In the last issue of this Magazine I summarized the current Northern Rock situation. That article dealt principally with the background to the case but this time I feel, in view of the recent Local Authority election results that some further comment is appropriate.
Boris Johnstone, Prime Minister commented on the election results in the following manner: “Results show that people want a Government focused on them”.
Since 2010 we have had, firstly a coalition Government of the Conservative Party and the Liberal Democrats, Conservatives being very much in the majority. That was followed by three Conservative Party governments with three different leaders.
Immediately before Boris Johnstone we had Mrs Teresa May as Prime Minister. In her inauguration speech she said “The Government I lead will be driven not by the interests of the privileged few, but by yours.”
“We will do everything we can to give you more control over your lives. When we take the big calls, we’ll think not of the powerful, but you. When we pass new laws, we’ll listen not to the mighty but to you ---------’’.
David Cameron may have used somewhat similar rhetoric but I have not traced it.
We live in a democratic society.
Democracy is defined as a political system that allows the citizens to participate in political decision‐making, or to elect representatives to government. Democracy involves inverting the long‐standing idea that the ruler's job is to govern, and the people's role is to obey. In words that are often attributed to Abraham Lincoln , democracy is government of the people, by the people, for the people.
“Democracy allows all citizens to participate in political decision making”. In the UK it does so through the Freedom of Information Act 2000 that enables any adult citizen a right of access to information from any public authority and that authority is then required to provide it, if held.
The Act applies to UK Asset Resolution, a government owned holding company but does not apply to its subsidiary, NRAM which is specifically exempted from the provisions of the Act on the basis that NRAM was a company governed by its own Executive Officers and its own Board of Directors operating at “arms length” from the government. As a result, the only information available is that contained in the Annual Accounts., including a Balance Sheet which only provides a “snapshot” of NRAM on a specific day. Many of the events that happen during each year are therefore opaque and are not public knowledge.
When I was writing my book in 2008 about the Financial Crisis ,“Decline and Fall of Banking”, I encountered numerous instances of rhetoric, by Politicians, Chief Executives and Directors of Banks which I paraphrased as falling into the category of “I say, therefore it must be so”. In other words, they made statements, generally positive in nature, which did not reflect the true situation.
So, are they just rhetoric, or can we trust in the statements of Politicians as related above.
We all know that loans from the Bank of England were made to Northern Rock as LOLR loans. The sums were quite small, up to 3 Billion initially but increasing over the ensuing months to a total of £26.8 billion, although the Bank of England recognized that the total could be upwards of 40 Billion if necessary, a sum for which Northern Rock had sufficient assets to provide satisfactory security to the Bank.
However, to enable it to be in a position (vis-à-vis the EU) to categorise the loans as “State Aid”, the UK Labour Government on 28th August 2008 had the loans “novated” to it. That is an interesting description of the transfer.
Webster’s US dictionary defines ”novated” 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 Oxford English dictionary reads, “there is no exact match for “novated” in English”.
It appears to follow, therefore, that the use of “Novated” can be attributed to the US advisers to HM Treasury, Goldman Sachs. HM Treasury appears not to have initiated this transfer of its own volition.
Why was HM Treasury recommended to “novate” the Bank of England LOLR loans? There can only be one answer, Goldman Sachs had determined that in late 2007 Northern Rock had an excess of 2.8 Billion of Assets over Liabilities. In other words, it had Equity (shareholder’s funds) of that amount and it was therefore likely that a positive outcome would arise from an administration of Northern Rock.
It follows that “taxpayers funds” were not used to “bail out” Northern Rock. It was never
“bankrupt” and the use of Bank of England LOLR loans was a legitimate way of resolving its liquidity shortage.
A question that has to be asked is why the Bank of England LOLR loans were, nearly seven months after Nationalisation ,“novated to” HM Treasury. ie. the loans, by that time reduced to 15Billion and forecast to be no more that 8.9 Billion by the end of 2008, were acquired by HM Treasury. In other words, HMT acquired a Bank with gross assets exceeding 100 Billion pounds at no cost because no payment by way of compensation was paid for the Ordinary Shares owned by shareholders. Their shares were erroneously declared to be valueless notwithstanding that Goldman Sachs had attributed to them a value of 2.8 Billion for the purpose of attracting take-over bids.
In 2008 the Ordinary shareholders had their shares acquired by a Labour Party Government with an undertaking that the question of compensation would subsequently be considered by an Independent Valuer (but one chosen and appointed by the Chancellor of the Exchequer).
It was conceivable that all the loans assumed by the Government could have been repaid no later than early 2011. However, there have since been four consecutive Conservative Party led Governments that have kept Nationalisation in place, notwithstanding that 167 Conservative Party MP’s voted against Nationalisation and despite the fact that the Labour Government in 2007/9 only intended “a temporary Nationalisation” leading to a return of Northern Rock (possibly smaller) to its former status as a publicly owned Bank.
Now, thirteen years later Northern Rock (what little is left of it) has been sold off piecemeal by successive Conservative Governments at what is believed to be a Profit of 7,820,000,000 pounds Sterling.
Here is anExtract from Minutes of a Bank of England Meeting held on 10th October 2007 (but not published until 2014): “The authorities needed to create leverage over the shareholders in order to achieve a resolution in the absence of the special regime. Nationalisation was an option to deal with shareholders---------" “It was pointed out that while it was true that nationalisation did not itself solve the company's problems, it did open up another option. It would enable a fresh bidding process without the shareholdersand with the Goldman Sachs financing option on the table.”
“In discussion, it was noted that nationalisation only dealt with the legal position of Northern Rock's shareholders, nothing more”.
It was the frequently repeated intention of Government that the loan funds due to the Government would be repaid as soon as possible. HM Treasury (presumably guided by Goldman Sachs) changed that policy in 2010 to one that slowed repayment in favour of unsuccessfully stimulating the UK mortgage market.
For that purpose, it lent a further 8.5 Billion pounds to NRAM, notwithstanding that a condition of NRAM’s creation was that it would not engage in new business. Why therefore was this additional loan (for which NRAM had sole liability for repayment) made to NRAM? NRAM derived no benefit and could make no use of it, although it was obliged to repay it together with the interest cost.
