David Prosser: Between a Rock and a hard place

Outlook Want to buy a bank? Only a couple of (not very careful) previous owners? It could be yours for a knock-down price, as long as you settle up before next year's election.

Gordon Brown may have convinced much of the world that he has saved the banks – and the global financial system to boot – but back home the ungrateful electorate isn't exactly queuing up to thank him. In an ideal world therefore, he'd like to sell Northern Rock, or the good bits of it anyway, back to the private sector before polling day – providing proof, if you will, of his masterful handling of the credit crisis.

Still, while an early sale of Rock might make sense politically – though one somehow can't quite see this being an election clincher – it wouldn't stack up financially. Quite simply, off-loading Rock before the end of the year would mean missing out on the opportunity to recoup as much as possible of the taxpayer's losses on the bank (or even missing out on a profit one day).

Most obviously, any potential buyer of Rock before the next election is going to know the current administration is a forced seller. If you've ever tried selling off the last bits of rubbish in the few minutes before a car boot sale closes for the day, you'll have a fair idea of what the Treasury could expect to get back from Rock in such circumstances. Moreover, there are reasons to think Rock might, in time, become an attractive saleable asset. The plan to split the bank in two, leaving the toxic mortgage debt with the state while selling the savings business, branch network and better-performing loans, is a good one, assuming we get a decent price for the latter in order to mitigate future losses on the former.

Yesterday's update from Rock suggests that a corner is in sight, with impairments still rising but at a slower rate. In time – and with luck – the "good" bank's assets should enable it to put the "bad" bank's problems behind it, capitalising on a decent network of branches, a savings business of some scale and a relatively healthy loan book. That transformation, however, will take an economic recovery and at least a couple of years to achieve – by which time the potential sale price ought to be much higher.

We've seen what happens when you make hasty decisions about Northern Rock's future. One reason why the bank would be harder to sell right now is that under Treasury control it spent months forcing its best mortgage customers out of the door. The redemptions helped Rock pay down its debts to the taxpayer, but left it with a disproportionately high number of less creditworthy customers. It also deprived the mortgage market of billions of pounds of credit – which is why the policy was eventually reversed.

And there are at least two other reasons to hold fire on a sell-off of Rock. The first is that the taxpayer is earning a decent margin on the bank's debts, given the punitive interest rate payable on the £11bn or so of the bank's outstanding borrowing. Second, we do not yet know just how sizeable the losses are likely to be on the bad bank stuff with which we'll be stuck once a sale has gone through.

That information isn't likely to be known for a couple of years and will depend on the pace of economic recovery and what that means for Rock's struggling customers. If the plan is that the proceeds from a sale of the good bank will pay for the future losses of the bad bank, why not wait until we know what those losses might be, particularly if we're earning decent interest in the meantime?

One final point. Northern Rock announced earlier this year that it would increase mortgage lending by some £5bn in 2009 – welcome relief for a sector thirsty for credit. In fact, the bank is only going to manage £4bn this year, mostly because of delays in its passing European state aid tests. Still, this is a boost to the mortgage market that the Treasury has actually been able to deliver; with other lenders, it can only cajole them into action. As the clamour for lending continues, it seems odd to sell the one institution where ministers have real power over supply.