Hints of Northern Rock, B&B merger

* Richard Pym, chairman of Bradford & Bingley, also to chair Northern Rock Asset Management (the new "bad bank")  for joint £250,000 salary
* Gary Hoffman, chief executive of Northern Rock also to be chief executive of Northern Rock Asset Management
* Ron Sandler's salary for new "good bank" Northern Rock reduced from £350,000 to £250,000
* Mike Fairey (ex Lloyds TSB); Mark Pain (ex Abbey National); Mary Phibbs (Standard Chartered) appointed non exec directors of "new " Northern Rock
* Tom Scholar (HM Treasury's nark) and John Devaney to step down as non execs on 1 January
* NRAM will have assets of £50 billion
* NR will have assets of £10 billion - described as high-quality mortgages
* B&B and NRAM will continue to run down their mortgage books.
COMMENT : Observers believe this exercise will eventually show a profit for the Government. Shareholdeers are still denied compensation or their shares back.

UK Credit Guarantee Scheme (CGS) extended

The CGS makes available, to eligible institutions, a government guarantee of new short and medium term debt issuance of up to three years' maturity.

Up to 4 December 2009 £134billion had been taken up.

Access has been extended to 28 February 2010, and applications will be dealt with on a case by case basis. Unused allocations will expire by 31 December 2009.

Up to £250 billion is available under the scheme.

Would you trust a bank set up by Steve and Dave?

Amongst the wierd things produced by Government are Statutory Instruments. Recently published : the Northern Rock plc Transfer Order 2009 and the Northern Rock plc (Tax Consequences) Regulations 2009.

The Orders were laid by two Lords Commissioners of Her Majesty's Treasury. These grand sounding gentlemen are listed as Steve McCabe and Dave Watts. (Because of the very odd nature of our structures, they are not in fact finance ministers but Government Whips who handle Labour Party discipline at Westminster)

The Orders transfer assets from what's described in them as ACo (Northern Rock plc) to BCo (Gosforth Subsidiary No1 plc) without tax liability. Then ACo will be renamed Northern Rock (Asset Managemetn) plc and BCo will become Northern Rock plc.

Confused? That may well be the intention!

In effect, the "good" assets of Northern Rock are being transferred to a new company, leaving behind a "bad bank", which is the one we have/had shares in (recently declared worthless by the £4.5 million paid value - I forecast this at the time he was appointed, could have saved the taxpayers the money)

The "good bank" will be the one this Government tries to flog off to "beardie" Branson or Tesco.

If American experience is anything to go by, the "bad bank" will eventually turn in a surplus for the taxpayer too.

But then we always knew we were being ripped off.....

Pre Budget report 2009

Below is a summary of the key points of Alistair Darling's Pre-Budget Report

National Insurance :

There will be an increase of 0.5% in the NIC rates payable by employees, employers and the self-employed in addition to the 0.5% increase already stated in the 2008 PBR.

There will also be an increase to the primary threshold and lower profits limit of £570 above those already planned in the 2008 PBR. This is to compensate lower earners for the proposed increase to the rates of Class 1 and Class 4 NIC.

The main rate of Class 1 primary NIC will be 12%, with a rate of 2% payable on earnings above the upper earnings limit. The main rate of Class 1 secondary NIC will increase to 13.8% (rather than the 13.3% previously announced) on earnings above the secondary threshold. The increase will also apply to Class 1A and Class 1B NIC
rates.

From April 2011, the main rate of Class 4 NIC will increase to 9%, with a rate of 2% payable on profits above the upper profits limit.

This should raise an additional £7 billion per annum from 2011, much needed to cover government debt.

Company Cars and Vans

Company cars: downwards revision of company car tax bands

The table of company car tax bands will be restructured from 6 April 2012 such that the 10% band applies to petrol company cars with CO2 emissions of 99g/km and below. The bands increase at 1% intervals for each additional 5g/km of CO2. The 3% diesel supplement still applies. Qualifying Low Emission Cars (QUALECs) will therefore no longer exist as a separate category.

Company cars and vans: tax on receipt of free private fuel : the figure used as the basis for calculating the tax charge on the benefit of private fuel received by an employee in a company car is to be increased from £16,900 to £18,000 from 6 April 2010. The figure used as the basis for calculating the tax charge on the benefit of private fuel received by an employee in a company van is to be increased from £500 to £550.

Electric company cars and vans: zero tax on benefit of private use

The percentage figure used to calculate the benefit in kind of an electric car/van will be reduced to 0% for five years from 6 April 2010. This is effectively a tax free benefit. Electric vans: 100% first-year capital allowances

Subject to confirming compatibility with the State aid rules, legislation will beintroduced to provide a 100% first-year allowance for business expenditure on new (not second hand) electric vans from 1 April 2010 (corporation tax) or 6 April 2010(income tax).

Note: where the term "electric" is used above, this is intended to describe a vehicle which is propelled solely by electricity and is not a hybrid.


VAT

VAT will revert to 17.5% on 1st January 2010

Stamp Duty

Stamp duty will revert to normal threshholds from 1 January 2010, ie : the minimum threshhold will increase to £175,000

Green Measure

A scrappage support scheme has been announced for old domestic boilers.

Public Sector Pay

This has been limited to no more than 1.0% increase per annum.

Bank Bonuses

Plans were unveiled to tax Bank bonuses in a one-off windfall tax of 50% for bonuses in excess of £25,000.

[Observers suspect this will prove to be totally ineffective as the banks will simply find a way round this. There's an email going round the City already which says : "Take a step back. This was designed by a f***wit
in about 2 weeks. They have given the finest brains in world finance 6
months to find a way around it. Doesn't really seem a fair battle does
it?"].

Summary - This Pre-Budget Report is light in susbtance and contained few surprises, typical in the run up to a General Election.

Northern Rock investors will not get compensation

Taken from The Guardian

Thousands of Northern Rock investors have suffered a setback in their claims for compensation following the nationalisation of the Newcastle-based lender nearly two years ago after the independent valuer concluded that there was "no value" in the bank's shares.

After receiving "several thousand" responses, the independent valuer Andrew Caldwell published a consultation document in which he concludes that shareholders should receive "no compensation".

His pronouncements came as the government said the nationalised lender could be split in two – in to a "good" and "bad" bank – on 1 January. However, government sources warned that hopes that the "good" part of the bank could be sold before an election were rapidly fading.

The division of the bank, which has been sanctioned by Europe, will have implications for mortgage customers of Northern Rock as some customers will be placed into the "bad" bank.

The Treasury select committee of MPs, which yesterday signalled it would begin a new inquiry into why some banks were deemed "too big to fail", is also expected to weigh the pros and cons of Northern Rock being turned back into a mutual – a status it held before 1997.

Responding to a campaign at Westminster, partly organised by the Co-operative Party and which has seen 100 MPs sign a parliamentary motion jointly calling for the bank to be remutualised, the committee will look at the "relationship between size and risk, and business model (including mutual models) and risk".

The investigation into whether shareholders should be compensated has taken longer than expected, Caldwell, a partner at accountants BDO Stoy Hayward, admitted. He encountered difficulties in obtaining the information he needed – and had been promised – when he was appointed by the Treasury 14 months ago. He did not receive some of the information until last month, further delaying the publication of today's consultation document. His report has cost £4.5m.

But shareholders, led by hedge fund manager Jon Wood, who have demanded compensation from the government and are determined to carry on their fight and are ready to take their claim to the European court of human rights in Strasbourg.

Wood, who is awaiting a decision from Britain's new supreme court about whether the methodology used by Caldwell can be challenged, said: "I do really think we'll get justice in the end."

Under the terms of his appointment, Caldwell based his calculation on the lender being in administration and no longer "a going concern" after all assistance from the Bank of England and the Treasury had been withdrawn.

He calculated how much money Northern Rock would have had left for shareholders after it had repaid the £25bn loan from the Bank of England, granted in September 2007 when it experienced funding difficulties during the credit crunch.

He concluded that it was "unlikely" Northern Rock could have been sold in its entirety and therefore searched for any assets the lender could have sold to raise the necessary funds. Following a complex analysis, he concluded that the lender would actually have had no money left after repaying the loan and would have been "in a deficit" of £5.7bn.

However, Wood and other shareholders have argued that the basis for the review for compensation should have assumed that the lender was still a "going concern" when it was nationalised. If this had been the case, shares in Northern Rock might have been valued at £4, Wood argued.

Northern Rock to be dismembered, sold?

As Chancellor of the Exchequer Alistair Darling visited Newcastle on what's probably a "softening up" visit to Northern Rock, Robin Ashby was asked to comment for Tyne Tees TV on the proposal to divide up the bank and flog off the ongoing profitable bits.

He stressed that there had always been value in the bank, and this plan proves that to be the case. This should be recognised in the compensation to be paid for the shares which were confiscated from us. The so-called "impaired assets" could well prove to be profitable in the long term if the Government doesn't panic for short term political reasons.

Applegarth and Apollo

Robin Ashby has been asked by the media for recation to the news in today's Times newspaper that Adam Applegarth, the Chief Executive of Northern Rock at the time of the crash, and architect of the bank's failed strategy, is to become a senior adviser to American private equity firm Apollo Management. It is suggested that he will not have to be approved by the Financial Services Authority as a fit and proper person, and that he will be advising on the acquisition of the dodgy, or "impaired", loans.

Robin commented:

"This is extraordinary. Mr Applegarth's judgement, and therefore Apollo's in taking him on, must be very much in question after the events of 2007.

"The mechanism for him doing the job can be seen as trying to get round FSA rules, which, if the case, is reprehensible.

"What are these people trying to achieve? The Government, Northern Rock, and their circus of highly paid advisers must have gone to the outermost edges of these dodgy deals, and must make that information available as part of any due diligence. If Applegarth has any insider knowledge that would help a buyer, I would have expected him to make that known to Northern Rock's team in return for his mega payoff.

"Some humility, and an apology to all those like our members who he has helped impoverish, wouldn't go amiss before he takes any new job."

Northern Rock : Half year loss of £724.2m

As reported by the BBC

Northern Rock has reported a loss of £724.2m for the first six months of 2009, compared with a loss of £585.4m in the first half of last year.

The nationalised bank said that 3.92% of its mortgage loans were more than three months in arrears, well above the national average of 2.39%.

It currently owes the government £10.9bn, but is waiting for European regulatory clearance for more funding.

Northern Rock was nationalised in February 2008.

It had to be bailed out by taxpayers in 2007, when its model of borrowing short-term funds from wholesale markets to lend to mortgage borrowers was hit by the credit crunch.

BBC business editor Robert Peston said that there were tentative signs that Northern Rock may be over the worst.

But he added that its mortgages are continuing to go bad at an alarming rate and a faster rate than most of its rivals.

The bank said the total value of all of its loans had fallen by £602.2m in the first six months of the year.

Additional funding

Northern Rock is in the process of splitting itself into two companies, one of which will hold savers' money and be responsible for new lending, while the other will hold many of the existing loans and be responsible for paying back loans to the government.

Have Your Say
J Shaw, Bradford

Once the restructuring has been completed, the Treasury will provide additional funding if the European Commission agrees to allow the plan.

Chief executive Gary Hoffman told reporters he was making "good progress" in discussions with the Commission and expected to receive clearance in the autumn.

Earlier in the year, Northern Rock announced a change to its strategy, which has meant that it has reduced the priority of repaying its loans to the government and instead has tried to increase the amount of money it is lending.

But it has warned it is unlikely to meet its target of £5bn of new lending for this year and is more likely to hit a figure of £4bn.

Mortgage demand

Mr Hoffman said that the target would be missed, because it was constrained by not yet having received state aid clearance from Europe.

But he added that there would have been demand for the extra money if it had been available and said applications for Northern Rock mortgages had doubled in the second quarter of the year, compared with the first three months of the year.

In addition to reporting statutory losses, Northern Rock also released an underlying figure, which it said gave a better reflection of the state of the business.

The underlying loss fell to £269.6m for the six months to 30 June, compared with £443.3m for the same period of 2008.

The underlying figure excludes a £156.4m rebate that it will receive if it gets state aid clearance from the European Commission.

It also excludes what it calls a volatility charge of £298.2m on the way it accounts for the value of certain assets.

Give us back our shares!

Yesterday Robin Ashby spoke to BBC Radio Scotland about the outcome of the shareholders' appeal to the Court of Appeal. He stressed that the Northern Rock Small Shareholders Group is not a party to the court proceedings, although in sympathy with the claims of other shareholders and of course very interested in the outcome.

In his view, this was by no means the end of the line. He would expect the case to go next to the new Supreme Court (which is the Judicial Committee of the House of Lords until 31 July) and if the shareholders lose there, perhaps even to the European Court of Human Rights.

(The parties to the case are the two biggest shareholders, RAB and SRM Global, and a few selected small shareholders working with the UK Shareholders Association.)

Once the legal challenge is resolved, the valuer can get on with his wrok. But it is part of the contention that the rules have been so rigged by the Government that they are wqasting money to employ him and might just as well be honest and say “we've taken your shares and we're going to give you nowt”

The view that he expressed was that the small shareholders for whom NRSSG speaks don't want derisory compensation, they want fairness. The big banks weren't nationalised. The Government stood behind them while they tried to launch rights issues which the Government underwrote. So it ended up with a dominant shareholding. In the case of Northern Rock, it could easily have done the same thing. Indeed, it has injected £3 billion as shares.

We might have been diluted to a very large extent, but we'd still have been shareholders in our company and could share in any upside – which obviously the Government expects, because it's planning to sell Northern Rock back to the private sector as soon as it can.

Clearly all this will be going on until the General Election next year, when I expect former shareholders will be reminded about the theft of their shares, and will hold politicians seeking their vote to account.

There's an easy way for them to get out of this situation – give us back our shares!

Court of Appeal defeat but fight goes on

Appeal defeat for Rock investors

Former Northern Rock shareholders have lost their appeal in the latest stage of their challenge to the government's compensation plan.

The shareholders had appealed against a High Court decision to refuse a judicial review of the fairness of the government's scheme to compensate them.

They argued the government had deliberately undervalued the bank in the run up to its nationalisation.

But they said that they would now try to take the case to the House of Lords.

"We embarked upon this legal challenge in the full expectation that it would be a lengthy process. We are determined to see it through to its conclusion," said Jon Wood, of SRM - which was involved in bringing the appeal.

Crunch

Northern Rock came close to collapse at the start of the credit crisis in 2007 after savers staged a run on the bank after it had sought financial aid from the government.

Subsequently it had to be bailed out by the government, which then went on to nationalise the bank in February 2008.

At the time of nationalisation the government said that any subsequent valuation for compensation purposes should be based on the assumption that Northern Rock had not been a going concern.

The appeal was brought by hedge funds and other Northern Rock shareholders.

They argued in the original High Court case that the government's assessment of the bank's true worth was false and almost guaranteed that they would end up with nothing.

Government barristers pointed out that the lender had been lent or guaranteed £54bn of taxpayers money to keep the bank going, and that without this support the bank would have gone bust, leaving the shares totally worthless.

The High Court judges ruled that shareholders had taken a commercial risk with their investment.
Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/8172169.stm

Published: 2009/07/28 09:41:54 GMT

© BBC MMIX

Public Accounts Committee Report - 25th June

The Public Accounts Committee publishes a report examining the
protection of the taxpayer ahead of nationalisation, the Treasury's
capacity and readiness and the oversight of Northern Rock after
nationalisation.

* Report: The Nationalisation of Northern Rock


Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:

"The Treasury's lack of preparedness for dealing with the failure of a
major bank was evident as early as 2004 but nothing much was done to
remedy this weakness. It is not surprising therefore that, in September
2007, when there was the run on deposits at Northern Rock, the Treasury
was caught flat-footed.

"The taxpayer was therefore exposed to enormous risks and liabilities to
an unknown degree. Even though the Treasury was pouring in billions to
stabilize the bank, Northern Rock was allowed to carry on awarding high
risk loans to the tune of £750 million. And, when the Treasury
nationalised the bank in February 2008, it did not carry out its own due
diligence on the quality of the Rock's loan book; nor did it sufficiently
challenge the company's unrealistic forecast that house prices would
remain much the same up to 2012.

"That said, the Treasury's ultimate decision to nationalise Northern Rock
in February 2008 was based on a comprehensive assessment of the options
available to it. This analysis suggested that public ownership
represented the best alternative in terms of value for money.

"The Treasury must never again be so ill-prepared. As this crisis has
shown, the Treasury's ability to respond effectively to future financial
crises must be maintained at the highest level. This involves making
sure that, in future scenario testing, action is swiftly taken to deal
with any shortcomings that emerge."

Mr Leigh was speaking as the Committee published its 31st report of this
Session which, on the basis of evidence from the Treasury, examined the
protection of the taxpayer ahead of nationalisation, the Treasury's
capacity and readiness and the oversight of Northern Rock after
nationalisation.

The run on deposits at Northern Rock in September 2007 and the company's
subsequent search for a solution, culminating in public ownership in
February 2008, was the first major test in recent times of the Treasury's
capacity to deal with a bank in difficulty. By 2007 Northern Rock had
grown to become the fifth largest mortgage lender in the UK. To finance
its growth the company depended on raising funds from wholesale sources
such as other banks, and selling its existing mortgage book to investors.
In August 2007, credit concerns stemming from bad debts in the US mortgage
market caused banks to curb their lending to each other and investors to
stop buying mortgage-backed securities. Northern Rock began to experience
problems raising funds and asked the Bank of England for emergency
financial support.

When Northern Rock's customers became aware of the support, queues formed
outside branches and, over a few days, £4.6 billion was withdrawn. The
Treasury stabilised the situation by providing a series of guarantees to
retail depositors and wholesale lenders. This action avoided the immediate
risk of problems spreading to other banks. At its peak, the taxpayer
underwrote up to £51 billion of the company's liabilities. Throughout the
period of emergency support the company agreed, amongst other measures, to
reduce mortgage lending, but continued to write loans of up to 125 per
cent of a property's value.

With the assistance in place, the Treasury's preferred option was to
support the company while it searched for a private sector buyer. The
Treasury considered it should avoid taking any actions that were properly
a matter for the Northern Rock directors and, therefore, regarded the
company as being in charge of the search for a buyer, even though
increasingly large sums of public money were at risk. It gradually became
clear that potential buyers for the company could not arrange private
funding and, with market conditions continuing to deteriorate, there was
no prospect of a sale on this basis. The Treasury decided that
nationalising the company offered the best means of protecting the
taxpayer.

The Treasury was stretched to deal with a crisis of this nature. The
Treasury, the Bank of England and Financial Services Authority (the
Tripartite Authorities) had undertaken an exercise in 2004 to test their
response if a bank got into difficulty and had identified gaps in the
statutory framework to protect depositors. Prior to 2007, the Treasury did
not judge the work to address these gaps to be a priority.

Very few people within the Treasury had the relevant skills to deal with
the crisis at Northern Rock and it made extensive use of external
advisers. Although Goldman Sachs commenced work as the Treasury's
financial adviser in September 2007, a fee structure was not agreed until
January 2008. The agreement included a monthly retainer plus a success
fee, but success was not defined.

Once the company was in public ownership, the Treasury approved a business
plan for it in March 2008. This plan was based on optimistic assumptions
about the outlook for house prices. The base case had assumed, for
example, a 5 per cent drop in house prices in 2008 and flat thereafter.
The company had to substantially revise its forecasts in August 2008.

Window dressing the banks

The striking thing about the bank announcements of the last few days is not the sizeof the write-downs (huge though they are) but the underlying business performancewhich has been very strong. The good ships Barclays and RBS may be taking on waterbut they are steaming ahead faster than ever.

RBS lost money in the last quarter but continues with "impairment cgharged" - marginal potential losses which if as seems quite likely come good mean massive write backs some way down the line - and thus record breaking profits at the time the Government could be seeking to sell off part of its stake. Already the RBS share price is 50% higher than the last rights issue price at which the Govt injected funds, and is closing in on the previous rights price. The current window dressing could fuel a windfall for the taxpayer - but the Labour Party may be too late to benefit from it.

Northern Rock compensation

By Pradeep Chand

I had a meeting with Andrew Caldwell (the Government's Northern Rock share valuer)on April 8th and I was able to convey all my views on Valuation. The key points I made at the meeting were:-

1. The Valuation should be professional and independent, capable of scrutiny by all stakeholders. The Valuer had a Duty of Care to present the negative impact on Valuation of Tripartite mismanagement of the Leak / Run, miserable supervision during September 2007 to February 2008, piecemeal and fragmented approach. Government conditions not defensible: only rational process would be to "Balance" these with £3 Billion of destroyed embedded value.

2. Shareholders are long term savers. Never allowed to vote on private sector bids or Rights Issue.

3. Discrimination evident if compared with terms for Bradford & Bingley valuation, waiving rules on Lloyds takeover of HBOS, and £1.6 Billion gift to Nationwide to resolve Dunfermerline. SLS and capital injections were 12 months too late. SLS would have enabled NR to flourish as a Going Concern.

4. Regard £3.3 Billion government equity injection in April 2008 as key indicator of "Imputed Value" (no rational investor would inject this unless NPV of future cash flows were OVER £3.3 Billion)

5. TSC minutes reflect badly on Governor of BoE “It could have gone either way" with regard to Run. FSA had admitted serious errors in Regulation. National Audit Report highly critical of Treasury. Mervyn King admitted to Robert Peston that Run could have been averted. Guarantees given Four Days Too Late. ALL Tripartite members failed.

6. Suggested that 96 pence was a rock bottom compensation value (heavily weighed down by worry over nationalisation). Fair Value was in the £3.75 to £6.45 range. Strongly PRAISED SRM and RAB support of share price, suggested we levy a 90% tax on Lansdowne and other Short Sellers to fund part of Compensation to NR shareholders.

7. Pointed out my personal distress, by pass -- even wearing heart monitor at meeting.

RBS Rights Issue Action Group

A firm of solicitors specialising in Class Actions is exploring the possibility of legal action in respect of the RBS rights issue of April 2008 (the one at 200 pence - c.f. recent price below 30 pence)

Full details at www.leonkaye.co.uk.

There's also www.rbsactiongroup.co.uk if you are an aggrieved RBS shareholder

Mervyn King speech - Finance: A return from risk

The link below will direct you to the transcript of a speech given by Mervyn King, Governor of the Bank of England to a selection of international bankers on March 17th 2009.

http://www.bankofengland.co.uk/publications/speeches/2009/speech381.pdf

Bradford & Bingley guarantees - over £17 billion

HM TREASURY: DEPARTMENTAL MINUTE
FINANCIAL SUPPORT FOR BRADFORD & BINGLEY

The purpose of this Minute is to inform Parliament of a change to the contingent liability, now covered by the provisions of the Banking Act 2009, in relation to guarantee arrangements to safeguard wholesale borrowings and deposits with Bradford & Bingley. This guarantee is designed to provide assurance to wholesale depositors and borrowers, and to preserve wider financial market stability and maximise proceeds in the wind-down.

On 29 September 2008 the Government made an Order under the Banking (Special Provisions) Act 2008, to transfer Bradford & Bingley's UK and Isle of Man retail deposit business along with its branch network to Abbey National plc. The remainder of Bradford & Bingley's business has been taken into public ownership.

Following the turbulence in global financial markets, Bradford & Bingley found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution. The Financial Services Authority (FSA) determined in September 2008 that the firm no longer met its threshold conditions for operating as a deposit taker under the Financial Services and Markets Act 2000 and FSA rules.

The Government, on the advice of the FSA and the Bank of England, acted immediately to maintain financial stability and protect depositors, while minimising the exposure to taxpayers to bring about the part public, part private solution that met those objectives.

On 29 September 2008, the Treasury put in place guarantee arrangements to safeguard certain wholesale borrowings and deposits with Bradford & Bingley existing as at midnight on 28 September 2008. The guarantee arrangements were notified to the European Commission as rescue aid. As part of the restructuring aid notification to the European Commission the Treasury is seeking approval to continue the existing guarantee arrangements. The guarantee arrangements will remain in place while the Commission considers the Treasury's request. If approved by the Commission, the guarantee arrangements will continue until the wind-down of Bradford & Bingley is completed.

As reported in the Treasury's Spring Supplementary Estimates 2008-09 the size of Bradford & Bingley's wholesale deposits and borrowings covered by the guarantee arrangements is estimated to be about up to £17 billion. The amount guaranteed and therefore the size of the contingent liability will reduce as the wholesale deposits and borrowings reach maturity.

Arrangements will be put in place to ensure that Bradford & Bingley will pay an appropriate fee for the provision of these guarantee arrangements in order to ensure it does not receive a commercial advantage.

In normal circumstances, if any of these liabilities are called, the Treasury would seek Parliamentary approval through the normal Supply procedure. However, if the Treasury and the National Audit Office are satisfied that the need for expenditure is too urgent to permit normal arrangements, direct funding from the Consolidated Fund under the Banking Act could be used. The Treasury would as soon as is reasonably practicable lay a report before Parliament specifying the amount paid, unless it considers that the report should be delayed or dispensed with on public interest grounds.

It is normal practice, when a Government department proposes to undertake a contingent liability in excess of £250,000 for which there is no specific statutory authority, for the department concerned to present to Parliament a Minute giving• particulars of the liability created and explaining the circumstances; and to refrain from incurring the liability until fourteen parliamentary sitting days after the issue of the Minute, except in cases of special urgency.

This Minute gives notification of a guarantee into which the Treasury has entered into with the Financial Services Authority.

On 29 September 2008 the Government made an Order under the Banking (Special Provisions) Act 2008, to transfer Bradford & Bingley's UK and Isle of Man retail deposit business along with its branch network to Abbey National plc.

The remainder of Bradford & Bingley's business was taken into public ownership. In order to enable Bradford & Bingley to meet its regulatory requirements as defined by the FSA, the Treasury provided a guarantee to the FSA of its intention to take appropriate steps (should they prove necessary) to ensure that Bradford & Bingley will continue to operate above the minimum regulatory capital requirements. The size of this guarantee is unquantifiable. This commitment will remain in place for so long as required by the FSA to continue to regulate Bradford & Bingley.

In normal circumstances, if any of these liabilities are called, the Treasury would seek Parliamentary approval through the normal Supply procedure. However, if the Treasury and the National Audit Office are satisfied that the need for expenditure is too urgent to permit normal arrangements, direct funding from the Consolidated Fund under the Banking Act could be used. The Treasury would as soon as is reasonably practicable lay a report before Parliament specifying the amount paid, unless it considers that the report should be delayed or dispensed with on public interest grounds.

This guarantee was given on 30 March 2009. Owing to market sensitivity it was not possible in this case to give Members the usual period of 14 parliamentary sitting days notice before incurring the liability.

Public Accounts Committee to take further evidence on Northern Rock

At 16.30 on Monday 30th March, the Public Accounts Committee will take evidence from Sir Nick Macpherson, Permanent Secretary, HM Treasury and John Kingman, Chief Executive, UK Financial Investments Ltd. Details will be posted following the meeting.

Legal action - where we are now

As followers will know, the NRSSG is not part of the legal action being taken against the Government. This is being led by the U K Shareholders Association with support from the two biggest shareholders RAB and SRM.

Althought the request for a judicial review was turned down in the High Court, they have been given leave to appeal to the Court of Appeal because of the importance of the principles of the case.

This means there will be further delay in the valuer setting to work on the basis that in effect our shares are worthless. It is likely that any valuation will also be the subject of legal challenge.

Robin Ashby has frequently expressed the view that either we want fair value (which for the sake of argument would be the net value of the business at the end of the first day of the run on the bank, £4 a share) or we want our shares back and we'll take our chances in the long run.

As the Government has injected £3 billion of equity since it stole our shares, that would put us in a similar position to other banks such as RBS and Lloyds, where the Government has underwritten rights issues and now has a large share stake but exisiting shares remain with the original owners.

National Audit Office report on Northern Rock

Amongst the media coverage of this, Robin Ashby was featured on BBC TV Look North on Friday. The article is still viewable at

http://news.bbc.co.uk/1/hi/england/7956211.stm

Government's £150 billion asset purchasing and "money printing" plan

The Chancellor of the Exchequer recently lodged a paper explaining what would happen. Rather than relying on the newspapers, you can read it for yourself below. Its one and a half pages make interesting reading, including part of the justification: to get inflation back up to 2%

The private sector could benefit to the tune of £50 billion



HM TREASURY: DEPARTMENTAL MINUTE

Contingent liabilities arising from the asset purchase facility

This Minute gives Parliament further information about the contingent liabilities described in the Treasury Minute of 19 January 2009. It concerns the Asset Purchase Facility ('the Facility') on which further details were announced today in an exchange of fetters between the Chancellor and the Governor of tt1e Bank of England.

As foreshadowed in the earlier Minute, the Chancellor has authorised an extension to the Facility to allow the Monetary Policy Committee (MPC) to use it for monetary policy purposes if the MPC deems that appropriate. The Facility can be used to purchase UK Government debt on the secondary market as well as private sector assets (specified in the previous Minute). Purchases undertaken for monetary policy purposes would be financed by the creation of central bank money.

The maximum scale of the purcl1ases under the Facility has been raised to up to £150 billion, of which up to £50 billion could be used to purchase private sector assets. The purchase of private sector assets will continue as planned and the scale of purchases will not be affected by the extension of the Facility. The option of issuing Treasury bills to finance such asset purchases will remain open. If and when the MPC decides that private sector purchases should be financed by the creation of central bank money, the Bank executive will apply the same criteria in selecting those assets as if the purchases were financed by the issuance of Treasury bills. And in that case, the need to finance purchases using Treasury bills is expected to cease, at least initially. These are maximum limits within which the MPC will determine the scale of its purchases each month; the overall limits and the balance of purchases between government debt and private sector assets will be kept under review. .

If the Facility were to be used for monetary policy purposes, the MPC would decide, each month, on the asset purchases it judged necessary to meet the inflation target. The MPC would continue to be accountable for use of the Facility in the same way that it is for its decisions on the level of Bank Rate, including reporting its decisions in its monthly minutes and explaining its analysis in the quarterly Inflation Report. It will also publish a quarterly report of the transactions undertaken and, where appropriate, information on specific transactions and operations. Implementation of the MPC's decisions on asset purchases would fall to the Bank's Executive.

HM Treasury stands behind the Bank and is, therefore, providing an indemnity for the facility. As is the case for the purchases of private sector assets financed by the issuance of Treasury bills, HM Treasury will indemnify the Bank for any losses that it makes arising out of, or in connection with, the use of the Facility to purchase UK government debt and private sector assets financed by the creation of central bank money.

The risk of the indemnity being called cannot be forecast accurately. It arises partly because asset prices will fall if yields on interest bearing assets rise. But other factors could be relevant too. If the perceived iIIiquidity and credit risk attached to those assets lessens, they may appreciate in value. If the liability is called, provision for any payment will be sought through the normal Supply procedure.

The purpose for extending the use of the Facility is to enable the Bank of England to use asset purchases in order to meet the 2 per cent target for CPI inflation and stimulate the economy. To the extent that the Facility is used to buy gills on the secondary market financed by central bank money, this would be similar to the current implementation of monetary policy, except that the instrument of policy would shift towards the quantity of money provided rather than its price. The Facility also uses central bank money to purchase high quality private sector assets to improve liquidity in credit markets that are currently not functioning normally.

It is still intended that the facility will be temporary. Its closing date is not yet decided and will be announced when the Government is able to make an informed decision on the state of the markets.

I regret that, owing to the urgency of the situation as outlined above, it was not possible to give notification of this indemnity with the customary full fourteen parliamentary sitting days' notice.

HM Treasury
5March 2009

Rock Shares

This comment appeared in this Saturday's issue of The Northern Echo (p.17)

"So, Northern Rock is prepared to lend £14bn in the next two years (see Businees Echo, Feb 24). Where's the money for my shares?"
George Maxwell, Reeth, North Yorkshire

Rock investors lose court case

Former Northern Rock shareholders have lost their legal challenge to the government's plan to compensate them.

In the High Court last month they argued the government had deliberately undervalued the bank in the run up to its nationalisation last year.

This had infringed their human rights, they argued, and meant they would now receive nothing.

Full article found on the BBC Website

Robin Ashby has done interviews with IRN and Tyne Tees News today on the issue

Evidence to Treasury Select Committee

By Christopher Bean 3rd February 2009

Thoughts on the Treasury Select Committee's exploration of the audit & credit rating agencies activities during the present financial and economic crisis.

Verification vs. Viability
The examination of the auditors and credit agencies stimulated a strong feeling of ambivalence as they provided true to form a dissimulation of their reliance on ‘compliance’ with current standards which seemed to dissolve them of any responsibility and certainly any accountability; which was satisfying only in that it confirmed my interpretation as being not wrong. All that such ‘certification’ establishes is that the organisation (system) has been built and is operating in accordance with a codified set of criteria – it does not establish if the organisation (system) is viable within the current and predicted volatility of even the short term future.

Building the wrong system right does not make it any less wrong.

The aggregation of standards reveals nothing as to the viability of the organisation’s ability to operate within an evolving dynamic environment; by dynamic I do not mean the rather sophistic answer provided by the witnesses, but at least those representing: flows of energy, material and information aligned with spatial and temporal progress of the organisation’s relationships with its operating environment.

This does not require 500 pages of detailed analysis as the witnesses mentioned; it is fully acknowledged that the problem is complex, but so is the human body and you would not expect your doctor, the health accountant, to present you with an analysis that was too difficult to understand; you would expect a synthesis of your condition to provide a comprehensible picture of your health, something that could be grasped within minutes.

As soon as we go into detail which is where individual domain experts operate, no matter how small our specialist area we shall sooner or later be overwhelmed by data. Not understanding the nature of systems, results in difficulty finding the right level of aggregation, which as you will be aware requires taking account not only of higher systemic levels but also of indicators of sub-systems. We are all aware, implicitly, of the need to understand how deep we need to break down the detail; but where does the limit lie? For instance, to understand the breeding behaviour of a sheep there is absolutely no need to record the wool count, research blood-pressure and renal function; even if you did take all that into account, the resultant degree of refinement would be an arbitrary choice. What matters is not the amount of information but making the right choice. This is a universal truth as regards the flood of information currently overwhelming us. Information is invariably the fear of complex states of affairs. Possessing more information certainly does not mean being better informed.

The problem is not the complexity, which as we know is essential to the richness of life; it’s the inability of the auditors, restricted by the needs of their comfort blanket compliance, to absolve themselves from the responsibility and its associated accountability, for dealing with complexity. Within any complex system there are only so many variables (not constants) that represent the viability of the organisation – any viable system being governed by only a small number of rules.

Summary currently the auditors test for verifiability against accounting standards, compliance - is the organisation being operated right. What they, or some new body, should be examining is the viability; the validation of the organisation – is it the right organisation for the dynamics of the environment it is operating within. This also has the effect of restricting new entries and forms of competition to the market place.

This problem is the most common oversight made by auditors (who I accept have no remit, which includes national audit activities in the public sector, certainly both NAO & WAO are aware of this limitation) when striving to understand and put meaning to the viability of a complex problem. Verification is useful when you are buying something with causal relations such as a clock.

What separates a verifiable organisation, system, from a validatable viable one is complexity – a difference of such significance as the difference between success and failure.

This dilemma in dealing with complexity stems from the fact that our whole education and management practice (see OGC project management guidance plus Treasury Green, Red & Magenta books) tends towards drawing simple logical conclusions and defining obvious cause-effect relations. Yet simple cause-effect relations exist only in theory; they have no existence in reality; intervention in a system where its links have not been understood, results in that system behaving in a counter-intuitive manner; action taken does not produce the result that might ‘logically’ have been expected or that previous experience of the system suggested.

Conclusion Certainly within the UK, much is spoken about complexity, but the reality is that institutionalized thinking has not developed beyond a whole plethora of traditional practice, doing better what was done before; yet future success (however that might be measured, possibly in terms of competitive and comparative advantage) depends almost entirely on possessing the capability (not requiring new high cost domain expertise) to understand the nature of complexity. The present financial and now economic crisis highlights more than anything else this essential need; however, I have yet to witness any desire to grasp this nettle, a nettle which is somewhat akin to Poe’s Purloined Letter!

Foresight

Owners of capital will stimulate  the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their  debt  becomes unbearable. The unpaid debt will lead to bankruptcy  of banks, which will have to be nationalised and the State  will  have to take the road which will eventually lead to State
intervention and thus Communism."
                                                              
Karl Marx                                                   
Das Kapital 1867

Appeal to MP to pursue source of original Northern Rock leak.

Robin Ashby has today written to Jim Cousins MP, MP for Newcastle Central and a member of the Treasury Select Committee, in the following terms:

Dear Jim,

As you know, the Northern Rock Small Shareholders Group is not a party to the legal proceedings currently under way. The story on page 41 of today's Times is therefore the first we've heard about the evidence of John Kingham, ex Treasury, about who is responsible for the first leak to Peston of the BBC.
Can I therefore urge you to take up the cudgels again to try to find out through Parliament who in effect caused the run on the bank - and arguably made a substantial contribution to some of our current problems - by premature disclosure.
With best wishes
Robin Ashby