MPs savage the Treasury over Northern Rock

Thursday, 25 June 2009 12:36 PM

The taxpayer was "exposed to enormous risks and liabilities" during the Treasury's handling of the Northern Rock crisis, a damning report by a group of MP's has concluded.

The report, by the committee of public accounts (PAC), was heavily critical of the Treasury's handling of the banks' collapse and subsequent nationalisation.

Chairman of the committee, Edward Leigh MP, said: "The Treasury's lack of preparedness for dealing with the failure of a major bank was evident as early as 2004 but nothing much was done to remedy this weakness."

The Northern Rock crisis was the first modern test in of the Treasury's capacity to deal with a failing bank.

The report accuses it of being caught "flat-footed", despite having undertaken an exercise to test its response to just such a scenario under Gordon Brown's chancellorship in 2004.

"The Treasury must never again be so ill-prepared," the report warned.

Following the run on Northern Rock, the Treasury poured billions into stabilising the bank while allowing it to carry on awarding high risk loans to the tune of £750 million, MPs found.

Further oversights occurred upon nationalisation in February 2008, when the Treasury failed to carry out due diligence on Northern Rock's loans.

It also omitted to challenge the company's forecast that house prices would remain stable until 2012 - which was over-optimistic even compared to forecasts publicly available at the time.

"At the time it nationalised Northern Rock, the Treasury did not know enough about what it was taking on," the report reads.

The committee did, however, conclude the decision to nationalise was the best alternative in terms of value for money.

It also found that the Treasury learnt from the mistakes it made in outsourcing the financial modelling to Goldman Sachs, and this was evident in the way it dealt with the problems at Bradford & Bingley in September 2008.

Since the Northern Rock intervention, the Treasury has significantly increased the number of staff working on financial stability issues and claims it now has a better oversight on the Bank of England and the Financial Services Authority (FSA).

However, the PAC has called for greater powers for the comptroller and auditor general to be able to audit the work of the FSA in future.

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• banking crisis
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• economy
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• economy and finance