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Is UK sale right for tax payers?

By Owen Sanderson
19 Mar 2015

Getting assets out of the public sector has an obvious appeal. But it’s not always a great trade.

When George Osborne announced in the UK’s Budget that the Treasury would sell off £13bn of mortgages from Northern Rock, and finally exit its stake in Lloyds, it was widely seen as good news.

Apart from the small matter of RBS, the sales will let the UK government draw a line under bank bailouts. But it’s an expensive headline.

Consider this — you are a fund manager with unlimited leverage and an unlimited time horizon. Do you borrow £7bn at 1.92%, and invest it at 4.79% for 15 years?

By switching out of the Northern Rock book, the UK government is, in effect, is turning down the trade.

Northern Rock’s Granite master trust is not paying the taxpayer now — it worked as a securitization should, when Northern Rock went under and the trust breached its triggers, and switched payments to bondholders. But refinancing the mortgage book with Gilts (in effect, what most run-off agencies do) would be cheaper than selling it.

GlobalCapital’s back of an envelope numbers reckon the sale costs the UK taxpayer more than all of the headline grabbing alcohol duty cuts also announced on Wednesday. Meanwhile, how many vital services that the government has cut in the name of austerity could not selling it pay for?

Of course, taken to extremes, that logic implies the Government should own everything that offers a return. That is wrong — the arguments against state ownership are extensive and often convincing.

A big shareholding in a bank, for example, distracts management, can promote interference, depress valuations and misallocate capital. State banks can be vehicles for corruption at worst, and can be prone to poor investment choices and inefficiency.

But Northern Rock’s mortgages will simply run off. The state is not opening its door to new mortgage lending (it has quite enough exposure to UK housing), it is simply running off a book which it already owns, and has been administering for seven years.

Securitization bankers may be salivating over the mortgage trading, new issues, financings or liability managements that the sale will bring. But UK taxpayers should take a dim view of such electioneering.

By Owen Sanderson
19 Mar 2015