We live in a Democracy. What does that mean?
It as been described in various ways. It is “government of the people, by the people, for the people” Alternatively it may be described as a system in which everyone has a say or participates. Also, it can be a system of Government which is chosen by the people who appoint representatives (Members of Parliament) to make decisions on their behalf, which include laws but laws that are administered by a separate Court system which should ensure that, apart from making the laws, administration of the legal system is not carried out by politicians.
But is that how it actually works?
An examination of all the circumstances surrounding Northern Rock Bank tells a different story.
The circumstances in which we are particularly interested are those in which the shareholders of Northern Rock were deprived of their shares without compensation, in plain language, the shares were confiscated by the Government, the body apppinted by us to ostensibly look after our interests including those of shareholders.
It is important to recognise that the Bank of England, our Central Bank, is an institution totally independent from HM Government.
The Bof E in its Minutes (not published until 2014) wrote: .”It was recognized that the Northern Rock board should not have to organize their business to repay £40bn on 10th February (2008) whatever the circumstances, but equally the Bank and HMT would need to retain the right to require repayment depending on the circumstances. The way this issue would be expressed was still under discussion.”
NOTE: The £40Bn mentioned in the B of E Minutes was the Maximum amount that the B of E thought that it might be necessary to provide and for which security was available from NR. In fact the actual figure amounted to £28.5Bn.
“In the absence of a special resolution regime for banks the consequences meant the authorities were in something of a game with other players, including the shareholders.”
“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 and some pressure had been applied ahead of Northern Rock's emergency general meeting on 15 January 2008. The principal lever was through the financing.”
“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 processwithout the shareholders.
There are no doubt two very different views on this confiscation, that of the Government and that of the shareholders. This will not be readily resolved as thousands, indeed tens of thousands of words have been written on this subject. However not all relate to the topic in which we are concerned – the lack of compensation.
So far, our efforts have been directed at demonstating to HM Government the validity of our case, which HM Government does not accept. However the time has come when perhaps we should stress the invalidity of the Government’s case, particularly as it is a case which has used the law to contrive a desired result and which has not resulted in “natural justice” for the shareholders.
It is apparent from the responses that have been received from HM Treasury (HMT) (despite the letters having been addressed to a succession of Prime Ministers) that HMT relies on the fact that all relative Court proceedings found in favour of the Government - not really surprising in the circumstances prevalent in 2008/9 and particularly so because the Court proceedings were limited in scope.
The following is representative of the manner in which HM Governments, of whatever colour, viewed the circumstances of Northern Rock Bank.
1). Solvency. Prior to the Nationalisation of Northern Rock, HM Government, the FSA and the Bank of England were adamant that Northern Rock was SOLVENT. Why in those circumstances involve The Insolvency Act 1986? Why was a SOLVENT bank Nationalised without consultation with its Ordinary Shareholders? Changes in the status of a SOLVENT, “going concern” bank can only be made with shareholder’s consent. (see Company Laws). There was no Banking Law that provided a solution, so HM Government had to look elsewhere and contrive new laws that would serve its purpose.
2). Bank of England involvement. The B of E, as the Central Bank of the UK, made Lender of Last Resort (LOLR) loans to Northern Rock Bank. There is no doubt that those loans were made in accordance with the rules by means of which the B of E could legally and according to the custom of Central Banks, make LOLR loans available to Solvent Banks suffering temporary liquidity shortages but which are expected to recover.
What has not been explained is how the LOLR loans were made to disappear and were replaced by “STATE AID”, even prior to Nationalisation,nor has it been explained why it took another five months after nationalisation to achieve this through “Novation” of the loans.
3). Novation. The changeover from LOLR loans from the B of E to HM Government “State Aid” loans was identified as “novation” strangely however, the Oxford Dictionary indicates that there is “no direct equivalent in UK English for the word “novation”. One has to go to Websters USA dictionary to learn what that expression means, which leads one to the conclusion that it was introduced by the US Goldman Sachs.
What does it really mean in the present context?
It appears to be a transfer of a monetary obligation, in its entirety, with the agreement of all the parties involved. No consideration passes, the new party, in this case HM Government, assumes full responsibility for the transaction.
4). The legal situation. A point that was not given due consideration was that the Court judgments concentrated, not on the Equitable rights of shareholders but on the legality of the Government’s right to determine the terms for compensation, as set out in the Northern Rock Shareholders Compensation order, an order duly made by the Chancellor of the Exchequer.There is no evidence in the various Court Cases that the Courts made any attempt to determine, according to the law of Equity or otherwise, an appropriate level of compensation.
As the puropose of nationalisation was not to save NR but rather to protect the UK banking system, why was so much emphasis placed on achieving a NIL valuation for NR shares? There can only be one reason, HM Government wished to maximise the profits accruing to itself.
5).Interpretation of the legal situation. The government based its entire case on the outcome of Court proceedings and refuses to re-open the case, therefore examination is needed as to their validity 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 matter is morally wrong.
In other words “Natural Justice” has not been delivered.
6). Court proceedings. Should reliance be placed on 1). The letter of the law , (bearing in mind that the law was created by HM Government) or on 2). Morality or “natural justice”?
7). Morality.Morality 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.”
It can be related to the effect of the Law of Equity and “natural justice”
Recently, HM Government proposed updating the law relating to the Parliamentary Standards Committee. The declared objectve being that it was not “natural justice” that a person, (in this case a Member of the Conservative Party) under investigation by the Committee had no “right of appeal” as is enjoyed by all other persons. There were other proposals that proved unacceptable when the matter reached Parliament. As the new Bill was supported by the Prime Minister it is apparent that this was a matter of concern to him, although the Bill did not receive Parliamentary approval and was withdrawn.
It can be deduced from that episode, and many unconnected situations, that Prime Ministers are concerned to be seen to dispense “natural Justice”.
8). Forms of law. English law can be interpreted according to three different branches a). Statute Law, being the laws devised by the UK Parliament.
b). Law based on precedents.
c). The Law of Equity which is derived from old English common law, when Courts used their discretion to apply justice in accordance with natural law. Equity law supersedes Common law and Statute law when there is a conflict between the two and neither can bring the correct verdict. It is available to Justices or Judges to use on a discretionary basis.
9). European Union and “State Aid. ”The EU defined “State Aid” as being government assistance that provides a “Competitive advantage.” However, this was interpreted by HM Government to suit its own purposes.
HM Government guaranteed the Bank of England LOLR loans but the guarantee was never called upon. HM Government also guaranteed depositors money, but a commercial fee was paid by NR for that facility and in any event it was never utilized. NR carried on its lending activities entirely within the UK. It therefore follows that it could not have obtained “a commercial advantage” viz a viz other countries. It also paid a penal rate of interest for the LOLR loans and subsequently for the so called “State Aid”. It is difficult to determine how, in those circumstances it could acquire a “commercial advantage”.
10).Goldman Sachs. This USA company was appointed as financial adviser to HM Government. Because neither HM Treasury (HMT) or The Chancellor had experience of such matters, a financial advisor was engaged from the USA, Goldman Sachs. The adviser suggested a nationalisation “as being the best way of protecting taxpayersfrom a financial viewpoint”. Goldman Sachs did not advise HM Government on the associated economic and other factors nor did it appear to consider the implications of its advice. In particular, it did not treat the LOLR loans from the B of E in the customary manner.
11). What were the laws which affected Northern Rock Bank directly? They were The Banking (Special Provisions) Act 2008 , 18th February 2008, supported by the addition of the Northern Rock Shareholders Compensation Order, although it has to be noted that the Order came into effect a month or so after the Act.
Those two legislative entities contained ASSUMPTIONS that ensured there could only be one outcome, a NILvaluation of the shares. One wonders why in that circumstance, a valuer was appointed at a remuneration of 4.5.Million pounds and why he later, on his own initiative, “assumed” a situation which enabled him to declare an artificial deficit as at 18th February 2008 of 2.4 Billion pounds in place of an Equity valuation of 3.382.1 Billionpounds published by the bank in its 2007 half yearly Statement and partially confirmed in late 2007 by Goldman Sachs that NR had equity amounting to 2.8 Billion. It was also a fact that those same pre-nationalisation assets produced a profit of 7.820 Billion pounds for HM Government.
The Annual Acounts for 2007 were subject to independent audit. The Auditors were satisfied with the statement of Equity made in the 2007 Annual Accounts. How was that reconciled with the subsequent finding of a deficit by Mr Caldwell?
The Annual Accounts for 2007 also contained an extract from the Government appointed Chairman of NR who was quoted: “We are nonetheless confident that it (his programme) can be delivered and, in due course, Northern Rock will be returned to private ownership, as a lower risk, financially viable mortgage and savings bank.”
Northern Rock Bank was never insolvent in the legal sense of the word, how could it have been so when it produced a profit of 7.820 Billion pounds when it was finally wound up after being nationalised or “taken into temporary public ownership” and never returned to its rightful owners, its shareholders.
3 February 2022
