£11bn profit from Northern Rock

Graeme Evans Tuesday 28 February 2012 13:53 GMT

Northern Rock's period of public ownership should generate a profit of up to £11 billion for the taxpayer over the next 10 to 15 years, the body responsible for the Government's bank investments said today.

Just under £37 billion was used in bailing out the two companies that comprise the former Northern Rock, but over time UKFI expects the return of cash will be between £46 billion and £48 billion.

This includes the recent sale of Northern Rock to Virgin Money in a deal that could potentially value the business at £1 billion, as well as repayments and the winding down of Northern Rock Asset Management, which houses a portfolio of mortgages and unsecured loans and remains under Government ownership.

Including the closed mortgage book assets of Bradford & Bingley, UKFI said the return of cash is expected to total between £95 billion and £97 billion over time, compared with £64 billion of funding.

UKFI said: "This means that, in cash terms, the companies are expected to more than repay the original funding provided by the taxpayer."

November's sale of Northern Rock's retail savings and mortgage business attracted criticism at the time for leaving taxpayers with a potential £400 million shortfall.

But today's UKFI report into the sale found the deal to be higher in value than all other ways of returning the business to the private sector, including by stock market listing and remutualisation.

Corporate advisers from Deutsche Bank also considered that delaying the sale by a year to 2013 - the deadline for the disposal to take place - would generate around a quarter less than the Virgin Money offer.

The report also highlighted the competition benefit of selling Northern Rock to Virgin Money, in a move creating a combined business with £19 billion of assets, 75 branches and four million customers.

Deutsche Bank received initial contact from 52 parties over the sale before this figure was reduced to 24. Of these, there were 10 private equity firms, four mutuals and eight new and emerging banks, as well as two existing UK financial institutions.

Northern Rock’s collapse: a victim’s tale

Dennis Grainger, who lost his savings, on his battle to win justice for shareholders

Emma Dunkley AUGUST 31 2017

Dennis Grainger had always been a prudent saver. Rather than spend his salary and the bonuses that he earned while working in the finance department of Northern Rock, he tucked away as much as he could afford into his company’s share save scheme.

His goal when he started the job in Sunderland in 1998 was to save enough for a comfortable retirement with his wife within the next decade.

But his decision to back the company by investing in shares of Northern Rock, a seemingly steady retail banking powerhouse based in the north-east of England, proved disastrous.

Unbeknown to Grainger and thousands of other shareholders, the lender was heading for trouble. In September 2007, Northern Rock became the first British bank in more than 150 years to experience a run, with customers forming queues around street corners to withdraw their deposits. It became the first major casualty of the financial crisis, acquired by the government in 2008 and then separated into a “good” bank, which was bought by Virgin Money in 2011, and a “bad” bank, which is still in the process of being sold.

Shareholders saw the value of their stock wiped out. Grainger lost £114,000. He says he still feels “rancour” at losing so much after nearly a decade of diligent saving, in part prompted by a government scheme aimed at employees investing in their own companies.

“When I joined finance as a junior manager, I didn’t qualify for the defined benefit [pension] scheme,” Grainger says. “At that time, the company was encouraging people to save in the share save scheme. I paid in the maximum I could pay each month, looking to give my wife a provision in retirement, to add to our pension pot. The maximum was £300 a month, which wasn’t a small amount to give away in 1998.”

A drop in Northern Rock’s share price in 2007 didn’t alarm Grainger. When he left the bank in the summer of that year, he still believed it was in rude health. “When it first emerged that the share price went from £14 to £12 in 2007, my wife said, ‘Something is happening.’ But I said, ‘I’m leaving it in there for another five, 10 years for your investment.’ She always likes to tell me now that if I’d listened I could have traded them in at £114,000, but I didn’t. I wanted to save for her.

“I said to her, ‘Why should I sell?’ Northern Rock had made a profit every year, paying dividends. I trusted my bank.”

Once the news broke that Northern Rock had been deemed “effectively insolvent”, Grainger realised his nest egg was gone. “I was upset, because I had believed in the company,” he says. Aside from his own savings, the impact on the community in the north-east was huge. “It was unusual to have a big bank of that stature in the north-east; it gave kids from local schools a job with shirts and ties. It was good for the area. Its collapse was so sad to see, so sad for the north-east.”

In the immediate aftermath of the bank’s collapse, Grainger set up an action group in the region for shareholders and spoke to hundreds of people who had lost their savings. “Half of them were widows. They lost everything. They didn’t know how to sell their shares, and they were leaving them for their grandkids.”

Grainger and other shareholders appealed in court in an attempt to gain compensation but lost the battle in 2009 on the grounds that the bank was already effectively worthless by the time it was bailed out by the government.

The 71-year-old is continuing his battle. He hopes to push the Treasury select committee to review how Northern Rock’s failure was handled by the government and to examine the issue of fair compensation for shareholders. “It leaves a nasty taste in our mouths. There’s almost a north-south divide; a lot of the shareholders are pensioners in the north-east. And my wife will say, ‘We’re not having the lifestyle we should have had.’” 

Northern Rock investors accuse Treasury of profiting from bailout

Shareholders renew compensation push as 10th anniversary of bank’s failure nears

Martin Arnold, Banking Editor SEPTEMBER 1 2017

Thousands of Northern Rock shareholders who were wiped out when the bank was nationalised almost a decade ago are renewing their campaign for compensation, arguing the government is set to make billions of pounds in profit from the bailout.

The move comes only days before the 10-year anniversary of the run on Northern Rock, which produced some of the most memorable images of the financial crisis as customers queued outside its branches to withdraw their money.

Dennis Grainger, chairman of an association of small shareholders in Northern Rock, told the Financial Times he planned to write to Theresa May, asking for a meeting with the prime minister to discuss the demands of his 160,000 members, many of whom are widows and pensioners.

“It cannot be right that parliament approved the expropriation of private property in the interests of financial stability, without payment of any compensation, when it is now known that there will be a substantial profit accruing to the government from the nationalisation of Northern Rock,” states a document the association intends to submit to the government.

The Treasury has sold many of Northern Rock’s assets, recouping much of the £37bn of funding it provided to rescue the lender, leaving a remaining debt of £4.6bn it is owed by NRAM, the body it set up to manage the bank’s mostly mortgage loans.

The taxpayer is expected to end up with a surplus as the Treasury also owns the entire £4.7bn of equity in NRAM that would turn into profit if it were sold at book value.

Many small shareholders lost their life savings when Northern Rock was nationalised. Pradeep Chand, a 70-year-old former finance director who advises the shareholder association, switched all of his self-invested personal pension into Northern Rock shares in 2005 “in the belief this was a safe, profitable, provincial UK bank”.

“I had kept buying more as the share price declined hoping to average down and in the belief that once [the Bank of England loans] had been agreed the value would slowly recover over three years,” said Mr Chand, who retired 12 years ago because of heart problems. He lost more than £415,000 on Northern Rock shares and now lives with his son and is dependent on his children to support him.

Mr Grainger’s campaign, which is supported by the UK Shareholders’ Association, disputes the zero valuation attributed to the bank’s equity by an independent valuer appointed by the government before its nationalisation in February 2008.

It argues the valuation was invalidated by the “unfair and unreal” basis on which it was carried out, particularly the assumption that state aid would be immediately withdrawn when usually central bank liquidity lasts years.

It said Northern Rock was singled out for unfair treatment, compared with how the government responded when bigger banks ran into trouble a few months later, such as Royal Bank of Scotland and Lloyds Banking Group.

“Secret loans and only partial ownership of Lloyds and RBS contrasts unfairly with the wholesale confiscation of Northern Rock,” it said. The Bank of England’s concern about “moral hazard” delayed its emergency liquidity for Northern Rock by several weeks, it argued, allowing a run to start on the bank once news of its request for assistance from the central bank had been leaked.

It added that because the UK had no specific bank resolution regime at the time, the necessary legislation had to be rushed through parliament, allowing for “unjust enrichment” by the government.

A Treasury spokesman said: “We will use any proceeds resulting from the sale of former Northern Rock assets, and any other financial assets acquired during the financial crisis, to recover the significant costs incurred by the taxpayer.

“When we intervened in Northern Rock we legislated to compensate shareholders based on the valuation of an independent expert,” he added. “They assessed that no compensation was due as the bank would have failed without taxpayer support.”

The spokesman pointed out that Andrew Cauldwell’s zero valuation on Northern Rock’s equity in 2008 was upheld following an appeal by the stricken lender’s shareholders to the Upper Tribunal in 2011.

The Northern Rock debacle spawned more than one group representing aggrieved shareholders. Robin Ashby, now a semi-retired Newcastle businessman and Liberal Democrat city councillor, was the co-ordinator for the Northern Rock Small Shareholders Group.

It represented several hundred people, including employees who had invested through the company’s Share Save scheme and loyal local customers of Northern Rock from its building society days before demutualisation in 1997.

Mr Ashby recalls a conversation with one of them after the bank’s near-collapse in 2007, a Northern Rock employee approaching 60 and, she had thought, retirement. She had lost around £12,000 in now worthless shares. “One lady said to me, ‘if I can get another job I will have to put off my retirement and the nice new kitchen.”

Some of the small shareholders in the group will no longer be alive. They did not officially abandon the fight but could not see how to make any progress. “We didn’t accept there was no hope,” says Mr Ashby. “We were told there was no hope. We had no mechanism whereby we could pursue it.”

Northern Rock's Bank of England bailout 'should have been secret'

11 September 2017

An agreement to bail out Northern Rock which triggered a run on the bank should have been kept secret, the country's then top banker claims.

The BBC revealed the Bank of England's support of the struggling North East bank on 13 September 2007.

The following day thousands of Northern Rock customers led the first run on a British bank since 1866.

Mervyn King, then governor of the Bank of England, said he advised the deal be kept secret to prevent panic.

He told BBC Inside Out, North East & Cumbria: "My advice was very clear - we should not reveal publicly the fact we were going to lend to Northern Rock."

A Northern Rock insider told the programme the bank wanted to keep the liquidity support facility secret but was told it was "illegal".

The then governor - now Baron King of Lothbury - disagreed. He said: "Northern Rock and the Financial Services Authority (FSA) all felt it would be a good idea to reveal it.

"The advice of the lawyers and FSA was [keeping the deal secret] was against a European directive.

"Actually, none of my colleagues in Europe believed that for a minute."

The FSA's former head, Sir Hector Sants, said it would be "inappropriate" for him to comment.

'Playing God'

The following year, the Bank of England did make secret loans worth £61.2bn to RBS and HBOS.

The news of the Northern Rock loan was broken by Robert Peston, then the BBC's business editor on the News at Ten.

The revelation caused many customers to try to withdraw their money and a there was a 30% drop in the value of Northern Rock shares.

Many staff and customers lost thousands of pounds worth of shares in the bank in the ensuing fall and subsequent nationalisation.

Northern Rock was taken over by the government in January 2008 before eventually being sold to Virgin money four years later.

Mr Peston, who is now political editor of ITV News, said: "Under the rules, the moment Northern Rock requests emergency help from the Bank of England in that way it has failed.

"That is an event.

"If I had not reported that event I would have been guilty of playing God in an incredibly patronising way.

"I'd have been effectively saying that adults were not capable of understanding the significant information and that would have been an appalling thing for any journalist to do."

Lord King said Mr Peston reported the story in a "very responsible way" and could not be blamed for the consequences.

He also said he would have wanted a "fair deal" for Northern Rock shareholders, which would have seen them get the "residual value" of the shares when the government took over.

Instead, they received nothing as the government concluded the bank was not a going concern, a view upheld by the High Court.

Campaigners are now mounting a new challenge for compensation.

Watch the full story on Inside Out, North East & Cumbria on Monday 11 September on BBC One at 19:30.

Northern Rock shareholders tell Theresa May 10 years on: 'Give us back the money stolen by the Government'

Ten years on from the start of the financial crisis, shareholders who lost everything they invested when Northern Rock was nationalised urge the PM to investigate how the Government 'shafted the little people' 

Adam LusherThursday 14 September 2017 14:07 BST

Ten years after the run on Northern Rock heralded the start of the financial crisis, small investors whose shares became worthless when the bank was nationalised are to ask Theresa May to open an investigation into how they were 'ripped off' by the Government.

More than 100,000 investors – many of them pensioners – saw the value of their holdings completely wiped out when Northern Rock was nationalised following the first run on a British bank since 1866.

Many of them had been people of modest means, customers of Northern Rock who had got their shares in 1997 when it ‘demutualised’ and switched from being a building society to a bank.

They thought they had a ‘nest egg’ invested in a solid provincial bank, the UK’s fifth largest mortgage lender whose charitable foundation showed it remained true to its North East roots.

But after the BBC’s then business editor Robert Peston revealed Northern Rock had asked the Bank of England for emergency financial support, huge queues formed outside branches on September 14 2007, as customers rushed to get their savings out, fearing the bank was about to go bust.

The run on Northern Rock later came to be seen as the moment when the first British victim was felled by the financial crisis that led to austerity. The queues of anxious customers became one of the defining images of the economic downturn.

Northern Rock was nationalised in February 2008. Gordon Brown’s government insisted this was necessary to help save the economy and said the bank was not a going concern and was in administration.

A Government-appointed valuer subsequently said the bank was worthless when it was nationalised, meaning Northern Rock shares had zero value and shareholders should get nothing in compensation

The Northern Rock Small Shareholder Action Group has been fighting this ever since.

While they accept that there is a risk that share value can go down as well as up, they say that the zero valuation was based on the “false assumption” that Northern Rock was in administration.

Instead they say that the bank was never insolvent and in fact still retained considerable value.

When they appointed a valuation expert of their own, they were told that at the time Northern Rock was nationalised, their shares were worth no less than £3 each and probably much more.

About 150,000 small investors, they claim, had their savings “stolen” by a “disingenuous” government which had been scheming “to prepare this valuable solvent company for sale at a profit to the taxpayer”.

Now, the shareholders are to present a letter to 10 Downing Street, along with a summary of the “detailed and fastidious research” they have commissioned, in order to persuade the Prime Minister to investigate their case.

Speaking before handing in the letter on Thursday afternoon, Dennis Grainger, chairman of the action group, told The Independent: “They [Gordon Brown’s government] nationalised the company, took everything and wiped out the shareholders.

“These weren’t shareholders as we often think of them.

“The majority I spoke to in the North East were just widows generally, older people in their sixties, seventies, eighties and even nineties – small, ordinary, decent salt-of-the-earth-types. They got their shares after the bank was formed through demutualisation.

“They had never bought a share in their lives, and wouldn’t know how to sell one.

“They just had their shares stolen from them. The ‘little people’ were rubbed out.”

Mr Grainger, 71, a former Northern Rock employee who says he lost £114,000, added: “We believed the Government rigged the valuation. It was absolute nonsense, contrived to remove the shareholders from the equation.”

The irony, he said, was that because Northern Rock had been based in Newcastle, drawing many of its customers turned shareholders from the surrounding area, Gordon Brown’s Labour government was effectively “stitching up” its supporters in the Labour heartland of the North East.

“The Government effectively shafted them,” he said. “They just didn’t count as far as the Government was concerned.”

In the intervening years, the action group has challenged the zero valuation of Northern Rock shares at a High Court judicial review and in the Appeal Court, but lost both times.

In 2009 the Appeal Court dismissed the shareholders’ claim that the valuation had been a “charade” and agreed with the Government that if the Bank of England and Treasury had not pumped money into Northern Rock, it would have folded because it couldn’t pay its debts.

The action group, however, has been given fresh hope by a BBC documentary broadcast on Monday in which Mervyn King, who was Governor of the Bank of England in 2007, appeared to reveal that he had advocated paying shareholders if Northern Rock ever made a profit.

The shareholders argue that the Treasury is indeed set to make a profit on the £37bn it made available to bail out Northern Rock.

This is because it has recouped much of the money through the sale of the bank’s assets, reducing the debt owed to it by NRAM, the body created to manage Northern Rock’s loans, to £4.6bn.

Since the Treasury owns all the equity in NRAM, which would bring in £4.7bn if sold at book value, it now appears the Government is set to make a profit.

Some of this, Mr Grainger argued, should go to the shareholders, as proved by Lord King, who was shown telling the BBC's Inside Out North East: “My plan was that the Government would acquire the shares legally by saying to the shareholders: We will ensure that you do have the claim on the residual value. I think that would have been a fair deal. [But] the lawyers in the Treasury said that wasn’t feasible.”

Mr Grainger said: “He was a bit late in saying it, but what Mervyn King has just said is significant.”

The Treasury, though, has pointed out that the zero valuation was upheld in court, and that it is obliged to recover “the significant costs incurred by the taxpayer” of the Northern Rock bail out.

A spokesman added: “When we intervened in Northern Rock, we legislated to compensate shareholders based on the valuation of an independent expert.

“They assessed that no compensation was due as the bank would have failed without taxpayer support.”