Am I Missing Something With The Sale Of Northern Rock?

[Deleted member 37751]

'We've' (the taxpayer) sold Northern Rock to Virgin Money for £747m today which will result in a 'paper' loss of between £400m and £650m.

Our highly regarded economist of a Chancellor says that this will turn out to be a good deal.

Why?

 

[wemorgan]

Chancellor says that this will turn out to be a good deal.

Why?

Because when you analyse that statement it means nothing, but makes his judgement seem wise.

Same old, same old...

 

[MOCAŠ]

..

It is possible to argue that taxpayers have got a reasonable deal on the sale of Northern Rock.

Here is how that argument would work.

The Treasury injected £1.4bn of capital into the bank. But by the end of this year - when the sale to Virgin Money is supposed to be completed - that capital will have been depleted to around £1bn.

The reason the capital has been eroded is that Northern Rock is lossmaking. This is because, in the act of cleaning up the bank, it retained the overheads of 75 branches, a call centre, and management, plus deposits of £16bn, versus mortgages of just £14bn.

Or to put it another way, the interest received on the mortgage book is dwarfed by all the other costs, including interest paid on deposits. So the Rock makes an intractable loss.

What that means is that Virgin is paying £747m in cash, plus - if all goes well - a possible further £280m for a bank that by December 31 will be left with net capital of around £1bn or maybe a bit more.

Depending on what assumptions you make about how much of the deferred purchase price will ever be paid, Virgin is probably paying a discount of around 20% to the book value of the Rock.

Now that compares very favourably with the market value of our biggest banks, whose shares are currently trading at discounts of between 40% and 50% relative to net asset vaue.

On that basis, George Osborne hasn't done too badly in the deal. The question is whether he could have done better - as the shadow chancellor Ed Balls has suggested - by waiting.

What perhaps is most interesting is that the Chancellor has decided to crystallise the loss now, rather than suspend the sale in the hope that markets recover enough to break even on the deal.

His decision to take this bird in the hand may be seen as George Osborne placing quite a big bet that markets and economy are going to get worse before they get better.

 

[Deleted member 37751]

I think this could be Osbournes 'selling the reserves of gold off cheap' moment.

 

[grober]

21% of Virgin Money Virgin Money - Wikipedia, the free encyclopedia was bought last year by WL Ross & Co. LLC for £100 million. Essentially an American investor known for restructuring failed companies in industries such as steel, coal, telecommunications, foreign investment and textiles. He specializes in leveraged buyouts and distressed businesses. In 2011, Forbes magazine listed Ross as one of the world's billionaires with a net worth of $1.9 billion. According to a recent New York Times article, he has been bottom-fishing in mortgages and mortgage companies. Wilbur Ross - Wikipedia, the free encyclopedia
He also has auto interests Wilbur Ross Says His Auto-Parts Acquisition Spree Has Far to Go - Bloomberg
and is rumoured to be interested in the Delphi Corp of Troy Michigan [ ring any INJECTOR bells] the guy obviously knows a bargain when he sees it

 

[trapperjohn]

I think this could be Osbournes 'selling the reserves of gold off cheap' moment.

Exactly my thoughts. It would be a bit expensive to buy back all that gold. Is this potential loss in the same league, perhaps time will tell.

Wonder if Virgin paid for this themselves or if they have borrowed and got a sub-prime loan

 

[wemorgan]

He also has auto interests Wilbur Ross Says His Auto-Parts Acquisition Spree Has Far to Go - Bloomberg
and is rumoured to be interested in the Delphi Corp of Troy Michigan [ ring any INJECTOR bells] the guy obviously knows a bargain when he sees it

He'd like to forget his purchases of Wagon and Oxford Automotive I think.

http://www.just-auto.com/news/wagon-buys-oxford-automotive_id85579.aspx
http://news.bbc.co.uk/1/hi/business/7770018.stm

 

[Dieselman]

I think this could be Osbournes 'selling the reserves of gold off cheap' moment.

I doubt that. Northern rock appears very inefficient, so taking an offer is probably the best thing to do.

 

[Deleted member 37751]

I doubt that. Northern rock appears very inefficient, so taking an offer is probably the best thing to do.

Wasn't gold at an all-time low?

Isn't the mantra 'sell high, buy low'?

 

[Dieselman]

Wasn't gold at an all-time low?

Isn't the mantra 'sell high, buy low'?

No point keeping a dead Duck that is losing money.

 

[Charles Morgan]

The fundamental problem that Northern Rock faced before, and which led it to rely upon a very flawed business model, was that its deposit base and local franchise was insufficient to let it grow to match the ambitions of its management. Securitisation was adopted as its principal funding base because it couldn't get access to enough retail deposits, and when they found they could securitise anything, off they went lending to any body - principally 110% LTV mortgages and liar loans, I mean, self certified mortgages.

Stripped of all the crud at some considerable expense, it cannot get any smaller without becoming incapable of covering fixed costs, and without a government guarantee of deposits, the notion that it is somehow going to attract retail investors who associate it with the images of the first bank run in 150 years is fanciful - they couldn't get them long before their troubles. Add in dead mortgage market and the eschewing of the loony loans it used to do, it is competing against some real giants with considerablely more aggressive margins.

So I find the notion that it is somehow going to expand and become an immensely valuable asset quite questionable. When you add in the requirement that all lenders assess their borrowers ability to repay, a very weak housing market, and a considerable increase in the capital that has to be retained within the banking book, this place is going nowhere. Getting a billion for it is pretty good going - Virgin will rebrand it, swallow up the deposits and as part of that it probably has a much better future and franchise.

Disclosure, I used to be part of the team that banked the Northern Rock back in the early 90s. I met all the management team that went on to bankrupt the institution, they were all pretty hardened drinkers, and to this day I recall with a shudder the all day drinking session that a short meeting turned into. Most of the Northern building societies would regularly have drinking competitions for senior management. Now, I am not a puritan, but....

 

[Red C220]

They are mitigating the loss. It's not great, but it's better than letting it fester and grow.

Look at this way, like a disease.

Do we accept that if we deal with it now we lose some fingers and a thumb. If we leave it and try and cure the problem we may end up saving the fingers and thumb. But if we don't get lucky, we could lose a hand, possibly the arm to the elbow and maybe even all the way to the shoulder.

I figure we're better off taking the smaller loss now than risk even more infection. "Smaller" being relative in the terms of £Billions.

 

[Dieselman]

^ Adds a whole new meaning to Piss Poor Management.

 

[davethemus]

Wasn't gold at an all-time low?

Isn't the mantra 'sell high, buy low'?

that's exactly what the chinese did

 

[oldcro]

The fundamental problem that Northern Rock faced before, and which led it to rely upon a very flawed business model, was that its deposit base and local franchise was insufficient to let it grow to match the ambitions of its management. Securitisation was adopted as its principal funding base because it couldn't get access to enough retail deposits, and when they found they could securitise anything, off they went lending to any body - principally 110% LTV mortgages and liar loans, I mean, self certified mortgages.

Stripped of all the crud at some considerable expense, it cannot get any smaller without becoming incapable of covering fixed costs, and without a government guarantee of deposits, the notion that it is somehow going to attract retail investors who associate it with the images of the first bank run in 150 years is fanciful - they couldn't get them long before their troubles. Add in dead mortgage market and the eschewing of the loony loans it used to do, it is competing against some real giants with considerablely more aggressive margins.

So I find the notion that it is somehow going to expand and become an immensely valuable asset quite questionable. When you add in the requirement that all lenders assess their borrowers ability to repay, a very weak housing market, and a considerable increase in the capital that has to be retained within the banking book, this place is going nowhere. Getting a billion for it is pretty good going - Virgin will rebrand it, swallow up the deposits and as part of that it probably has a much better future and franchise.

Disclosure, I used to be part of the team that banked the Northern Rock back in the early 90s. I met all the management team that went on to bankrupt the institution, they were all pretty hardened drinkers, and to this day I recall with a shudder the all day drinking session that a short meeting turned into. Most of the Northern building societies would regularly have drinking competitions for senior management. Now, I am not a puritan, but....

So why did the government waste so much taxpayers money saving such a poorly run bank? Wouldn't compensating the depositors and leaving the bank to go under be no more costly and a warning to the others.

 

[davethemus]

would it not have been better to let northern rock go to the wall and just guarantee the customers deposits.
I read somewhere that when it was nationalised it was split into 2 parts, obviously the part that has been sold today doesn't have any 'toxic-assets'. The part that does have the toxic-assets owes us £40 billion.

 

[wemorgan]

When the manure was hitting the fan, the Government thought it was just a few cows with diarrhoea. Little did they know it was the whole farm stock.

 

[Gucci]

Not a huge surprise on two accounts: 1. It's loss making and 2. It doesn't suit the Conservatives to have anything state owned!

 

[Charles Morgan]

A good question Oldcro. Some more cynical souls have suggested that it was bailed out not because of its systemic importance (it had none) but because it was headquartered in an important area for the party then in government. Perish the thought that a government would spend taxpayers money on such unworthiness.

 

[Dieselman]

I think it was bailed because it would be poor form to see any British bank go to the wall as we claim to be regulated and a significant portion of the Country's wealth is generated from banking.