The Bank of England will next week unveil a plan to swap £50bn of government bonds for British banks' mortgages, the BBC has learned.

The government bonds would have a maturity of up to a year, but would be rolled over for up to three years.

These would meet banks' demands for longer term loans, while escaping being accounted for in the national debt. ...

BBC NEWS 18 April 2007

Where's Tucker?" whispered someone in the oak-panelled hush of the Treasury select committee room. This was the perfect stage for the foul-mouthed spin doctor Malcolm Tucker from The Thick of It: the governor of the Bank of England, Mervyn King, had dithered while Northern Rock crumbled, and now there were calls for his resignation. Tucker, a foul-mouthed Scot, could surely reduce this small, bespectacled banker to dust.

Unfortunately, the Tucker in question was Paul, one of Mr King's sidekicks at the Bank. So it was left to John McFall, the Labour chair of the MPs' committee, to give his best Scotsman-in-a-fury impersonation. "How did you get a situation where the effort put in to rescue Northern Rock is the equivalent of screaming 'fire' in a darkened cinema?" Mr McFall barked. He pointed a finger bearing a ring the size of the Bank's gold reserves at the governor's deputy, Sir John Gieve: "Were you having a sleep in the back of the shop while a mugging was taking place?"

Mr King, however, is the bankers' banker, a man who could look down the barrel of a sawn-off shotgun and explain in clipped tones he was terribly sorry he could not offer the robber a "liquidity solution" on account of a "maturity transformation on the balance sheet".

The guvnor, as the MPs kept calling him, suddenly pulled out a weapon of his own: an almost racy explanation for why the Bank had not acted sooner to stop the Rock. He had been ready, he growled, to perform a "covert operation" one weekend. (In his suit of dark charcoal with charcoal pinstripes, and hair the colour of burnt charcoal, Mr King could certainly go into deep cover at a bankers' barbecue.) He would have helped arrange another bank's rescue of Northern Rock in a secret backroom deal, he confided, but lawyers advised against it because of a 2005 law that demanded transparency in takeovers.

Just as Malcolm Tucker could call on his rabid Scottish sidekick Jamie, so Mr McFall was backed up by fellow Scot George Mudie. Unlike Jamie, Mr Mudie never threatened to push something so far up someone's behind it popped out of their mouth. But he gave the impression he was just about to.

"Well that's nice, that's very nice to know," Mr Mudie snarled at the governor. "You say 'we'd love to do something but it was a lack of legislation, it was this, that and the other'. Well, I say, OK, you appear to be very concerned, you looked at various things and gave excuses for not doing them. What were you going to do?"

Mr King looked milder than ever, but a little twitch began dancing angrily in the charcoal recesses of his jowels. "A lender of last resort is a lender of last resort," he explained quietly. "If we'd jumped in that could've been very damaging to an institution. We were there as a backstop."

Mr McFall went feral. "Frankly, I do not think you are doing your job," he said. Mr Mudie exploded: "You were content to watch this impending disaster, this train running towards the buffers." But the five Bank of England buffers under interrogation were not moved. "At that point there didn't seem much point in blowing up the train before it hit the buffers," said Mr King. Britain's most senior banker almost smirked.

Guardian 21 June 2008

[FSA's] ... four key failings:

1. A lack of sufficient supervisory engagement with the firm, in particular the failure of the supervisory team to follow up rigorously with the management of the firm on the business model vulnerability arising from changing market conditions.

2. A lack of adequate oversight and review by FSA line management of the quality, intensity and rigour of the firm's supervision.

3. Inadequate specific resource directly supervising the firm.

4. A lack of intensity by the FSA in ensuring that all available risk information was properly utilised to inform its supervisory actions.

FSA chief executive Hector Sants said: "It is clear from the thorough review carried out by the Internal Audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge." ...

The Guardian 26 March 2008

Jeremy Warner and Hamish McRae - The Independent's neoliberal 'business' commentators - are against the U.S. Sarbanes-Oxley Act regulations enacted in the wake of the Enron scandal.

Whenever there is a financial crisis, of one thing we can be certain – that long after the horse has bolted, a posse of law-enforcing regulators and politicians will come charging after it determined not just on retribution but on so hedging the markets around with rules and regulations that they can never again run wild.

Mercifully, the regulatory backlash has so far been more apparent than real, at least in Britain. New resolution procedures have been proposed to deal with failed banks, including a beefed-up deposit insurance scheme, which if in place last summer would have avoided much of the grief and embarrassment caused by Northern Rock.

Yet for many, these largely sensible and measured reforms don't go far enough. There's an alarming groundswell of opinion looking for a more root-and-branch response, which reverses the "light touch" approach to regulation of recent years and replaces it with an iron grip. ...

The present crisis has demonised the idea of debt securitisation in a way that ignores its overwhelmingly beneficial contribution to economic efficiency and progress. It is to be hoped that the politicians don't give way to those who would return us to a bygone age of warm beer, nationalised industries and socially segregated access to credit, yet I sometimes fear I may be arguing a lost cause. ...

Jeremy Warner 26 February 2008

Tim Congdon, a banking historian at the London School of Economics, said the rot had seeped through the foundations of British lending.

Average equity capital has fallen to 3.2 per cent (nearer 2.5 per cent sans "goodwill"), compared with 5 per cent seven years ago. "How on earth did the Financial Services Authority let this happen?" he asks.

Worse, changes pushed through by Gordon Brown in 1998 have caused the de facto cash and liquid assets ratio to collapse from post-war levels above 30 per cent to near zero. "Brown hadn't got a clue what he was doing," he says.

The risk for Britain - as property buckles - is a twin banking and fiscal squeeze. The UK budget deficit is already 3 per cent of GDP at the peak of the economic cycle, shockingly out of line with its peers. America looks frugal by comparison.

Maastricht rules may force the Government to raise taxes or slash spending into a recession. This way lies crucifixion.

The UK current account deficit was 5.7 per cent of GDP in the second quarter, the highest in half a century. Gordon Brown has disarmed us on every front ...

Telegraph.co.uk 29 December 2007

The Financial Services Authority has been accused of "unfairly" favouring shareholders over policyholders by Clare Spottiswoode, who was appointed by Norwich Union to negotiate how much policyholders should gain from the insurer's £5.4bn "inherited estate".

Former gas regulator Ms Spottiswoode made her stinging comments after the FSA sent her a seven-page letter, standing by industry practices allowing insurers to use inherited estates to pay for the costs of obtaining new business. Inherited estates are funds that have built up in an insurer's with-profits funds and are not needed to meet their current and future commitments.

Ms Spottiswoode said this practice "denies current policyholders benefits". She added: "I cannot see that this is fair. The plain fact is that every use of the estate that erodes the value of the estate reduces the opportunity for policyholders to benefit from special distributions." ... Peter Vicary-Smith, chief executive of consumer magazine Which?, said the current system let Norwich Union and Prudential, which is also looking at a possible distribution of its inherited estate, carry out a "smash-and-grab raid on billions of pounds that should go to policyholders".

He said: "This is the worst possible advert for the insurance industry at a time when confidence in the financial services industry is at an all-time low. The FSA has once again failed to address the needs of policyholders and sided with those it is meant to regulate." ...

Telegraph.co.uk 14 December 2007

Just how exposed is the taxpayer to the Northern Rock debacle? In the Commons this week, the Prime Minister gave the impression of no exposure whatsoever, as the roughly £20bn of public money extended through the Bank of England was "secured lending" against Northern Rock assets.

Throughout the crisis, Alistair Darling, the Chancellor, has similarly attempted to reassure against any cost to the public purse. The Bank of England wouldn't have lent if it had thought Northern Rock was insolvent. The money was only to tide the company over a temporary liquidity problem.

We'll ignore, for the time being, that one of the primary definitions of insolvency is inability to pay liabilities as they fall due, which surely would be the case at Northern Rock if it didn't have an apparently open-ended facility from the Bank of England.

Yet even brushing aside this uncomfortable little truism, the Government's money is plainly very substantially exposed. If the company was liquidated tomorrow, the taxpayer would be highly unlikely to get all his money back.

Here's a rough guide as to why.

The loan book is reportedly worth around £100bn, more than enough, you would have thought, to cover the Bank's £20bn and the separate Treasury guarantee of about £18bn of retail deposits.

Unfortunately, around half the loan book has already been securitised. The vehicle through which this was done, a Channel Islands-based charity called Granite, has first call on these assets.

Some £13bn of the Bank of England facility is pledged against specific, apparently good-quality collateral, though even here the Bank of England had to relax the rules it normally applies to lend so much. Some of this collateral is not as high quality as the Bank would normally demand.

For the £11bn balance, there is no specific collateral at all. Rather, the money is secured against the assets of the company as a whole once prior claims have been satisfied. The Bank, by the way, only acts as agent on the Treasury's behalf for this money. The Treasury has also separately indemnified the Bank against the lender-of-last-resort facility.

Yet in theory, there should be enough in the Northern Rock kitty to cover the Treasury commitment. After Granite has had its share of the cake, there's £50bn of assets left to cover the Government's £38bn exposure. The trouble is that in these markets nobody believes that mortgage assets, even high-quality ones of the type Northern Rock claims ownership of, could be sold for anything like their face value.

Any notion that the Government can somehow wriggle off the hook by simply triggering a receivership is therefore complete fantasy. The Treasury has got itself in much deeper than it ever anticipated, and, recklessly or otherwise, has indeed exposed the taxpayer to the possibility of very serious losses.

Its best hope of getting the money back is to continue financing the company until more orderly credit conditions return, and the Bank of England's loans can be refinanced in the markets. As the sales prospectus has spelt out, this may take many years. Bringing in Luqman Arnold, the former Abbey National boss, to manage it all out looks by far the best of the available options.

In the meantime, ministers will have to persuade the European Commission to roll over what self-evidently amounts to state aid, when the deadline for such assistance expires in February, into "reconstruction aid". Given the way the UK Government has lectured its European counterparts on the meaningless nature of this distinction, it promises to be more than a little embarrassing.

The Independent 16 November 2007

Britain's banking sector, once a bastion of financial rectitude overseen by cautious pin-striped branch managers, has been swept along in a frenzy of creative accounting, adapting strategies invented by Wall Street's 'masters of the universe' to feed the British public's voracious appetite for cheap loans.

Northern Rock may have been by far the most aggressive proponent of the parcel-it-up, sell-it-on school of mortgage lending, leaving it perilously exposed once no one was buying; but it was certainly not the only UK bank to dive headfirst into the murky world of securitised loans, 'special purpose vehicles' and 'collateralised debt obligations' (CDOs). ...

... with the future of Northern Rock still hanging in the balance, tough questions are being asked about why regulators, accountants and the government itself failed to ask more questions about the explosion in securitisation that helped the banks to keep the borrowing boom powering on. 'These arrangements are hiding the risk inside these companies which means their shares may be mispriced and the public might be confused as to the safety of their deposits,' says Richard Murphy of the Tax Justice Network.

Just how radical the change in banks' behaviour has been over recent years is illustrated by the rapidly expanding 'customer funding gap' - the difference between how much banks take in deposits and how much they lend out.

Bank of England figures show that this 'funding gap' exploded, from close to zero in 2000, when the financial sector was still practising the 'good old-fashioned banking' favoured by Alistair Darling, to £530bn by the end of 2006. ...

The Observer 30 September 2007

The near collapse of Northern Rock revealed deep flaws in Britain's tripartite system of financial regulation, the boss of the CBI said last night.

In contrast to government ministers and regulators who have defended the combined efforts of the Financial Services Authority, the Bank of England and the Treasury, CBI director general Richard Lambert said the system had "been found wanting under fire".

He said a run on a major bank had proved an embarrassment to policymakers who made Britain look more like a developing world nation. "That one should have happened in a mature and prosperous country like the UK is almost unimaginable." ...

Mr Lambert, speaking to business leaders in Northern Rock's home city of Newcastle upon Tyne, said: "This was the first big test of the so-called tripartite arrangement, created when the Bank of England was given its independence 10 years ago, and designed to be the bedrock on which to build stability across our financial system.

"Perhaps there are just too many conflicts inherent in a system where three different institutions, with three different policy priorities, have to come together to tackle a fast-moving crisis."

He argued that a move to prevent another bank run by underwriting £100,000 of savings as outlined by the chancellor, Alistair Darling, would herald heavy handed regulation. A report by Credit Suisse said a scheme worth £50,000 would need to be funded up front by banks and could knock their profits by £7bn or 5% a year over five years. ...

The Guardian 27 September 2007

Simon Jenkins points the finger of blame away from "the organ
grinder's monkeys" to the organ grinder himself: Gordon Brown.

On Thursday, after no sign of mea culpa from anyone in charge, the House of Commons at last did its job. It held the executive to account, albeit making do with King and Gieve, the organ-grinder’s monkeys. They appeared mildly if briefly discomfited, secure in their jobs and pensions but forced at least to explain themselves. Gieve, a member not just of the Bank but also of the official regulator, the Financial Services Authority (FSA), showed little awareness of what this liaison implied. He seemed to think it was just to observe, thus embodying British amateurism at work.

King’s line was that none of this was his fault. True, crisis management is the chief task of a central bank. But the failure of Northern Rock - or at least the nationalisation of its deposits - was a result of decisions taken by the present prime minister when at the Treasury. One was the sacking of the Bank as Britain’s financial regulator, moving the job to the FSA. The other, two years ago, was enforcing the European Union’s “market abuses directive”. Its inter-bank disclosure rules made any covert rescue bid impossible (a claim since denied by Brussels). ...

In the days of the joint-stock cartel, the Bank of England’s governor would have heard rumours of trouble at Northern Rock and would have convened a secret meeting of the other banks. Given that Northern’s asset base, mostly house mortgages, was reportedly sound, a short-term loan would have been assembled and injected to restore confidence. There would have been no run on deposits.

Since 1997 Brown’s Treasury reforms have rendered any such covert operation near impossible, with a plethora of banks and a separate official regulator. It must have irked King, as it did Sir Eddie George, his predecessor, to hear Brown constantly blowing his trumpet over his reform of the Bank of England. Now it has fallen at the first hurdle. ...

The affair has shown just how difficult Tony Blair and Brown have made it for people to believe what leaders say. Both men have bombarded the public with vague pledges and targets whose purpose is little more than political wallpaper. Ministers promise smaller classes, more literacy, less poverty, more police, less traffic, with targets they have no means of achieving and with no intention of resigning or otherwise accepting responsibility if they fail.

The Sunday Times 23 September 2007

It emerged last night that the FSA official responsible for regulating Northern Rock was replaced just weeks before it announced that its problems required emergency help from the Bank of England. The FSA drafted in its former wholesale insurance supervisor Julian Adams to oversee the bank. A spokesman for the regulator refused to identify Mr Adams's predecessor or comment on his appointment.

It also emerged yesterday that members of Northern Rock's board received more than £30m in salaries, bonuses and incentives in the past five years. Adam Applegarth, the bank's embattled chief executive, received almost £10m. ...

John McFall, the committee's chairman said that what had once been seen as a "Rolls Royce" structure turned out be "an old banger" when put to the test.

"We wish to hear evidence from the government through the chancellor and the FSA through Callum McCarthy, as well as from the Bank of England governor."

The Guardian 22 September 2007

The euphoria generated by the success of UK banks and hedge funds blinded the Financial Services Authority to problems at Northern Rock, critics argue. When the watchdog did act, it was undermined by a lack of trust from the public and the tripartite system of regulation that meant neither it, the Bank of England nor the government took charge.

When London was trouncing New York as the financial centre of choice for investment banks, hedge funds and private equity firms, the FSA was the only body that could put the brakes on. Officials could have told banks to put more money aside in case of problems. ...

There were warnings from the top brass at the FSA that banks were taking too many risks, but the exotic methods used to raise finance on the world money markets went largely unchecked. ...

The FSA regulates about 29,000 firms, from global investment banks to small companies and about 165,000 individuals. Its importance has grown as the City has accounted for a growing slice of the UK economy. The financial services industry now provides almost 10% of national income and employs 1.1 million people.

The Treasury appoints the FSA board, including chairman Callum McCarthy and new chief executive Hector Sants. Both are former investment bankers who are keen that London keep its position as one of the world's four major financial centres.

In this project they are supported by the chancellor, the prime minister and the architect of the regulatory system, the current children's minister, Ed Balls. ...

The Guardian 22 September 2007

Looking back over the 20 years since Money Marketing was launched, the surprise is how little has actually changed, given how much consumer legislation has been enacted during that time.

Cowboy salesmen still roam the retail financial prairies, not to mention those who have swapped their boots and stetsons for pinstripe suits and sit behind stockbrokers' and investment bankers' desks. ...

Consumer protection is much better now than in 1985, thanks largely to the Financial Ombudsman Service. But if the FSA could do one single thing to improve the provision of financial services to the man in the street, it would be to get tough with the chief executives of financial institutions. ...

One of the worst aspects of the Equitable Life disaster is that Roy Ransom and other senior executives, who have personally and, arguably, knowingly wrecked the retirements of a whole generation of pensioners, will probably never be called to account.

The FSA does have powers to remove unfit executives and it should be much more willing to do so. Nothing would bring about a change of attitude faster than the fear of not only losing their job but being banned from working in a similar function ever again. It is time for the watchdog to bite - and for it to be seen to bite.

Money Marketing 23 June 2005