Open letter to the Prime Minister and Chancellor of Exchequer

18 September 2008

Dear Gordon & Alistair

RE: NORTHERN ROCK COMPENSATION, THE GLOBAL LIQUIDITY CRISIS, AND TRIPARTITE FAILURES

As you know, I have written to you several times on these subjects during the past year. My last letter was dated 8 May 2008. Having largely recovered from a major heart operation now, and prompted by economic & financial developments, I am writing to you again in the earnest hope that with the benefit of a year’s “learning curve” you are prepared to move policy away from Denial, Obduracy, and blatant Discrimination towards Northern Rock.

I have to say that I am impressed with the fresh impetus and proactive initiatives that you have sponsored this year. The piecemeal easing by the Bank of England from September 2007 (post the “Run” on Northern Rock), then more substantive support and flexible credit criteria from December 2007 temporarily prevented a breakdown in the UK banking system. I know that both of you sponsored the major initiative in April 2008 that the Bank of England refers to as the Special Liquidity Scheme (SLS) that provided longer term support based on sensible asset / collateral terms. Equally impressive have been the proactive support provided by the Tripartite led by the FSA in resolving the crises facing Bradford & Bingley and the Alliance & Leicester. Your crowning achievement has to be the support provided to the Lloyds TSB and HBOS merger, and the extension of the SLS through to January 2009 which will further restore market confidence and stability. Clearly the Lloyds TSB / HBOS merger required such an SLS extension. Excellent : except for the absurdly high interest rate of 5%: but that is outside your “control”.

If you seriously consider the huge errors of judgement and assessment regarding the global Financial Tsunami made by the Tripartite right up to April 2008, the major “U” Turns by the Bank of England, admissions of failure by the FSA and other Tripartite members, it is both discriminatory and unethical to insist on the ridiculous Valuation Terms stipulated for Northern Rock compensation. Expert estimates of general support (December plus SLS) provided to the UK Banking System to date range up to £200 Billion. My estimate is than an additional £300 Billion will be required by the UK Banks, up to the January 2009 deadline. Having totally changed the UK monetary landscape (quite rightly to ensure financial stability), supported the UK banks by hundreds of Billions by accepting a much broader base of mortgage securities for up to three years, arranged “rescues and mergers”, WHY are you DISCRIMINATING against Northern Rock Shareholders?

Mervyn King said to the Treasury Select Committee last year that the level of support requested by Northern Rock would have injected very large sums into the UK monetary system if help was given generally to the UK banks. He also commented on the “Run” that “Well it could have gone either way”! This is a prudent, mature Central Banker? Northern Rock was more than comparable to the Alliance & Leicester in market value but only had £350M of poor quality debt (more than provided for in the 2007 Full Year Accounts). Accelerated loan repayment has now wiped out another Billion in shareholder value, on top of the £2 Billion lost because of the “Run”. Surely it is hypocritical and unethical not to admit and accept that had the Tripartite acted promptly and appropriately (instead of applying the mantra of Moral Hazard compounded by miserable policy execution, and regulatory failure) to avert the “Run” on Northern Rock, supported and encouraged a merger with Lloyds TSB, provided the SLS in August 2007 rather than April 2008, the outcome would have been very different!

Blatant discrimination? YES! Northern Rock needed the same support as other UK mortgage banks; it was the first to suffer from the inter bank freeze due to its 72% reliance on wholesale markets. The other UK banks’ business models were up to 52% reliant on the inter bank credit markets. You have ensured UK stability, you have progressively adopted appropriate measures to manage the global crisis, NOW is the time to ACCEPT that 150,000 small shareholders should receive fair compensation and remove the pre-conditions of “administration and not a going concern”.

Do not waste more money on litigation and rigged valuations. In a £1.4 Trillion economy, the £1.5 Billion or so for Northern Rock compensation is very small beer, and is dwarfed by the of £200 to £450 Billion that you will/are providing to other UK banks. It requires honesty and courage from you to accept what went wrong a year ago: that is the British way.

If you can get Mervyn to reduce interest rates to 3% by Xmas then there will be a strong recovery in 2009. The USA has accepted the risks of low interest rates and massive support for financial institutions, quite rightly placing growth and recovery way above the 5.6% inflation rate in the USA.

I trust that you found my suggestions for the Autumn Statement helpful: it appears that these have been leaked to the Lib Dems!

Yours faithfuly

Pradeep Chand

Harrow

Middlesex