Northern Rock report shows Treasury failed to assess risks

Mar 20 2009 by William Green, The Journal

NORTHERN Rock was allowed to lend £800m in high-risk mortgages for six months after being placed on life-support with billions from the taxpayer.

The finding came in a damning National Audit Office (NAO) report which said an under-prepared Treasury failed to properly assess risks, carry out its own due diligence, or challenge over-optimistic business plans after nationalising the lender in February 2008.

Northern Rock continued to offer its infamous Together mortgage – lending 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 loans were tightened, the product still accounts for 50% of the lender’s arrears and 75% of repossessions. The Treasury – which until February was pursuing a private sector sale – “judged mortgage transactions were necessary to maintain the business” while a long-term solution was sought, the NAO said.

It was “severely stretched” in terms of expertise with rapid turnover in staff adding to difficulties, it added.

The NAO highlighted a high reliance on external advisers by the Treasury and Northern Rock, with taxpayers’ footing a £79m bill.

But the Treasury does not hold detailed calculations used to work out Northern Rock’s future, which remain the “intellectual property” of financial adviser Goldman Sachs.

The Bank of England also hired advisers to look at the implications of Northern Rock going into insolvency – raising questions about its views.

The NAO revealed the Treasury initially stayed out of the failed attempt to sell the Rock for fear of litigation if the bank entered insolvency. But further legal advice in January 2008 said the Treasury could get involved because the bid process depended on taxpayer support.