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Spending watchdog warns of £2bn lost on Rocks

The National Audit Office says taxpayers could lose £2bn once Northern Rock’s assets are wound down.

Last week, the NAO published a report on the creation and sale of Northern Rock plc.

It says it expects the net cost for the taxpayer to total £2bn, which includes a £480m loss on its £1.4bn investment in Northern Rock plc as a result of its sale to Virgin at the end of 2011.

In January 2010, Northern Rock was split into a mortgage lending arm and a savings arm, following its collapse in 2008. Northern Rock plc was dubbed the good bank while the bad bank, Northern Rock Asset Management, was made up of the bank’s sub-prime assets.

The NAO says the Treasury’s decision in early 2009 to support mortgage lending by splitting Northern Rock in two was reasonable but it was based on a business plan prepared by Northern Rock management which events showed to be optimistic.

The financial performance of the business was worse than planned, principally owing to low interest rates continuing for longer than had been expected.

In 2011, UK Financial Investments, a body owned by the Treasury, reviewed a full range of options for the future of Northern Rock plc, including turning it into a building society or selling shares on the stock exchange.

The NAO considers that UKFI’s recommendation for an early sale was the best way to minimise the losses and says UKFI ran the sales process well.

UKFI expects taxpayers will recover all the cash invested, including the loss on the sale of Northern Rock plc but the NAO believes they will face a £2bn shortfall.

NAO head Amyas Morse says: “Most of the former Northern Rock’s assets will be in public ownership for many years to come and there could be a net cost for the taxpayer of some £2bn by the time these assets are finally wound down.”

Lowland Financial managing director Graeme Mitchell says: “Whatever the rights and wrongs of the number-crunching, we were in a real mess and if the state had not stepped in the losses and likely contagion would have been much worse.”

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