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Northern Rock agreed £800m in high risk loans after bail-out
20.03.09
Nationalised Northern Rock was allowed to lend £800 million in high-risk mortgages for six months after being placed on life-support with billions from the taxpayer, the UK's public spending watchdog said today.
The finding came in a damning National Audit Office (NAO) report which said an under-prepared Treasury failed to properly assess risks, carry out its own due diligence, or challenge over-optimistic business plans after nationalising the lender in February 2008.
Northern Rock continued to offer its infamous Together mortgage - lending borrowers up to 125% of the value of their homes - from the time of its emergency support from the Bank of England in September 2007 until it was on the brink of public ownership.
While the terms for the controversial loans were tightened, the product still accounts for 50% of the lender's arrears and 75% of repossessions.
The Treasury - which until February was pursuing a private sector sale - "judged mortgage transactions were necessary to maintain the business" while a long-term solution was sought, the NAO said.
Edward Leigh MP, chairman of the Public Accounts Select Committee was scathing at the Treasury's failure to clamp down on the riskier loans.
He said: "While depositors were queuing up outside branches to withdraw their money and the Treasury was pouring public money in to stabilise the Rock, the bank was still ploughing on with awarding mortgages up to 125% of a property's value.
"Why didn't the Treasury demand an immediate stop to the reckless lending that got the bank into trouble in the first place?"
The Treasury had also been aware of "potential shortcomings" in dealing with a failing bank as early as 2004, the NAO said.
The Tripartite Authorities - which include the Financial Services Authority, the Treasury and the Bank of England - had identified the need for further work but it was "not judged by the Treasury to be a priority in a benign economic environment".
The Treasury should address this issue "with vigour", the report said.
Northern Rock was forced to call on emergency funding after the credit crunch shattered its business model, sparking the first bank run for almost 150 years.
But after the crisis broke, just 24 staff at an over-stretched Treasury were working on the problem, the NAO said - and it employed three different team leaders to deal with the Rock between August 2007 and its nationalisation.
The taxpayer footed £79 million in advisory fees on the deal, including £27 million incurred by the Treasury and £39 million spent by Northern Rock and £13 million in bidding fees paid by the lender.
Financial adviser Goldman Sachs - which netted £4.8 million in fees - was also offered a £4 million success fee without the Treasury defining what a "success" was, although this was never paid.
Further Treasury blunders followed when it failed to carry out "sufficient testing" of Northern Rock's business plans between nationalisation and submitting its proposals to the European Commission.
Northern Rock's business plan was based on a 5% fall in house prices in 2008, with its "recession" scenario factoring in a 20% fall over three years.
But house prices fell by 15.9% during 2008 - the biggest annual drop on record - according to building society Nationwide.
The struggling lender's £585 million loss in the first half of 2008 was more than £300 million worse than its base case and even worse than the recession scenario.
Mr Leigh added: "When making these huge financial commitments, (the Treasury) must be more systematic in assessing risks, testing future scenarios and keeping the taxpayers' interests front and centre."
Senior Treasury mandarins John Kingman and Sir Nick Macpherson will face a grilling from MPs over the report at a hearing on March 30.
A Treasury spokesman said: "We note that overall the report finds the Treasury was right to take the decisions it did to protect the interests of taxpayers and to promote stability in the financial system."
Today's report is the first in a series expected from the NAO this year over the Treasury's intervention in the financial sector.
