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What should we do with the Rock?

If you were the Chancellor, what would you do with Northern Rock? Selling it off to the highest bidder might seem like the easiest and quickest option and the most palatable to the taxpayer. However, there is still pressure for a mutual solution. Lobby group Mutuo says its plan, which would see the Government hold onto a stake until it gets its money back, would compensate taxpayers but over a longer time period than a sale.

George Osborne now faces a dilemma: Sell and risk opprobrium from those already hounding the Government over its commitment to foster diversity and promote mutuals, or, in the midst of questions about his fiscal retrenchment undermining recovery, abandon the sale at a short-term cost to the taxpayer.

Osborne announced to much fanfare during his Mansion House speech that he was putting the Rock on the market. His decision was based on advice from UK Financial Investments which told him a sale to a single private sector bidder would provide “substantially the best value for taxpayers”. He said mutuals could bid too, but the two building societies known to have been eyeing a bid, Coventry and Yorkshire, have since backed away. No other mutuals are thought to have thrown their hats – co-operatively, of course – into the ring.

Pressure has been growing for the Government to deliver on its commitment in the coalition agreement to foster diversity and promote mutuals. Last month, the all-party parliamentary group for building societies and mutuals said the Government has failed to show how it intends to deliver on this promise. The Building Societies Association says remutualising Northern Rock would be a perfect demonstration that Government is taking its commitment seriously and 113 MPs seem to agree having signed a Parliamentary motion calling for “equal and due consideration” to be given to remutualisation. Neither Osborne nor Northern Rock chairman Ron Sandler have ruled out the business becoming a mutual again.

But equally, Osborne, not exactly a big state sort of politician, is keen to start getting some of the Government-owned banks out of his in-tray. As he told the assembled great and good at Mansion House: “We could start at least to get some of our money back”. After UKFI said last month that uncertainty over regulatory changes mean it will not recommend the sale of other state-owned banks at present, selling the Rock looks like the only opportunity.

Out of £27bn pumped into the bank in 2008, £1.4bn was turned into equity for the part of the bank now up for sale, the “good bank”, Northern Rock plc. In its results this week, that was shown to have fallen to £1.1bn. Robert Peston reported earlier this week that the successful bidder is expected to pay around £1bn but Sandler says the shortfall will be made up in the long term from profits on £40bn worth of loans that will continue to be held by the state in the “bad bank”, Northern Rock Asset Management.

Osborne’s sidekick, and minister with responsibility for mutuals, Treasury financial secretary Mark Hoban has said in the past that it is the Treasury’s aim to provide a “level playing field” for mutuals rather than to promote them. Add this apparent cooling off on the commitment to promoting mutuals to the fact that Osborne thinks he can get taxpayers’ money back by selling it off and it does not bode well for remutualisation – as long as the bids put in by firms last week are acceptable.

So, who might take the Rock off the Government’s hands? Two firms understood to have have placed bids are Virgin Money and US private equity firm JC Flowers. Reports last year suggested JC Flowers was looking to suck up UK building societies to create a “hybrid-mutual” in which it would retain a stake. If its intention is to fold the Rock into this project, it could offer the coalition a way out of its mutual quandary. If not, Osborne could risk criticism for selling the bank at a cut down price to a private equity firm, despite assurances the difference will be made up in the long-term. Let’s not forgot the furore over a private equity firm’s involvement in Southern Cross. In that case, everyone’s favourite billionaire, Richard Branson, leads the field. Close your eyes and you can already see the carefully choreographed photo opportunity outside Number 11.  

Steve Tolley is the political reporter at Money Marketing


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