Government Must Come Clean On Northern Rock Loan - Cable

1.28.50pm GMT Fri 16th Nov 2007

The Liberal Democrats today attacked Alistair Darling for failing to disclose the details of the growing loan to Northern Rock.

In a letter to Liberal Democrat Acting Leader, Vince Cable MP, the Chancellor refused to confirm how much money had been leant to Northern Rock, whether it would have to pay interest on the loan or when it would have to be fully repaid.

Commenting, Vince Cable said:

"It is clear that the Government is more concerned with the welfare of the managers and shareholders of Northern Rock than the security of taxpayers' money.

"It is simply unacceptable for the Chancellor to cover up the sheer scale of payments being made to Northern Rock when it can offer no guarantee that this money will ever be repaid.

"We are now in an absurd situation where banks can take ludicrous gambles with their customers' money, knowing that if it all goes wrong the taxpayer will bail them out.

"If banks are to have the benefit of the British public acting as a lender of last resort they must put an end to unsustainable lending practices.

"When things do go wrong, the boards and management must be held responsible."

ENDS

Notes

1. Below is a copy of Vince Cable's letter to Alistair Darling:

Rt. Hon Alistair Darling MP

HM Treasury

1 Horse Guards Road

London

SW1A 2HQ

25th October 2007

Dear Alistair,

Northern Rock

You will recall our exchange in Parliament last Tuesday. I am increasingly concerned that the Government is committing vast amounts of taxpayers' money to support the bank (£16 billion at the latest count and increasing by £1 million every four minutes) while it continues to be managed by the same team which was in charge when the credit crisis occurred six weeks ago, operating the same business model.

You said to me that the Government could not dismiss the management since this was a private company. That is a highly technical argument which ignores both commercial reality and the clear conflict of interest between Northern Rock's shareholders and the taxpayer who has a far higher exposure to loss through the Bank of England's funding.

If the Government guarantee were withdrawn, even for a moment, the company would go straight into administration. The Government therefore, in practice, has the power to require the present directors to resign and appoint government nominees to replace them whenever it wishes, or if the present board refuses, to require that administrators be appointed.

Underlying your confidence in the current management appears to be a belief that the loan book is good and that lending practices are sound. I cited to you an example of how the current management is freely offering loan packages at combined multiples of income and loan to value ratios which no prudent bank could possibly sustain.

It has emerged in the last few days, from analysis in the City, that there are very serious problems with the assets of the bank which have been overlooked by the FSA, perhaps because so much of the mortgage portfolio is very new as a result of Northern Rock's breakneck recent expansion. A very high percentage - 45% - of Northern Rock mortgages are 'income unverified'. Yet the treatment of these assets appears to be much less rigorous than for other mortgage banks - like

Alliance and Leicester or Bradford and Bingley - in respect of the treatment of arrears. 'Unauthorised under-payments' are not being treated as arrears, as they should be, but are being dressed up as payment holidays. It looks as if bad debts are being hidden.

It is also being pointed out that Northern Rock's most recent lending - which on no definition would fit your definition of 'old fashioned lending' - could lead to a rapid escalation of re-mortgaging with the accumulation of bad debt. Some of this questionable credit has been undertaken since you authorized lending public money to the bank.

I have three questions:

1. Are you willing to use your position as lender of last resort to impose entirely new management and new disciplines on the bank?

2. Will you ensure that the FSA urgently revisits its earlier examination of the loan book which was, clearly, superficial and complacent in its conclusions?

3. Will you make a clear weekly announcement of the total amount of funding provided by the Bank of England to Northern Rock, rather than letting it emerge through the Bank's weekly balance sheet?

What might at first have seemed an embarrassing accident now risks becoming a major financial scandal which may ultimately land taxpayers with a bill for billions of pounds. As the custodian of public money I hope you will intervene quickly to limit the damage.

Yours sincerely,

Vincent Cable MP

MP for Twickenham

Liberal Democrat Acting Leader and Shadow Chancellor of the Exchequer