Northern Rock Bonuses give lie to shareholder compensation rules

So there we have it on the week after the main Northern Rock shareholders were in court arguing the lie of the governments compensation order that Northern Rock should have been valued as if it were in administration we learn that the repayment targets have been met and workers will get a 10% bonus.

Now I am pleased for them they stuck it out when all was bleak and clearly have done a good job since. If that was the deal then they deserve every penny they get.

However there are two glaring issues in this. Firstly the amount of debt repayment that has been made at a time when there is a dire shortage of credit, if Northern Rock had been allowed to function this could well have enables a small but significant easing of pressures on a number of other organisations. The government may let them do that now but too little too late springs to mind.

But as significant is the fact they have been able to repay this in the first place. This is not a small nibble this is a considerable chunk of the debt to the government. In fact it offers plenty of evidence that far from being a basket case all the business needed was a resolution to its cashflow and a new board of management.

But hang on a minute isn't that the mantra of the government now "we must stop sound businesses going into administration and jobs being lost due to short term problems with credit supply" . Shame they didn't apply that right at the start they might have nipped it in the bud.

But I do have one final question. Why has this emerged now after the court hearings surely this is clear evidence which supports the shareholder case and needs to be placed before the judge undertaking the review or is that too inconvenient for the government to bare?

Could Labour trigger a stock market crash next week?

Its an interesting question but quite a valid one to ask now that the terms of the Bill to compensate Northern Rock shareholders has been published.

The key problem is the terms that have been set in order to determine the valuation

In determining the amount of any compensation payable by the Treasury to any person in accordance with paragraphs 3 to 5, it must be assumed (in addition to the assumptions required to be made by section 5(4) of the Act (compensation etc. for securities transferred etc.)) that Northern Rock —
(a) is unable to continue as a going concern; and
(b) is in administration.

Obviously the company was not in administration at the time of nationalisation, and was, and still is, trading normally and as a going concern (as Government Ministers have repeatedly stated).

This means that in setting the criteria the Government is ignoring the facts and could be said to be acting in a way that is ethically and morally unjust in an attempt to contrive to fix the terms of compensation.

As a result of these terms any valuation process will not be objective and independent and as such liable to legal challenge. In essence the terms of reference in the Compensation Order will mean that the panel cannot value the Company in accordance with conventional standards and practices.

And that is the rub of the whole problem,if the Government are prepared to break standard accounting rules once what is to stop them again in the future.

Does this mean any use of the lender of last resort facility from the Bank of England could leave a bank and its shareholder vulnerable to nationalisation for a pittance?

.. and if it does given the state of the credit market at the moment is it wise to hold any substantial amount of assets in this sector?

Of course this need never happen all the Government has to do is remove these clauses from the bill. At a stroke they will ensure that any valuation is not prejudged by the very people who have most to gain from it.

In so doing and ensuring the valuation is on a normal commercial basis not only will they remove the main plank of any human rights based claim from shareholders but they will also go a long way to reassuring investors that it is still safe to invest their money in UK financial companies.

And of course with all those small northern investors it won't do them any political harm either

Rock Nationalisation just the start of Labours problems

Todays announcement of Northern Rock nationalisation is just the start of Labours problems.

I like many other demutualisation shareholders have seen the writing on the wall for weeks but at the end of the day the whole fiasco should never have been allowed to happen.

I hope tomorrow that Vince will ask the hard questions.

The questions that seek to understand what the Chancellor was doing in the summer when he knew the problems at Northern Rock were a possibility, the questions as to why the FSA allowed the directors to act in the way they did and the questions that seek to unravel if there has been a false market in Northern Rock shares since the middle of August last year.

Because these are the questions on my mind at the moment, I accept shares go up and down and are a risk but put simply I owned shares in a company who in the full knowledge of the Government were keeping price sensitive information from the market.

In fact the whole story of Northern Rock is enough to shake the foundations of confidence in the banking sector to the core.

Price sensitive information not released to shareholders, dividends announced and then withdrawn, the government inferring that a private deal was possible then pulling the plug at the last minute, rescue terms set with financially impossible criteria. Then terms of reference for compensation set by the people writing the final cheque.

Now as we go down the nationalisation route I ask myself how much less taxpayers money would have been spent with nationalisation at £4 a share in the second week of the crisis than will now have been spent over the intervening time and will be spent in the courts.

Wheter I get a penny out of this I now don't really care, what I do care about is the incompetence of our Chancellor past and present exposed to the full. All the lessons that are to be learnt learnt in full and the relevant people (and I dont mean Northern Rock employees) given their P45 at the first available opportunity

Between the Rock and a hard place

Yes its back to our old friend the Northern Rock and the complete dogs breakfast our government have made of the whole sordid business. I've said before that the government has many unanswered questions.

But the latest steps in this affair have left me decidedly underwhelmed. While I have never favoured nationalisation which puts me at odds with the party as a whole I do find myself agreeing with much of what Jonathon Wallace had to say earlier this week.

However what alarms me has been the wholesale demonisation of the shareholders during this affair. Sure some of the hedge funds are latecomers to the party and many have upped stakes as the price hit the trough it is now in and will have made a tidy profit this week however there are many of us who have held shares since demutualisation and we may yet get our revenge.

You see what people have tended to forget is that the three motions that failed at the recent EGM only did so because they needed a 75% vote all three motions secured over 65% of the vote showing a clear level of discomfort at what was planned.

So where are we now. Well despite all the Labour spin of the weekend Branson is not the only game in town , both Olivant and the new board are putting together packages and the shareholders will have the final say and with the Government finance on the table who is to say others wont appear.

And that is the rub the original Virgin offer was an insult to the intelligence of the existing shareholders. We were in effect told to double up or risk with no guarantee of returns for the foreseeable future or lose everything.

Since then the incompetent handling of the affair by our Chancellor has seen shares fall still further and the balance sheet get bleaker. So when we now see Gord and Dickie smiling at one an other in China there comes a temptation to to say sod you when it comes to a vote.

However there are more questions that now need to be aired.

Given the sensitive nature of his comments weren't Northern Rock shares suspended first thing on Monday morning until after the Chancellor had spoken in the Commons (or at the very least while he was speaking) ?

What exposure does the government have in the event of a failure and what exposure do shareholders have in the same circumstance?

And what are the government plans if the only solution they approve is Richard Branson and his plans are rejected by shareholders?

While a private sector solution looks possible nothing can be rules either in or out at this moment in time.

Many questions for Northern Rock

First let me declare an interest, I am a demutualisation shareholder in Northern Rock. I had planned to sell my shares in June to finance a house move but the move fell though. Not long after the company issued a profit warning but the market advice was stay put.

"Analysts at Keefe, Bruyette & Woods said that Wednesday's announcement reflected "a period-specific strain in 2007 and does not indicate the business model is not working." Profits outlook hits Northern Rock

I left for holiday off the back of stable but not stunning results and a nice dividend announced and waiting for me in the autumn. In late Aug I though about selling again but with no threats on the table and no pressing need for the money I thought I would wait until the announced dividend was paid and take stock again.

The rest is history. On paper I am about £5000 poorer than I was 12 months ago.

So as we move into the end phase there are a few questions that still need to be answered and most of them relate to the governments handling and culpability in the affair.

-------------------
Why was no stock exchange announcement made by the company about its financial position between the 14th August and the 14th September 2007 when clearly the company had already anticipated the financial crisis and had been in discussions with the Bank of England?

14th August : Bank of England governor Mervyn King is alerted to the potential impact of the global credit squeeze on Northern Rock's business in a phone call with officials at the Financial Services Authority (FSA) and the Treasury." Timeline:Northern Rock banking crisis

------------------

Why were declared shareholder dividends suspended when staff pay rises were still paid in full, and secret bonuses for 173 staff totalling up to £17m allowed to proceed?

"SENIOR staff at Northern Rock are receiving secret bonuses of up to £100,000 a year as part of an incentive scheme" Key Northern Rock staff receive secret bonuses

------------------
Why does the Chancellor continue to blame the bank for risky trading practices when those same trading practices were approved as sound by the oversight regulator?

"we recommend investors look through the near-term interest rate strain and at a business model that can clearly deliver superior returns at lower risk," they continued." Analysts at Keefe, Bruyette & Woods Profits outlook hits Northern Rock (July 2007)

------------------
Why did the Bank of England and the Chancellor fail to use the time from the 14th Aug when knowledge that a government approved method of funding a bank was under pressure to the 13th Sept when it failed to put in place policy that would have protected savers the majority of savers and hence preempted the run on Northern Rock in the first place.

"Our system for dealing with the insolvency of banks and deposit insurance is markedly inferior to other countries." Professor Mervyn King.

------------------

Nationalisation now seems to be the only answer my remaining shares will quite likely become worthless and as a taxpayer I will have an hefty increase in national debt.

However even as late as the middle of August action could have been taken by Government and the Bank of England to reduce the severity of this crisis.

As a taxpayer I want my pound of flesh as shareholder in a highly regulated industry I want a pound of bones too.