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Rock move saves £1.5bn

Taxpayers were reportedly saved around £1.5bn after Government moves to buy back debt in nationalised lenders Northern Rock Asset Management and Bradford & Bingley, the public spending watchdog has said.

According to reports, a study by the National Audit Office (NAO) hailed efforts last year to snap up £2.4bn of so-called subordinated debt - high interest paying debt that ranks behind other loans in the event of insolvency - in the failed banks as value for money for the taxpayer.

Subordinated bondholders in B&B and Northern Rock Asset Management (NRAM), which was spun off from the “good” part of Northern Rock last year, were being paid “excessive” interest rates of interest despite being protected from losses after the Government took the banks into public ownership, said the NAO.

These debt holders would have normally absorbed losses if the two banks had been allowed to collapse into insolvency, but the Government instead opted to wind them down.

UK Financial Investments, which manages State-owned banking assets, launched a buy-back of subordinated debt designed to make savings for the taxpayer and encourage holders to sell.

The NAO said the decision helped save around £1.5 billion in future interest payments and ensured these bondholders contributed to the costs of nationalisation.

Amyas Morse, head of the NAO, said: “Opportunistically buying back the subordinated debt of the taxpayer-owned banks was value for money in the circumstances.

“The holders of this debt had been paid to bear the risk of taking loss if the banks ran into trouble, but were rescued as part of the nationalisation.

“It is good for the taxpayer that the debt holders have now shared part of the costs of restructuring the banks. It remains to be seen if the cost of subsidising the banks will eventually be recouped by the taxpayer.”

This was posted in Bdaily's Members' News section by Ruth Mitchell .