John Moir, retired accountant and former financial
director of Lloyds of London, argues that the Northern Rock rescue plan is the biggest financial rip-off in history.
There are a lot of facts surrounding the Northern Rock disaster that
are being withheld from the public, i.e, the taxpayer or, in its
simplest term, “us”). These facts, some of which I will enumerate
below, would be embarrassing to the Government and would probably
scupper the latest ingenious plan (i.e, con) to get the Government off
the hook. This does not excuse the official lies and deception.
First let me put my cards on the table. Northern Rock had a flawed
business plan and tried to grow much too fast for its own good. When
the fatal flaw was exposed by the credit crunch, it should have been
allowed to go into administration or be liquidated. This would have
hurt a lot of people and cost a few thousand jobs but nothing like the
cost of the salvage plans now about to be foisted on the British
public.
It appears that the taxpayer will be forced to guarantee bonds secured
over the assets of Northern Rock (its mortgage book). The plan is for
either the Government or a private buyer to run the bank in a
subsidised way (subsidy also thanks to us) in the hope that it can one
day become profitable, pay off the bonds, release the taxpayer from the
guarantees and maybe even provide a small profit for the taxpayer.
Dream on. None of this will happen and, what is worse, neither our
Prime Minister, our Chancellor, the Governor of the Bank of England,
the Financial Services Authority nor any self-respecting level-headed
financial journalist believes it either.
I will return later to the reason why none of them wish to be honest with us. First, I need to let you in on the secret being withheld from us. We keep being reassured by the Prime Minister and his Chancellor that the assets owned by Northern Rock are high quality. The mortgages held by Northern Rock are sound, they say. This is patently untrue and all of the above-mentioned parties are aware of this crucial fact. Since I do not have personal access to the records of Northern Rock, how can I state this categorically? Let us look at some of the proofs which are available to us.
First, if the Northern Rock mortgage book was of high quality, there would have been plenty of competitor banks and other private parties willing to acquire the business without the need for taxpayer support. There was not a mad scramble of eager would-be purchasers – there was an embarrassing void, with only three serious bidders out of the potential hundreds. This soon fell to only two, when JC Flowers backed off, then three when the Northern Rock managers (yes, the ones who engineered the disaster) joined in. We are left with carrion birds trying to salvage something from the corpse.
The second piece of evidence I draw comes from the events in the last two years before the fall. Northern Rock grew very fast from a small northern player to become one of the top mortgage providers in the country. Its market share rose dramatically, not to say meteorically, in two years. Now any businessman will tell you that the only way to make such gains on your competitors is to offer products at a price well below the competition. In a highly competitive mortgage market, this meant offering mortgages to people your competitors were loathe to deal with. This resulted in very aggressive marketing. Rock offered mortgages based on joint incomes, six times salaries, 100% or even 120% mortgage of property value. There was also the madness of self-certification of earnings. “You tell me what you earn. I do not check with your employer and we will give you a mortgage”. These loans are referred to in the trade as liar loans. I wonder why? No wonder they grew fast! Unfortunately this irresponsible lending does not show in the inevitable bad debts and repossessions while the economy is booming and house prices are rising. As America has found out, sub-prime lending is uncovered as soon as the froth goes off the housing boom and the wider economy.
Now, I hope you are convinced, as I am, that Northern Rock has a lot of sub-prime mortgages in its books. This is the big lie.
As taxpayers, we are being asked to invest, in the form of guarantees, up to £50 billion (or is it £100 billion?) to keep afloat a busted company. The Prime Minister tells us that he does not expect to call on us for real cash because the business is sound. But he, his Chancellor, his FSA, the Bank and all their advisors know this is untrue.
If a company issued a prospectus on grounds even remotely as misleading as this, the issuers would probably be going to jail. All we will be able to do is throw out Gordon Brown and his crew of liars and incompetents at the next election. By then, however, every taxpaying family in the UK will be thousands of pounds out of pocket and many of our irresponsible banks and building societies will feel comforted by the fact that the suckers (i.e, us) will always bail out the bad guys.
As a parting shot, I said I would explain the reasons why the culprits are all denying us the truth. First, the Prime Minister: He set up the FSA and gave the Bank its “independence”. He has trumpeted this as his greatest achievement and now his reputation for financial competence is in tatters. He must try to engineer some form of “rescue” to shore up his vanishing reputation.
Next is the Chancellor: He is totally in thrall to the Prime Minister and sees no alternative but to go along with the con. His job depends on his continuing to prop up his boss. The Governor of the Bank got the first call right: “do not prop up irresponsible financial institutions”. However his independence was quickly overruled by the Chancellor, who was told by the Prime Minister to guarantee depositors money (with ours) and shortly thereafter to guarantee all other banks who loaned money to prop up the failed bank. So much for independence.
The Financial Services Authority, the bunch of pen-pushers given responsibility by the Prime Minister to oversee the banking establishment (and have since been found to be woefully unable to do so) are trying to defend their position. They either have to confess knowledge of the situation followed by inaction or deny knowledge that was well-known to the street. No wonder they are silent.
Financial journalists – I don’t know. Perhaps they are under political pressure or are they cowed by the implied threat that the disclosures could cause a total collapse of our financial systems or result in a major UK recession for which they will be blamed. Maybe someone can set me straight.
All I know is that the Government is trying to dupe me and all other taxpayers and an awful lot of people are allowing themselves to be made complicit in what I think is the biggest financial rip-off in UK history.
John Moir, retired accountant and former financial
director of Lloyds of London, argues that the Northern Rock rescue plan is the biggest financial rip-off in history.
There are a lot of facts surrounding the Northern Rock disaster that
are being withheld from the public, i.e, the taxpayer or, in its
simplest term, “us”). These facts, some of which I will enumerate
below, would be embarrassing to the Government and would probably
scupper the latest ingenious plan (i.e, con) to get the Government off
the hook. This does not excuse the official lies and deception.
First let me put my cards on the table. Northern Rock had a flawed
business plan and tried to grow much too fast for its own good. When
the fatal flaw was exposed by the credit crunch, it should have been
allowed to go into administration or be liquidated. This would have
hurt a lot of people and cost a few thousand jobs but nothing like the
cost of the salvage plans now about to be foisted on the British
public.
It appears that the taxpayer will be forced to guarantee bonds secured
over the assets of Northern Rock (its mortgage book). The plan is for
either the Government or a private buyer to run the bank in a
subsidised way (subsidy also thanks to us) in the hope that it can one
day become profitable, pay off the bonds, release the taxpayer from the
guarantees and maybe even provide a small profit for the taxpayer.
Dream on. None of this will happen and, what is worse, neither our
Prime Minister, our Chancellor, the Governor of the Bank of England,
the Financial Services Authority nor any self-respecting level-headed
financial journalist believes it either.
I will return later to the reason why none of them wish to be honest with us. First, I need to let you in on the secret being withheld from us. We keep being reassured by the Prime Minister and his Chancellor that the assets owned by Northern Rock are high quality. The mortgages held by Northern Rock are sound, they say. This is patently untrue and all of the above-mentioned parties are aware of this crucial fact. Since I do not have personal access to the records of Northern Rock, how can I state this categorically? Let us look at some of the proofs which are available to us.
First, if the Northern Rock mortgage book was of high quality, there would have been plenty of competitor banks and other private parties willing to acquire the business without the need for taxpayer support. There was not a mad scramble of eager would-be purchasers – there was an embarrassing void, with only three serious bidders out of the potential hundreds. This soon fell to only two, when JC Flowers backed off, then three when the Northern Rock managers (yes, the ones who engineered the disaster) joined in. We are left with carrion birds trying to salvage something from the corpse.
The second piece of evidence I draw comes from the events in the last two years before the fall. Northern Rock grew very fast from a small northern player to become one of the top mortgage providers in the country. Its market share rose dramatically, not to say meteorically, in two years. Now any businessman will tell you that the only way to make such gains on your competitors is to offer products at a price well below the competition. In a highly competitive mortgage market, this meant offering mortgages to people your competitors were loathe to deal with. This resulted in very aggressive marketing. Rock offered mortgages based on joint incomes, six times salaries, 100% or even 120% mortgage of property value. There was also the madness of self-certification of earnings. “You tell me what you earn. I do not check with your employer and we will give you a mortgage”. These loans are referred to in the trade as liar loans. I wonder why? No wonder they grew fast! Unfortunately this irresponsible lending does not show in the inevitable bad debts and repossessions while the economy is booming and house prices are rising. As America has found out, sub-prime lending is uncovered as soon as the froth goes off the housing boom and the wider economy.
Now, I hope you are convinced, as I am, that Northern Rock has a lot of sub-prime mortgages in its books. This is the big lie.
As taxpayers, we are being asked to invest, in the form of guarantees, up to £50 billion (or is it £100 billion?) to keep afloat a busted company. The Prime Minister tells us that he does not expect to call on us for real cash because the business is sound. But he, his Chancellor, his FSA, the Bank and all their advisors know this is untrue.
If a company issued a prospectus on grounds even remotely as misleading as this, the issuers would probably be going to jail. All we will be able to do is throw out Gordon Brown and his crew of liars and incompetents at the next election. By then, however, every taxpaying family in the UK will be thousands of pounds out of pocket and many of our irresponsible banks and building societies will feel comforted by the fact that the suckers (i.e, us) will always bail out the bad guys.
As a parting shot, I said I would explain the reasons why the culprits are all denying us the truth. First, the Prime Minister: He set up the FSA and gave the Bank its “independence”. He has trumpeted this as his greatest achievement and now his reputation for financial competence is in tatters. He must try to engineer some form of “rescue” to shore up his vanishing reputation.
Next is the Chancellor: He is totally in thrall to the Prime Minister and sees no alternative but to go along with the con. His job depends on his continuing to prop up his boss. The Governor of the Bank got the first call right: “do not prop up irresponsible financial institutions”. However his independence was quickly overruled by the Chancellor, who was told by the Prime Minister to guarantee depositors money (with ours) and shortly thereafter to guarantee all other banks who loaned money to prop up the failed bank. So much for independence.
The Financial Services Authority, the bunch of pen-pushers given responsibility by the Prime Minister to oversee the banking establishment (and have since been found to be woefully unable to do so) are trying to defend their position. They either have to confess knowledge of the situation followed by inaction or deny knowledge that was well-known to the street. No wonder they are silent.
Financial journalists – I don’t know. Perhaps they are under political pressure or are they cowed by the implied threat that the disclosures could cause a total collapse of our financial systems or result in a major UK recession for which they will be blamed. Maybe someone can set me straight.
All I know is that the Government is trying to dupe me and all other taxpayers and an awful lot of people are allowing themselves to be made complicit in what I think is the biggest financial rip-off in UK history.