HM Government or Northern Rock shareholders

The UK is a Democratic state.

What do we mean by that? It refers to a political system that is sometimes defined as one which allows all citizens to participate in political decision making.

How is that achieved (if it is really true)?  It has been described as “ government of the people, by the people, for the people”. We must always remember that politicians do not have super powers (although some of them may believe so). They are ordinary people like us, who have become our representatives as  “Members of Parliament”. They exhibit the same strengths and faults as every one of us. From their ranks they appoint senior politicians known as Ministers who have additional, often onerous, responsibilities.

There are two parties to every difference of opinion or dispute. In the case of Northern Rock Bank they are:

1)  HM Government

2)  The former shareholders of Northern Rock

One expects those two opposing parties to have different points of view and to adhere to them.

So far, my Articles have been based on facts derived from official sources including the Bank of England (BofE), HM Government Departments, FSA, etc. In this Article however, we have to resort to opinions to demonstrate our case. They may be opinions which relate to the true status of Northern Rock but we cannot say so because we have to rely on deductions based on the same principle used by Judges or Justices in Court proceedings that are the standard burden of proof in civil cases, i.e. “the balance of probabilities”.

There have been several Court Cases concerning Northern Rock and the effects of its Nationalisation. Our concern is with the confiscation of Northern Rock shares without compensation.

Being a “law abiding democratic society”, it is our expectation that we can rely on the probity of HM Government to produce solutions. However, in this case, HM Government adheres to a single point of view based essentially on the outcome of Court proceedings and refuses to change it, hence the need to set out the two conflicting points of view in order that ordinary people can judge for themselves which, “on the balance of probabilites” is likely to be the true answer.

We shall start with the situation as determined by HM Government. The followingare the main points.

1. The years 2007 and 2008 produced a financial crisis of a severity which had never been experienced in our lifetimes, particularly as it relates to banks in the UK.  As a result, when Northern Rock (NR) became the first casualty, there was no political “game plan” to deal with it although, after the run on deposits HM Government became acutely aware of the need for an effective response.
2. The most desirable solution was to achieve a “takeover” of NR by another private sector entity. In the circumstances of the time that proved impossible and The Chancellor of the Exchequer had of necessity to consider nationalisation or “temporarily taking NR into Public ownership” as  being  the preferred expression.
3. Since neither HM Treasury (HMT) or The Chancellor had real experience of such matters, a special advisor was engaged from the USA, Goldman Sachs. The adviser suggested a nationalisation “as being the best way of protecting taxpayers” from a financial viewpoint.  What was not related was the extent to which “taxpayers” were involved and therefore why they required “protection”.
4. At the time it was nationalised, NR owned 113 Billion pounds of assets (mostly mortgages) and had an annual interest income of about 5 billion pounds. In June 2007 it had an excess of assets over liabilities (Equity) stated as being 3.3821 billion pounds.
5. What we do not know because HMT never made the reasons public, except for a reliance on the outcome of Court proceedings, was why HM Government decided that the shareholdings in NR should be acquired without offering compensation particularly since NR had been officially declared SOLVENT and therefore it was appropriate to consult and obtain the approval of the shareholders on any course of action.
6. Before that  objective (no compensation) could be achieved, the shares had to be declared valueless.  The only  Statute Law  capable of achieving that status was The Insolvency Act 1986 but there was a real problem. NR was not INSOLVENT.  Because it had obtained LOLR loans from the Bank of England, perfectly legally and legitimately, it continued with its business activities as normal.  So, what to do?
7. We do not know the author of the solution because that information has never been made public knowledge, however, two new pieces of Law were devised that could provide a solution. It has to be borne in mind that at that time, NR was the only Bank obviously in difficulty and the two new pieces of Law were primarily intended to deal with its situation. They were The Banking (Special Provisions) Act 2008 and an associated Northern Rock Shareholders Compensation Order made by the Chancellor.
8. The Act had a life of only one year because it was a “stop-gap” and would be succeeded by a comprehensive Banking Act and although it provided for similar treatment for other banks, it was never used again. The Order related only to NR. (Bradford & Bingley was subject to a different treatment although the new law was partially applied).
9. It can therefore be deduced that the new Banking Act and its accompanying Order were created specifically to deal with NR’s situation.
10. It appears that HMT was aware of the fact that, because NR had such a large portfolio of mortgages relative to the LOLR loans, ownership of NR would prove profitable. In order to  maximise benefits “ASSUMPTIONS” were includedwhich ensured that a “valuer”, selected by The Chancellor, could only find one answer, that the shares had no worth. There were precedents  in law for the inclusion of “assumptions” so that aspect is not contested.
11. The “valuer”, in order to justify a NIL valuation of the shares in February 2008, created further “Assumptions” of his own, namely that the assets of NR (mortgages) needed to be subjected to further deductions. The result was that a deficit amounting to 2.4 Billion pounds was artificially created thus rendering the bank apparently INSOLVENT.
12. In October 2007  Goldman Sachs had calculated that NR was SOLVENT with Equitable Funds amounting to 2.8 Billion pounds that appeared to contradict the INSOLVENCY assumed by the valuer as at 17th February 2008.
13. The valuer, John Caldwell admitted that the situation was “unreal” but his published conclusion satisfiedHM Government’s objective.

There were many more aspects of the story that could be related. As I have said earlier, NR was a very complex tale but the foregoing are the relevant principal points in this part of the story. We can now consider the case being advanced on behalf of NR shareholders.

1. The average NR shareholder could not be expected to understand the complex financial situation which NR presented. The statement by the Chairman, included in the Interim Accounts, was positive, upbeat and made public on 25th July 2007. The first intimation that the shareholders received that something was amiss, was the “leak” by the BBC’s Robert Peston of the news of NR’s approach to the BofE for an LOLR loan before any of the Board of NR, the Bank of England or Government sources made an official announcement. That leak panicked NR depositors generally and there was a “run” on the bank that galvanised HM Government to hurriedly react.
2. On behalf of NR shareholders, several Court proceedings were pursued but those did not rule on the Equitable right of shareholders to compensation but concentrated on the lawfulness of HM government’s actions which were not in doubt and appeared to be affirmed by the Government Legal Service which is comprised of 2100 lawyers and Barristers and 700 support staff.
3. When civil disputes are referred to the Court system, a Court is led by a Judge or Justice who determines that matters under consideration fall within the law. His role is not to determine the facts of a case, which are presented by the Barristers for each party. He may consider as appropriate, any or all of Statute Law (created by Government), the law based on legal precedents, or the Law of Equity, a branch of law available to Judges at their discretion and which is intended to ensure that “natural justice” is achieved.
4. The fact that the use of  the Law of Equity is discretionary emphasises that when Judges issue decisions, they are in the nature of opinions. This is demonstrated by the fact that not all Judges may reach similar conclusions. We accept this aspect of our legal system because we trust all Judges, who are very experienced in all aspects of law, to reach an  appropriate conclusion based on the burden of proofs submitted to them and in accordance with “the balance of probabilities”.
5. It is important to recognise that the English legal system has no (obvious) connections with Parliament. HM Government plays no (obvious) part in the appointment of Judges or Lords  Justice as they are sometimes known.
6. All references to “taxpayers” and mission statements reading “maximise profit for taxpayers” are  pointless rhetoric.  Given a reasonabe period, NR had ample funds with which to repay the LOLR loans, as it was expected to do.  As related in earlier Articles, it has been shown that there could be no real risk to HM Government or its “taxpayers” and that NRAM was never a “bad bank.” From original assets it has provided a profit of £7,820,000,000, at present only for the benefit of HM Conservative Government but without acknowledgment that a new Law and associated Ministerial Order had been engineered for that sole purpose.
7. Why should a Government believe that it is lawful that, as Members of Parliament, those same representatives should be able to devise a law only for political reasons disregarding the people that they represent and their established rights. That is what happened in the case of Northern Rock Bank. The Labour Government or its adviser planned to deprive shareholders of the whole value of their investment despite the fact that it knew that NR was a solvent bank, nationalised but operating normally. The Chancellor said in his statement immediately before nationalisation that “under public ownership the Government will secure the entire proceeds from the  future sale of the business in return for bearing the risks”, notwithstanding that it acquired the funds emanating from NR at no cost although they had an Equity value in the June 2007 Interim Accounts of £3,382.1 billion.
8. There never was a question of the “taxpayer” funding NR. With the assistance of the LOLR loans, NR was capable of funding its obligations from within the bank and it has done so.
9. On 19 February 2008, Professor Tim Congdon, formerly an economic adviser to a Conservative Government (one of the so-called “three wise men”), wrote a lengthy article in the Financial Times which ended: “If NR does repay its loan from the State in full but its shareholders receive nothing, the British Government’s actions wii amount to robbery under the law.”  That was a personal point of view but one has to give it credence in view of his earlier position as an economic advisor to a Conservative Government. However, in 2007/08  we had a Labour Government.
10. Earlier, Professor Congdon published an article in The Times on 2nd November 2007 in which he said that the Bank of England could create money “by the stroke of a pen”, at no inerest cost, referring to the fact that it was the only entity able to issue legal tender.
11. It was not until five months after the nationalisation that the LOLR loans were transferred to HM government  by “novation” and became so called State Aid. One has to question: a).  Why it took the Government so long before doing so.  b).There was no need and the LOLR loans would have been repaid in full, with interest, within two years or so.
12. Instead of which, Conservative Governments maintained nationalisation for another ten years, despite the fact that 167 Conservative MPs voted against nationalisation in 2007.

Those are summaries of the cases as presented by HM Government and the former shareholders but a more detailed examination of some matters is appropriate.The case for the shareholders is based on facts from official sources, as mentioned above. HM Government’s case is dependent on the outcome of court proceedings and some parts are dependent on technicalities that were used as a basis in Court proceedings.

1. We can firstly deal with the Bank of England Emergency Aid role, also referred to as Lender of last resort loans (LOLR). These are emergency funding loans made by all Central Banks,  more or less automatically, to SOLVENT banks and only to such banks suffering from a temporary lack of liquidity. There is plenty of evidence that LOLR loans are made when an occasion arises, by the UK Central Bank and by other Central Banks.
2. LOLR loans are not regarded as “State Aid” and generally are accompanied by adequate security, greater than the amount borrowed. It is also the expectation of Central Banks that the loans will be wholly repaid within an agreed time frame that is usually calculated to allow the recipient sufficient time to make repayment.
3. As LOLR loans solved the liquidity status of the recipient, why was it considered necessary  (but only after a period of five months) to “novate” the balance outstanding on the LOLR loans to HMT? There is only one logical answer. To ensure that profits arising from the original loans, made at no cost to the BofE, would  accrue to HMT and so to HM Government.  The Chancellor said as much and applied a penal interest rate to the new Government loans.
4. As mentioned earlier, the LOLR loans were interest-free to the Bank of England, therefore why did HM Government consider it necessary to “novate” the balance of them still outstanding in 2008 to HMT?
5. Once they were “novated” the BofE could delete them from its records and in fact, the Governmentall erased all references to LOLR loans, as if they had never existed. They were then regarded as being “State Aid”.
6. HM Governments (Labour and Successive Conservative) have relied heavily on  the outcome of Court hearings in defence of their stance. Was this valid? No, because the Courts did not rule on the Equitable rights of shareholders, they concentrated on whether or not the government was legally entitled to set the terms of its compensation package, a matter which is not contended, either by the shareholders or the EU Commission.
7. Because we are a law abiding nation, we tend to believe that Court proceedings are sacrosanct but that is not really the case. Judges or Justices reach conclusions that reflect their own personal view. That view is however, conditioned by long and extensive legal training. Although they express a professional opinion, it is no more than their interpretation of the outcome of the cases presented to them.
8. Because that is so, the conclusions reached can vary from one Judge to another. There are no universal answers. As judges deliver their judgments on the basis of “the balance of probabilities”, they can vary.
9. Because Judges are individuals, it follows that there will be some Judges that see political aspects differently from their peers. At the same time the judiciary is independent of Government but has to bear in mind the economic and other repercussions of its determinations particularly in the midst of a financial crisis of massive proportions.
10. The present Conservative Government (or at least elements within it) has demonstrated that whilst our legal system can usually  be relied upon, our Government, as presently led,  cannot be trusted to the same extent.
11. Our Government has placed reliance on technicalities, such as in the case of determination of what constitutes “State Aid”. For example, is it legitimate for a government to maintain that “State Aid” is involved when no cash has been either needed or produced?  ”State Aid”  is surely only involved when, according to the EU definition, (which is the definition with which the UK Government was concerned), means aid from Government that confers a competitive advantage on the recipient.
12. As NR was charged a penal rate of interest on its loans, latterly from HM Government it is difficult to understand why it could, at the same time, obtain a competitive advantage.
13. Trust is the primary consideration in all dealings with our Government and our legal system. If we cannot trust in both,  how can we expect to enjoy the benefits of “natural justice”?

That is a summary of the two cases presented by HM Government and by the former shareholders, I have my opinion on what should be the outcome but what is your conclusion? You should make your views known  to UKSA if you believe that Northern Rock shareholders did not receive “natural justice”.

Endnotes:

The expression “novate” was apparently introduced by Goldman Sachs, the USA adviser to HM Government. It is important that we understand what it means as it has no direct equivalent in the UK Oxford Dictionary. It is an expression used in the USA. It is defined in Websters (US dictionary) as: “the replacement of one legal agreement by a new obligation, with the agreement of all the parties". By way of example, on financial exchanges using a clearing house, transactions between members are novated so that matching contracts are created between the buyer and the clearing house and between the clearing house and the seller. Novation is an expression limited to financial transactions in the USA. The nearest in the UK would be “transfer”, which assumes a payment for the transfer, or a “gift” which involves no payment.

What “novate “implies, is that the agreement is transferred in its entirety to a new holder. 

12 January 2022