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The events leading to NR nationalisation began with the well-known difficulties affecting the global financial market in 2007 (i.e. the 2007-2008 financial crisis). NR Management (NRM) held initial discussions with the Financial Services Authority (FSA) from early Spring 2007 focusing on their difficulties to access and refinance loans, particularly medium-term debt maturing later in 2007/08. NRM particularly highlighted the issues concerning access to wholesale markets for medium- and long-term loans. Later the FSA urged NR to take urgent measures to boost liquidity. NRM stated some initiatives were underway, specifically lower lending to the commercial property, and loan finance from Irish, Canadian, Australian, and Scandinavian markets. An additional £2.2 Billion was secured by June 2007. UK LIBOR based interbank loans ‘were more costly’ as the Bank of England interest rate increases of January, May and July 2007 made the credit squeeze worse, and the wholesale market freeze was worsening rapidly.
Several urgent Tripartite/NRM meetings (with Hector Sants leading the FSA from July 2007) and intense discussions took place from June 2007 onwards. Market rumours and speculation increased in parallel, with evidence of ‘higher Short Selling’. The NR share price had declined from £12 a share in January 2007 to £8.50 by midsummer, despite good half year results reported in July 2007.
The Tripartite members/NR Board agreed that one attractive option was to encourage a friendly takeover of NR by a major UK Bank (Lloyds Bank had expressed interest). Negotiations from July 2007 through end August 2007 failed due to a combination of issues. The Bank of England (Bank) was concerned with ‘moral hazard' of loan guarantees and considered the £3.20 per share offered by Lloyd’s bank too low. The Treasury was focused on NRM failure to assess risk, and with implicit loan guarantees the FSA mediation efforts failed. The Treasury expressed concerns over the delays in Tripartite decision processes and considered that the tripartite should have pursued the potential takeover option with more urgency and dedicated effort, cohesion.
During August, the question of Lender of Last Resort (LOLR) facility by the Bank of England was being seriously debated and finally agreed in early September 2007. The provision of LOLR to NR was scheduled for 17 September 2007, in an orderly manner that would also assure depositors and investors. The LOLR facility was agreed internally and was to be kept confidential/not for disclosure to the public. The BBC made a news report about this, and this is what we believe exacerbated the fear and panic of shareholders. This information was leaked to the media and panic ensued; significant amounts of cash was withdrawn by investors which resulted in the government stepping in to reassure those investors that the government would guarantee their investments.
On 17 February 2008, ordinary and preference shares were transferred to public ownership and the bank was taken into temporary public ownership, which later was made permanent. The government had been unable to provide anyone of the calibre needed to manage a situation of this magnitude and the financial analysis underpinning the decision to opt for public ownership was prepared by Goldman Sachs. The National Audit Office asked the Treasury to request the detailed calculations, but Goldman Sachs declined this request. Under the terms of the contract with the Treasury, the financial model remained the intellectual property of Goldman Sachs even though this had been paid for from the public purse (Source House of Commons, Public Accounts Committee – The Nationalisation of Northern Rock). The shareholders were promised compensation (The Northern Rock Compensations Scheme Order 2008), but none materialised as the valuations calculated deemed the value of NR as nil. With the passage of time, further financial details have surfaced to question this zero valuation, hence our request for fair and equitable compensation for this erroneous confiscation of our investment through the act of nationalisation.
The chronology from early 2007 (see appendix 3) exposes FSA regulatory defects, delays in decision making, and unclear roles, leadership, and committee structure inherent in the tripartite arrangements. These severely delayed effective NR supervision and crisis response, and UK market stability in general, during the rapidly emerging global financial tsunami. Tripartite regulatory weaknesses are evident in the failure to agree an urgent, appropriate response and abandon moral hazard dogma, and in the confusion about legal advice on EU regulations. This delay is not, in our view, acceptable responsible conduct in the highly dynamic global and UK money markets, interdependent banking system.
LOLR is provided (at penal interest rates above Bank Rate) based on rigorous commercial criteria regarding the recipient bank’s recovery prospects. These validate the bank’s ability to cover both the with-interest payment schedules agreed with the Bank of England, and to repay the LOLR loans provided over an average three year, maximum four-year, period. Assessment of the ‘cover’ provided by (audited) balance sheet asset book values is part of the risk assessment undertaken. NR comfortably met LOLR criteria as a profitable, solvent, going concern. The FSA stated its view that NR property assets were of ‘good quality’.
Despite this being confidential information not for disclosure to the public, a news report was published on 13 September 2007 from the BBC stating that LOLR facilities by the Bank of England (agreed by the tripartite) were being considered. This catalysed fear and panic among NR members that manifested in a ‘run’ on NR, with depositors lining up to withdraw all their savings as quickly as possible (the first UK bank run in over 150 years). The ‘leak’ of highly price- sensitive news resulted in a massive diminution of the NR share price and exacerbated the credit squeeze, lost market confidence in UK retail banking, and damaged UK financial stability and our global reputation.
The run forced the Bank of England to announce the provision of LOLR on 14 September 2007 (instead of the 17th of September agreed with NR management and other tripartite members) to provide a liquidity support facility.
The LOLR provision could have been accompanied with an immediate suspension on trading NR Shares thus avoiding ‘short selling’. This could have been imposed ‘before’ the London Stock Exchange commenced trading on the 14 September 2007. The net result was to reduce the NR share price by a minimum of 32% thereby creating an unstable market that inaccurately represented the reality of the situation in NR Shares, and other UK bank shares. This represents a major tripartite execution failure that effectively encouraged speculation and established a ‘false market’ for NR Shares, with systemic effects on other UK bank shares.
It is imperative that the TSC (in closed session if necessary) identify the source that provided the ‘scoop’ to the BBC. The gravity in terms of NR value destruction, subsequent valuation and sale prospects, and systemic effects on other UK banks fully justify disclosure in the national interest. The tripartite failure to agree appropriate crisis response resulted in several weeks of delay in LOLR provision (that was being discussed from July 2007 by the tripartite). This delay and market rumours encouraged ‘short selling’ and speculation.
Hector Sants’ expert view was that the crisis and the ‘run’ may have been averted by prompt, decisive Tripartite response. We urge the TSC to seek and consider his expert testimony. We also urge the TSC to invite testimony from the ex-Governor of the Bank of England, Lord King, and Sir John Kingman (head of the Treasury Team concerned with NR and liaison with Goldman Sachs). Hector Sants’ initiative to impose a temporary ban on ‘short selling’ of UK Bank equities in Autumn 2008 is commendable.
UK Bank of England policy lagged by months to align with the US FED and ECB initiatives to improve banking stability, credit market liquidity, and lower interest rates progressively from late September 2007, eventually playing ‘catch up’ in autumn 2008 with a decisive 2 percent cut in bank rate. The UK central bank appears to have placed higher priority on inflation management and ‘moral hazard’ and less on interpreting the scope of option permissible under the law when considering NR. This is clear when the Bank of England considered that the September 2007 provision of LOLR to NR facilities required public disclosure, yet a few months later it provided secret loans of at least £60 billion to Halifax, Bank of Scotland, and the Royal Bank of Scotland. It appears that the Bank was wrong in interpreting EU state aid disclosure criteria and NR bore the resulting fallout.
The Bank was to offer limited parcels of liquidity from October 2007. UK banks were reluctant to avail themselves of this facility in case it caused loss in market confidence and/or a ‘run’. Only in April 2008 did the Bank realise the imperative for a significant liquidity injection into the UK banking system/interbank credit market and participated in the Treasury-led support package of several hundred billion pounds worth of guarantees, warranties, and other incentives to restore confidence in UK banking, risk management, and financial stability.
HM Treasury appointed Goldman Sachs as Advisers and replaced NR top management with Government selected professionals. The primary objective was to ensure disciplined cash and balance sheet control and determine sale prospects and value. Goldman Sachs was tasked with drafting a Prospectus for Sale of NR that would attract Private Sector bids. The issued Prospectus highlighted Goldman Sachs’ professional view that NR acquisition would reward the potential bidder with a net present value in the range of £2.8 billion to £3 billion over two to three years.
The Government never consulted with NR shareholders on the private sector bids submitted nor on any other proposals for crisis resolution. This directly conflicts with established private sector practice and the democratic principles of our free enterprise economy. Shareholders were neither given the opportunity to vote on any rights issue, nor on the alternative that combined a rights issue with private equity capital injection. Requests for clarification of the piecemeal Treasury measures were never provided.
On 14 September, the judgement of the FSA had been that “Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book”.
On 25 October, the Chancellor of the Exchequer reaffirmed that “Northern Rock is and was solvent”
On 19 November, he told the House that “the Financial Services Authority has said before, and continues to say, that Northern Rock’s main asset base—its mortgage book—is strong and sound”.
We strongly question the appropriateness of the financial and economic rationale for the ‘temporary’ nationalisation of NR. Specifically, we question the compensation order assumptions based on Andrew Caldwell, the Independent Valuer’s calculations (appointed by HM Treasury) to determine shareholder compensation. We further assert that HM Treasury has failed to meet the criteria for professional and prudential management of the ‘de facto confiscated’ (since no fair value compensation was paid) NR assets, with total disregard of shareholder interests.
Our issues and concerns over the rationale for policy decisions, specifically the compensation order assumptions given to the Independent Valuer (appointed by HM Treasury) on which to base the valuation outcome, have never been credibly responded to, justified, or addressed. All our shareholders and savers regard this appeal to the TSC as ‘The last resort’ to ‘Right the Wrong’ based on the facts and evidence. Key concerns never responded to are: -
No rationale for the policy, to urgently ‘sell’ NR after it had just sustained a historic damaging ‘run’, that caused £billions of shareholder value destruction.
No explanation of the ‘leak’ of LOLR provision.
No temporary ban on trading/short selling of NR shares, to stem damage to the NR market value.
Details of the professional advice given by Goldman Sachs. These were never made public or shared with NR shareholders.
Why would a responsible Government want to sell any bank in an undeniably worst possible time? We need clarification as to why the government tried to urgently sell a UK mortgage bank in a highly volatile, dysfunctional, UK/Global market gripped with immense concerns of subprime mortgage asset toxicity, systemic risk exposure, in the middle of a historic banking crisis.
Why did the Government block the 23 pence per share interim dividend payment even though LOLR had been provided at punitive interest rates.
Justification for the decision to take NR into ‘temporary’ public sector ownership.
Justification of why 100% state ownership. Why not 25%, proportionate to the maximum £ 26.5 billion of LOLR provided relative to a £110 billion balance sheet?
Government stated that the best option was ‘temporary’ public ownership that would protect the interests of (a) customer deposits (b) protect taxpayer interests and (c) support UK market stability. Why was shareholder compensation, based on the £3 billion prospectus valuation, not awarded, after deducting expenses? Goldman Sachs was a reputable valuer, advising HM Treasury?
The three core objectives of the Government’s (unilateral) decision, whilst securing parliamentary support, were in fact neither necessary nor achieved. Why nationalise NR?
The FSA had already established, and publicly stated in September/October 2007 that NR had a ‘good quality’ asset book. The central bank progressively accepted mortgage-based assets as collateral and made a provision for up to £40 billion of LOLR if required. Why nationalise?
Regarding UK financial stability, the Government was fully aware that tripartite members, led by the Treasury and the Bank, possibly with Goldman Sachs advice, were at an advanced stage of finalising a £100 - £150 billion bank rescue package of Government loans, guarantees, and other incentives to stabilise interbank lending, and assist with the reduced liquidity resulting from toxic asset exposure. The Government launched the rescue package in early April 2008, less than six weeks after NR's compulsory nationalisation. Why was parliament not informed during the debate on NR nationalisation in February?
A substantial support package for all UK banks of £100 - £200 billion was announced in April 2008, just weeks after NR Nationalisation - so why nationalise NR? From the NR shareholder perspective the LOLR, provided several months earlier, was already showing success and NR was able to reduce the LOLR by £16 billion within a year, from £26.5 billion down to £11 billion, despite penal interest rates and virtual prohibition to offer new mortgages or loans. Why pass the emergency legislation before the April 2008 rescue package? The April 2008 business plan formulated by the interim management team was approved with the objective to ‘return NR to the private sector’ – this was accomplished by 2009 after the NR business model had been de-risked in terms of funding and growth with ample liquidity – why was this not acted upon?
Systemic risks and exposure were highly prevalent, evident, in the UK and Europe by spring 2008. Risk assessment of interbank loan toxicity CDO exposure ranged between 30-80% among many global investment banks (the USA and Europe primarily). Concerns that integrated retail/investment institutions had utilised retail deposits to increase their leverage substantially created further fear of financial exposure. The April 2008 UK Government package proved inadequate as global conditions deteriorated, systemic risks and contagion spread yet NR had virtually no systemic risk and minimal asset toxicity – Why was nationalisation necessary?
Despite the rescue Freddie Mac and Fannie May in the USA. Lehman Brothers collapsed later in September 2008.To its credit, the UK Government then launched a UK Bank support/rescue package of £500 Billion up to £800 Billion requiring massive quantitative easing from the Bank of England to avoid a collapse of the UK banking system. This major initiative was successful, and the Treasury acquired an 80% ownership of the Royal Bank of Scotland and 40% in the combined Lloyds/ HBOS bank. Barclays preferred to launch huge rights issues in the UK and overseas and borrow £billions from Middle East investors at 14% rather than the UK Treasury 6% interest rate – Why was NR treated differently to other UK troubled banks?
We question why there was the reclassification of LOLR to ‘state aid’ in the March 2008 NR compensation order that mandated the assumption of ’in administration’. LOLR is provided (on a ‘going concern’ basis) typically for up to three or four years and commenced on the 14 September 2007. The temporary Nationalisation in February 2008, and compensation order, effectively transferred all assets and loans to the Treasury and redesignated LOLR as ‘State Aid’ thus allowing all future gains to accrue to the exchequer - why was the NR valuation conducted on the assumption of ‘in administration’ as opposed to Bradford & Bingley’s ‘going concern’ basis?
Summary of the BBC Inside Out, North East & Cumbria report:
Northern Rock's Bank of England bailout 'should have been secret'
The following year, the Bank of England did make secret loans worth £61.2bn to RBS and HBOS.
Mervyn King also said he would have wanted a "fair deal" for Northern Rock shareholders, which would have seen them get the "residual value" of the shares when the government took over. Instead, they received nothing as the government concluded the bank was not a going concern, a view upheld by the High Court. Campaigners are now mounting a new challenge for compensation.
Read the full story here on the BBC website.
Mervyn King
Former Bank of England Governor
We submit our views on professional, equitable, approaches to determine NR valuation and a range of estimates for NR shareholder compensation.
Our belief is that NR failed to be assessed for compensation based on any of the key professional valuations that comply with company law: accounting standards such as the US FASB; international reporting standards; institutional accounting directive; and established practices and conventions. Company reports must include notes that assure compliance and transparency, and assessment of known and potential risks to operations. Professional valuations comply with the regulatory regime and allow the valuer discretion on any assumption made and associated rationale. Legal and financial institute members are compelled to apply the ethos of utmost good faith, ‘Uberrimae Fidei’.
Regarding the NR valuation, we consider it appropriate and professional to start with the published, audited, accounts as a ‘key’ (book value) valuation basis. This methodology excludes speculation, short selling, or subjective forecasts /projections. Published, audited, accounts detail the ‘book value’ of assets and liabilities stated in the balance sheet, the profit and loss account for the year in question, and the statement of sources and application of funds, including cash flow analysis and notes to the accounts.
We believe that analysis of Government published accounts from the accounting year 2007 through to the last NRAM (Treasury) accounts for 2021 indicate that ‘cumulatively’ HM Treasury made a ‘net surplus of £7.8 Billion after repayment of loans, interest charges and fees. It is important to note that the creation of the asset management entities, UKFI, UKAR, NRAM, etc is both complex and not helpful to precise analysis. Our banking expert, the late esteemed Bill Brown, took several weeks to forensically sift through the accounting data. The separation of the proportion of NR’s operations into the so called ‘good bank ‘makes the forensic tracking more difficult.
Key Government statements of NR Value: -
• November 2007, Prospectus for sale stated Goldman Sachs supported £2.8 Billion - £3 Billion NBV over up to three years.
• February 2008, NR is placed in a state of ‘temporary’ nationalisation. The Chancellor, Alistair Darling, stated that the Government would inject £3.3 Billion of Capital into NR but only £1.4 Billion was injected.
• 2012, the UKFI estimated that Government would achieve a net gain up to £11 billion over a period of up to 15 years.
• 10 June 2015, the Chancellor, George Osborne, stated ‘that the Government would secure a Net Surplus of £9.6 Billion from NR/ Bradford & Bingley, based on Rothschild/Treasury Estimates’.
• 2020, a letter from Steve Barclay HM Treasury Minister to the NR Action Committee stated that any ‘surplus’ from NR would be used to cover losses on the Royal Bank of Scotland. The Minister neither accepted nor rejected our assertion of a (cumulative) £9 Billion Net Value – How can a surplus from NR be morally justified to support other banks?
• 2015 and 2021 estimates from the OBR (established by HM Treasury) gave a valuation of £10.6 and 16.9 billion respectively**.
** Both valuations relate to UKAR – the combined total of Bradford & Bingley and NR
