock management's forecasts with scepticism, it accepted them blindly.

Margaret Hodge, the Labour MP who chairs the PAC, said: "It is particularly alarming that the Treasury was happy to trust Northern Rock management's overly optimistic business plan.

"Given the scale of the crisis, we are fortunate that the net present cost to the taxpayer is potentially not more than £2bn. But this is perhaps more by luck than good judgement." Even with the fortuitous sale, the taxpayer is still likely to lose £480m on the original investment of £1.4bn in the "good bank".

The "bad bank" – now called Northern Rock Asset Management – remains in public hands and is gradually winding down £54m of mortgages, while trying to pay off the loan of almost £20bn from the bailout it received during the nationalisation process.

Ms Hodge added: "With many billions of pounds of assets still in public ownership, my committee will want officials to commit to stronger challenge processes and controls over such important decisions in future."

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