The business case approved in March 2008 had been developed on assumptions made by the Northern Rock management team in the Autumn of 2007 in planning for a wind-down of the company and later as part of the management team bid, using stress tests required by the Financial Services Authority.
The base case used in the March plan had assumed that house prices in 2008 would fall by five per cent and remain unchanged for three years thereafter. The recession case was for a 20 per cent reduction over three years.
The base case approved by the Treasury in March 2008 tended towards an optimistic view of the housing market when compared with the forecasts available in late 2007 and early 2008 . House price futures data available over the same period shows that trading in residential property derivative contracts during October 2007 to March 2008 indicated that house prices would experience annual falls of eight per cent to 14 per cent, higher than assumed in Northern Rock’s business plan over the following four years, under both the base case and recession scenarios. By the end of 2008 house prices had fallen by 13.5 per cent (Land Registry Price Index).
Those quotes come from the National Audit Office report on the nationalisation of Northern Rock. A report which examines the actions taken by HM Treasury to stabilise the ailing mortgage lender, the search for a longer term solution (that means a bidder), the Crock’s new business plan and whether HMT was able to handle a company restructuring which was highly complex.
Other than its house price forecasts, a business plan that proved to be wildly optimistic -the Crock made a much biggest than expected loss – and the fact that it continued to write 125% mortgages, the Treasury actually emerges relatively unscathed.
The biggest criticism is that resources were severely stretched and there was a rapid turnover of staff. All of which had predictably consequences.
As the head of the NAO, Tim Burr, spells out:
The Treasury successfully met its objective to protect Northern Rock’s depositors and stopped the run on the bank. It rightly concluded that the private sector bids for the bank gave insufficient prospect of safeguarding the taxpayer’s interest. The Treasury could however have conducted a more systematic assessment of the risks it was taking on and more thoroughly tested the bank’s initial business plan in public ownership.
Indeed. A 5% decline in house prices. What planet were they on?
Related links:
It’s hard not to wince as we look into Northern Rock’s past – Lombard
The nationalisation of Northern Rock – National Audit Office
Brown accused over bank warnings – FT.com