Private sector mistakes turn into publicly funded failure.

March 20, 2009 5:11 PM

Isn’t hindsight a wonderful thing? The Treasury team is probably indulging in a fair amount of it today, following the release of the National Audit Office’s report into the Treasury’s nationalisation Northern Rock. Although the report supports the idea that nationalisation was the best way to protect taxpayer’s money, the Treasury comes under heavy fire over its severe mishandling of the process.


Even after financial assistance was provided by taxpayers in October 2007, the Bank continued to hand out the infamous 125% ‘Together’ mortgages. In the months between that rescue package and the bank’s full nationalisation (to the tune of £26.9billion) in February 2008, Northern Rock agreed nearly £2 billion in such ‘Together’ Mortgages. 


These ‘Together’ mortgages currently represent 70% of Northern Rock’s repossessions, with predictions that more than 60% of customers are in danger of falling into native equity by next year. Amazingly, not only did the bank agree to more of these high-risk mortgages, the taxpayer also footed the £79m bill for advice from law firms, banks and PR in the failed salvage effort, including £39m spent by Northern Rock on advisers to review its strategic options.


These private banking mistakes highlight a wider problem with the Government’s handling of the banking crises. The Audit Office report questioned why the Treasury failed to challenge the company’s forecast of future trading as due diligence was not commissioned prior to the bailout, particularly with reference to the quality of the banks loan book, as well as the lack conditions placed on the bank regarding these risky mortgages. Darling yesterday admitted to the Treasury Select Committee that taxpayers are likely to own the nationalised banks for a number of years to come. Economists estimate that 3 years of public ownership of Northern Rock would require a net subsidy of £1.3 billion of taxpayers money. They also believe that the bank will be in public hands for at least another 5 years.  


Perhaps most shocking, it has also been revealed that weakness in the banking system first became apparent in 2004, when the Treasury was run by Gordon Brown. The Tripartite Authorities – the Treasury, Bank of England and FSA- tested their ability to handle a financial crises. They found a single bank failure had the ability to destabilise the whole financial system and in turn, the economy. However, at the height of the boom, it was decided that the threat of banks failing was not important enough to lead to increased scrutiny or regulation. Two years later Northern Rock collapsed, leaving taxpayers to pay for Brown’s failures yet again.


It is perhaps unsurprising that a bank with such relaxed mortgage criteria, which allowed mortgages to be agreed at six times the applicants income and at 125% of the value of their homes, was found to be reckless and unsustainable. It is less clear why the Treasury, suitably forewarned, did not think it right to stop such irresponsible banking. It will be enlightening to hear the Treasury’s response (set for 30th March) to the Public Accounts Committee’s findings .

Isn’t hindsight a wonderful thing? The Treasury team is probably indulging in a fair amount of it today, following the release of the National Audit Office’s report into the Treasury’s nationalisation Northern Rock. Although the report supports the idea that nationalisation was the best way to protect taxpayer’s money, the Treasury comes under heavy fire over its severe mishandling of the process.


Even after financial assistance was provided by taxpayers in October 2007, the Bank continued to hand out the infamous 125% ‘Together’ mortgages. In the months between that rescue package and the bank’s full nationalisation (to the tune of £26.9billion) in February 2008, Northern Rock agreed nearly £2 billion in such ‘Together’ Mortgages. 


These ‘Together’ mortgages currently represent 70% of Northern Rock’s repossessions, with predictions that more than 60% of customers are in danger of falling into native equity by next year. Amazingly, not only did the bank agree to more of these high-risk mortgages, the taxpayer also footed the £79m bill for advice from law firms, banks and PR in the failed salvage effort, including £39m spent by Northern Rock on advisers to review its strategic options.


These private banking mistakes highlight a wider problem with the Government’s handling of the banking crises. The Audit Office report questioned why the Treasury failed to challenge the company’s forecast of future trading as due diligence was not commissioned prior to the bailout, particularly with reference to the quality of the banks loan book, as well as the lack conditions placed on the bank regarding these risky mortgages. Darling yesterday admitted to the Treasury Select Committee that taxpayers are likely to own the nationalised banks for a number of years to come. Economists estimate that 3 years of public ownership of Northern Rock would require a net subsidy of £1.3 billion of taxpayers money. They also believe that the bank will be in public hands for at least another 5 years.  


Perhaps most shocking, it has also been revealed that weakness in the banking system first became apparent in 2004, when the Treasury was run by Gordon Brown. The Tripartite Authorities – the Treasury, Bank of England and FSA- tested their ability to handle a financial crises. They found a single bank failure had the ability to destabilise the whole financial system and in turn, the economy. However, at the height of the boom, it was decided that the threat of banks failing was not important enough to lead to increased scrutiny or regulation. Two years later Northern Rock collapsed, leaving taxpayers to pay for Brown’s failures yet again.


It is perhaps unsurprising that a bank with such relaxed mortgage criteria, which allowed mortgages to be agreed at six times the applicants income and at 125% of the value of their homes, was found to be reckless and unsustainable. It is less clear why the Treasury, suitably forewarned, did not think it right to stop such irresponsible banking. It will be enlightening to hear the Treasury’s response (set for 30th March) to the Public Accounts Committee’s findings .

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