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• Audit Office reveals series of Treasury blunders
• Warnings three years earlier were ignored
The Treasury was warned three years before Northern Rock nearly went bust that it needed to set up emergency plans to handle a banking crisis but did nothing about it, the National Audit Office (NAO) reveals in a report published today.
The result was that when Northern Rock was hit by the crisis, neither the Treasury, the Bank of England nor the Financial Services Authority were prepared for it; they did not conduct a due diligence exercise on taking over the failing bank and continued to lend 125% mortgages when taxpayers' cash was being used to bail out the bank. The Treasury relied on optimistic forecasts that predicted only a 5% fall in house prices.
The auditors say: "The tripartite authorities [Treasury, Bank of England and Financial Services Authority] had identified weaknesses in the arrangements for dealing with insolvent institutions posing a systemic risk some three years before the crisis at Northern Rock ... The authorities concluded in 2005 that the existing legislative framework - effectively restricting the available options to letting the institution fail and deal with the consequences or bail it out - would not be sufficient in a crisis situation."
Nothing was done until the crisis broke. The report discloses that at this stage there was only one senior civil servant with knowledge of how to handle a banking crisis, supported by 16 junior officials. As a result, when the crisis broke, "the availability of people with relevant skills and experience within the Treasury was severely stretched".
About 24 officials were detailed to handle Northern Rock but the report says: "Stakeholders interviewed by us found it difficult to work with the rapid turnover of staff within the Treasury team. Below second permanent secretary level, the Treasury employed, for example, three different team leaders to deal with Northern Rock over the period August 2007 to February 2008 and into public ownership."
The government needed to bring in investment bankers from Goldman Sachs to help run the bank and agreed a £4m "success" fee without defining what success was - so it was never paid. They also allowed Goldman Sachs to keep the intellectual property rights over the financial modelling they used to rescue the bank. The result, the auditors note, is that a blueprint on how to save a failing bank will not be available to the government in future unless it pays Goldman Sachs a fee.
Northern Rock lent £800m on its Together mortgage - allowing borrowers up to 125% of the value of their homes - from the time of its emergency support from the Bank of England in September 2007 until it was on the brink of public ownership. While the terms for the controversial loans were tightened, the product still accounts for 50% of the lender's arrears and 75% of repossessions.
The Treasury "judged mortgage transactions were necessary to maintain the business" while it sought a private-sector sale, the NAO said.
Edward Leigh, Tory chairman of the public accounts select committee, was scathing about the Treasury's failure to clamp down on risky loans. He said: "While depositors were queuing up outside branches to withdraw their money and the Treasury was pouring public money in to stabilise the Rock, the bank was still ploughing on with awarding mortgages up to 125% of a property's value. Why didn't the Treasury demand an immediate stop to the reckless lending that got the bank into trouble in the first place?
"When making these huge financial commitments, [the Treasury] must be more systematic in assessing risks, testing future scenarios and keeping the taxpayers' interests front and centre."
Vince Cable, Liberal Democrat Treasury spokesman, said: "This report is a damning account of the Treasury's mismanagement of the Northern Rock crisis. The government's inability to stop Northern Rock issuing high-risk Together mortgages even after the bank started receiving state aid is a total disgrace.
"The fact that resolving shortcomings in the tripartite system wasn't seen as a priority shows that Gordon Brown had his head in the sand. Ministers failed to listen to any of the warnings about the brewing storm," he said.
Senior Treasury civil servants John Kingman and Sir Nick Macpherson will come before the committee on 30 March.
A Treasury spokesman said: "We note that overall the report finds the Treasury was right to take the decisions it did to protect the interests of taxpayers and to promote stability in the financial system."
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