The government has announced that Northern Rock, a lender that was nationalised in 2008 during the credit crunch, will be sold to Virgin Money.
The government, upon nationalising the bank, split the bank into Northern Rock plc and Northern Rock (Asset Management). Its bad debt was placed into Asset Management, while Virgin has paid £747 million to rebrand Northern Rock plc as Virgin Money.
Job loss, tax loss
Surprisingly, Virgin has pledged no compulsory job cuts for three years. This is welcome news for the 2,500 people currently employed by Northern Rock, though the figure is down from 5,500 when it was nationalised.
Critics of the move to sell Northern Rock say that since taxpayers injected £1.4 billion into Northern Rock PC, they are getting only half of that back with the £747 million purchase.
However, in addition to the hundreds of millions that the government will receive after the sale, there is the potential of a further £280 million over the years to come. The loss would still be sizeable, around £400 million to £650 million, analysts estimate.
This is disturbing news, particularly since the size of the losses in the ‘bad bank’ part of Northern Rock is still uncertain.
Out of business
Chancellor George Osborne has said that despite the losses, the move was defensible and necessary in order to get “the British taxpayer out of the business of owning banks.” However, the government has announced that it has no plans to sell Northern Rock (Asset Management), the section of the bank which harbours all of its bad debt.
Osborne also said that the deal represents “value for money” for the government, and will give the general public more choice as High Street consumers.
Most importantly, said Osborne, is that the move will “safeguard jobs in the North East.” This is because Virgin Money has announced its plans to establish a new headquarters in Newcastle, where Northern Rock is based.
Though the sale is set to be completed on 1 January 2012, the government has said that Virgin Money is “expected” to pay an additional £50 million within six months, followed by another £150 million in the future.
Additionally, if Northern Rock is sold or listed on the stock exchange in the next five years, Virgin Money will be forced to pay the government another £50 to £80 million.