I can remember when £1 billion was real money

All the usual suspects have rehashed the story about Virgin Money buying Northern Rock plc for £747 million, which they reckon produces a loss for the taxpayer of £400 million. That is based on sales proceeds of £1 billion and an entirely spurious figure of £1.4 billion which "taxpayers had injected... into Northern Rock".

The taxpayer did no such thing, £1.4 billion was an entirely made up figure for the share capital of the reconstructed NR, i.e. the amount by which its gross assets exceeded its liabilities when it was set up. The other half of this transaction is a corresponding shortfall of £1.4 billion in Northern Rock Asset Management (the bit which still belongs to the taxpayer).

Ho hum, so let's do this properly. If you look at the relevant bit on NR's actual website, what it says is this:

* Agreement has been reached with Virgin Money for the acquisition of Northern Rock plc – the sale is expected to complete by the end of the year

* The Government will receive £747 million in cash on closing of the sale, with the potential in the future to receive over one billion pounds in total.

There's no explanation of how this additional £250 million-plus will be calculated or what would trigger the liability, but hey.
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UPDATE, the print version of today's Evening Standard article explained all, there's another £50 million due in cash (why not now?), the government allotted itself £150 million in NR bonds (reducing the net value of the assets sold) and if NR is floated within five years, then Virgin Money has to pay another £80 million. We can forget about the £80 million, but adjust the real purchase price to £797 million.

As it happens, NR had net assets of £1,122 million as at 30 June 2011, from which we deduct the £150 million extra liabilities, giving us a net asset value as at today's date of £972 million, against a purchase price of £797, that's a real book loss of £175 million.

What we do not know is what the goodwill value of NR is, which we would add to the book value to give us the real loss. It is quite possible that NR has a negative goodwill value, as it has made losses of over £200 million in each of the last two years; if we assume that NR will lose another £200 million before it returns to profitability or break even, then we can adjust the £175 million loss to a £25 million profit.

The fact that Gordon Brown might have wildly overpaid for the whole thing in the first place is an entirely separate issue, that is sunk costs. Perhaps we can claw a bit back by placing a charge over the royalty income from his books?