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HM Government v Northern Rock shareholders

Nine earlier articles have been produced on this subject and it is appropriate to read them all in order to determine whether the shareholders or HM Government have produced the most likely solution, bearing in mind that Northern Rock was, at all relevant times, SOLVENT andup to the date of nationalisation, should have been in the control of its shareholdersand thereafter it operated in a normal manner under government control.

The problem with most cases relating to corporations and governments, in this circumstance the shareholders, is that as long as they strenuously deny that a challenger has no case, they are bound to win unless further action is taken by the challengers.  Corporations or governments invariably deny any wrongdoing and as a result they can ensure that most challenges are defeated, not by proving their case but rather by denying that a contrary view can exist.

The government actions regarding Northern Rock were challenged by none other than Professor Tim Congdon, an eminent and well-respected economist who had been one of the “Three Wise Men” who advised the (Conservative) Chancellor of the Exchequer on economic policy in the 1970s. His views, although personal, therefore deserve respect.

His first letter, published on 2 November 2007, was a contribution to The Times in which he pointed out that far from costing the taxpayer,  the government or the Bank of England money, the LOLR loan actually produced profits for them and he explained why.

His  second letter to The Financial Times on 19 February 2008 ended with the following:

If Northern Rock does repay the loan in full but its shareholders receive nothing, the British Government’s actions would amount to robbery under the law.”

(NOTE: at the time the loan was actually an LOLR Loan from the Bank of England. That loan, including later government loans, was repaid in full from Northern Rock Assets.)

The British Government completely ignored that statement. Why?  Because it followed its usual strategy, as described above.

It also played its “ACE” card, court proceedings had all been in the Government’s favour. HM Government based its case on the outcome of the Court Proceedings and HMT steadfastly refuses to reconsider the Court Proceedings, notwithstanding that they were achieved through the creation of ASSUMPTIONS in two pieces of new law, namely the Banking (Special Provisions Act 2008 and a Ministerial Order, The Northern Rock Shareholders Compensation Order, each specifically devised to ensure that the only determination of the value of shares in Northern Rock could be NIL.

The shareholders are of the opinion that further examination is needed to establish the validity of the findings because it can be demonstrated that one may consider that a matter can be determined in a Court of Law as being strictly in accordance with the law but that the same finding is morally wrong.

In other words, “natural justice” has not been served. Morality, or ethical behaviour can be defined as “principles concerning the distinction between right and wrong or good and bad behaviour”. Alternatively it can be described as “Morality is the differentiation of intentions, decisions and actions between those that are distinguished as proper and those that are improper”.

Who has determined the outcome? HM Government. In other words, the matter has been determined by HM Government and The Chancellor who have in effect acted as a “self-regulating body". They have chosen to ignore the fact that the Court Proceedings concentrated on the legality of the Government’s ability to choose the terms and conditions on which shareholders interests would be acquired. The Courts did not consider the extent to which shareholders should be compensated under the Law of Equity.

What is really required is not a “self-regulating determination” of the facts but a judge-led enquiry, on behalf of the shareholders and HM Government.

Having a “Judge Led” enquiry ensures independence because we can place our trust in Judges but debatably not so in Governments. HM Government has already rejected a Public Enquiry, so “judge led is the next best thing.  A Judge will also have authority to require witnesses to appear before him. An acceptable alternative would be an independent arbitrator such as Qualified Members of the Institute of Chartered Accountants selected by both the shareholders and HM Government.

In both cases, the valuation of Northern Rock shares would be in independent hands.

A referral to the TSC is also a possibility but that could still be regarded as being in the nature of “self-regulation.”

An inability to trust governments is nothing new. Examples can be traced over centuries. The recent controversy involving a Conservative Government led by Boris Johnstone is clear evidence that, although Parliament and MP’s may be elected to represent us, the reality is somewhat different. Whilst it is probably true that most people become politicians with the best of motives, many get caught up in the political power environment and cease to truly represent us.

Politics is an anachronism which we cannot, unfortunately, abolish. Politicians only exist because we have Sovereign States, i.e. States nowadays managed by politicians, who try to keep power in their own hands. Even the EU has experienced this fact. However, politicians fail to recognise that the world is not ruled by them, it is under the control of multi-national corporations who operate worldwide, completely indifferent to National Boundaries which are essentially the creation of politicians.

In politics and banking, it does not matter what is true, everything depends on what people believe to be true.

Returning to specifics, the GDP of the UK is around two TRILLION pounds each year. Whilst governments always experience a shortage of money, does it actually make a difference for HM Government to insist on the retention, possibly illegally, of all £7.8 billion of profits derived from Northern Rock shareholder’s funds? It makes no sense.

To date we have quoted many facts from official sources but we have been concerned at the lack of transparency which means that we are unable to ascertain the full facts which would have enabled us to prove our case based on “the balance of probabilities, which is the standard for civil Court proceedings.

Although HM Governments have relied on court proceedings, it is important to appreciate the role of Judges or Justices. Their role is to ensure that matters are dealt with legally, i.e. within the law. When they issue a determination of a civil case, it is in the nature of their opinion based on the “balance of probabilities” of the facts as presented to them. They do not determine the facts of a case.

The following are official comments on the manner in which the Financial Crisis was dealt. One has to be fair, however and acknowledge that nobody in an official capacity foresaw what was about to unfold.

Bank of England Minutes, 11 May 2008:There had been no agreed strategy and inadequate preparation for stopping a run.”

National Audit Office Report May 2012 :  “Given the scale and urgency of the banking crisis, the Treasury lacked sufficient in-house capacity to make the best use of external advice.

The Public Accounts Committee in 2012/13 stated: "The Treasury did not have sufficient capacity or the skills to understand and respond to the crisis when it began."

The Public Accounts Committee in 2012/1 stated: “The Treasury was part of a monumental collective failure to understand how the pre-crisis boom could lead to a banking crisis."

In view of the obvious fact that HMT and The Chancellor had no prior experience on which to rely, they decided to seek professional advice.  The problem was, who should it be and also who should make the choice?  At Cabinet level, the spokesperson would normally be The Chancellor but who actually made the choice? The Chancellor has a whole team of HMT advisers and it could have been any one of those.

Fourteen years later there should be no impediment to identification, even if the Chancellor is no longer in office. There must have been discussions between him and the selected advisor that would justify the choice.

The Chancellor, on behalf of HM Government, chose a corporation as a professional adviser that normally operates under the laws of the USA as an investment company. Why choose an investment management company, Goldman Sachs, which was not a Bank at the time but which later became a “wholesale bank,” not a UK retail bank like Northern Rock. In addition, Goldman Sachs was one of the leading players in the Securitisation fiasco in the USA which was a significant element of the Financial Crisis of 2007/08.  Whilst a politician may have regarded Goldman Sachs as  a leading firm on Wall Street, a banker would have recognised that even at that time it did not have an untarnished image, was not a bank and may have been unfamiliar with UK and EU banking, which operates quite differently from banking in the USA.

HM Government could alternatively have selected a UK bank, for example one of the well known British merchant banks or even a major firm of accountants, both of which would have been familiar with British banking law and practice and would not have been tainted by the dubious nature of Goldman Sach’s activities over many years. (most of which its management, following corporate custom, denies).

The Chancellor had ultimate responsibility but who initiated the legislation that ensured that the shares of Northern Rock would have no value?

According to the Insolvency Act 1986, although it may be a contentious proposition, Northern Rock was always SOLVENT evenafter it received Bank of England LOLR assistance until the time it was nationalised and it continued to operate, even after Nationalisation, on a “going concern” basis.

What was the motivation behind HM Government’s free of cost acquisition (novation) of shareholder’s interests? Was it to maximise its own ability to profit from the nationalisation of Northern Rock and at the same time limit the benefits to private sector corporations accruing from a “takeover?”. One of the inhibiting factors was that the public sector would not benefit from a takeover of Northern Rock until the private sector “bidder” achieved a profit of £2.7 billion, being the amount of the equity capital attibutable to shareholders.

It should not be difficult now for that information to be obtained from The Chancellor, the person who said in 2008, “our Financial Adviser, Goldman Sachs has concluded from a Financial point of view that a temporary period of public ownership (nationalisation)  better meets our objectives of protecting taxpayers.”

An additional factor was the extent of the risks borne by the public sector. In fact there was no risk that was apparent because it must be remembered that the Bank of England was fully secured, including a generous margin. A “reasonable time” could have been by 2010 or 2011 at the latest. Successive Conservative governments, for their own benefit, maintained nationalisation for a further ten years or more.

One expects governments not only to act within the spirit of the law but also to observe ethical or moral behaviour in all their dealings. You must judge whether that has been the experience of the shareholders in Northern Rock.


17 February 2022

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