Rock bottom deal?

Boasts by George Osborne that the ÂŁ13bn sale of former Northern Rock mortgage loans have resulted in gains for the taxpayer are being questioned by industry experts with Unite calling for answers and transparency.

The mortgages were taken over by the taxpayer at the height of the global banking meltdown, and are their disposal is the biggest ever sale of financial assets by any European government.

The loans were sold to New York based Cerberus which has been buying up what it calls ‘distressed’ loans which have remained in place since the 2007 global financial crisis. Northern Rock was one of the first UK-based banks to feel the impact of problems in the US mortgage market which helped spark the global banking crisis.

UK and US taxpayers stepped in to stop the total collapse of major banks across the world. The banking crisis piled up public debt, sparked a recession and played a major role in creating the UK budget deficit.

These Northern Rock loans were taken over by the taxpayers in 2010. The risks were, in effect, nationalised. With risks hugely reduced, Osborne is now privatising it.

Cerberus has also bought the entire share capital of NRAM, the former Northern Rock mortgage business. While it must have believed it got a decent deal out of its purchase, questions are being raised as to whether the sellers – UK taxpayers – were also winners.

The Treasury is pitching the sale of the mortgage assets as a financial triumph for the taxpayer. But suspicions have been raised by the tortured form of words used by Osborne in a Treasury press release about the sale.

Osborne heavily implies this by saying, “we are now clear that taxpayers will get back more money from Northern Rock than they were forced to put in during the financial crisis.”

But he holds back from explicitly saying that the sale of these assets made gains for the taxpayer.

Questioned by experts

The issue has been questioned by experts who suggest the taxpayer may lose out on taxes made from profits generated by the interest on ÂŁ13bn of loans. They quote sources which claim the interest rates on the loans are as high as 4.79 per cent.

But some of individual mortgages in £1bn part of the loans held in Northern Rock ‘legacy’ mortgages charge interest in excess of 6 per cent.

The interest on the ÂŁ12bn of loans at 4.79 per cent, says Jolyon Maugham writing on the New Statesman website, suggests that would generate over ÂŁ600m in interest, generating up to ÂŁ125m in tax.

But it all depends where the mortgages are now held and if they are subject to UK tax, an issue the Treasury press release remains silent on.

Maugham suggests numerous legitimate means may be used to ensure the loans are technically ‘held’ in low tax areas such as Luxembourg, thus escaping the UK tax net.

Another way of looking at it is that the taxpayer may be giving up – potentially – over £600m in interest payments each year. Osborne appears to want the quick hit of a lump sum rather than, say, £6bn income to the taxpayer over 10 years.

‘Serious questions’

Unite assistant general secretary Steve Turner is concerned at what the deal will mean for the taxpayer. He said, “There are serious questions to answer about the deal and we know we cannot take George Osborne’s claims at face value.

“The taxpayer took over these mortgage loans – which are secured against the value of the property – when house prices were dropping rapidly and the banking system was in meltdown.

“The value of the properties are likely to have grown and the banking system has been stabilised by huge injections of public money.

“Parliamentary watchdogs need to confirm these income generating assets have not been sold off at a knockdown rate considering the loans are not as precarious as they were in 2007.

“To suggest this must be a good deal for the taxpayer – as Osborne suggests – because the sale was above marginally above ‘book value’ is nonsense.

“The risks linked to the loans are nowhere near as high, the income generated by them is healthy. We need to know if, by this deal, we have now given up on taxing the potentially £600m income from the interest on the loans.

“We need full transparency to ensure that having taken on eight years of huge financial risk on the loans that the private sector is now jumping on the profits when the risk is far lower.

“I’d like to see a proper Parliamentary investigation with full transparency. Osborne is at pains to imply this is a good deal which in my view, suggests the opposite may be the case.”

Alarming

Unite also has concerns for the workforce. Unite regional officer Brian Cole commented, “The sale of mortgage debt for astronomical figures was one of the main causes of the financial crisis, so it’s alarming to see the mortgages of so many home owners being sold-off to an equity firm whose only interest is short-term profit.

“The finance industry doesn’t need another ‘get rich quick’ scheme. Our members and the thousands of home owners who rely on us deserve long-term security, yet once again their futures are being placed on the roulette wheel.

“The union will continue to consult our financial workers members and seek assurances from Cerberus over both the long-term future of staff and the mortgage book.”