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Viewing cable 08LONDON2909, APOLOGIES, EXCUSES, AND GLOOM - TESTIMONY OF EXECUTIVES OF

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Reference ID Created Released Classification Origin
08LONDON2909 2008-11-20 14:28 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy London
VZCZCXRO5767
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHLO #2909/01 3251428
ZNR UUUUU ZZH
P 201428Z NOV 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 0464
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHBL/AMCONSUL BELFAST PRIORITY 1171
RUEHED/AMCONSUL EDINBURGH PRIORITY 1026
UNCLAS SECTION 01 OF 02 LONDON 002909 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV UK
SUBJECT:  APOLOGIES, EXCUSES, AND GLOOM - TESTIMONY OF EXECUTIVES OF 
NATIONALIZED BANKS 
 
LONDON 00002909  001.2 OF 002 
 
 
1.  (SBU) Summary:  The executive teams of the UK's two nationalized 
banks, Bradford & Bingley (B&B) and Northern Rock (NR), were quizzed 
by MPs on the Treasury Committee November 18.  B&B executives gave a 
gloomy outlook for the bank's mortgage books, with GBP 600-800 
million losses expected from the housing market downturn.  The bank 
has cut 2,000 jobs since August, with further reductions expected. 
MPs were shocked by the extent of a 2006 deal with General Motors, 
while one said sarcastically that it was good to know that HMG was 
supporting the U.S. car industry.  Northern Rock is showing slow, 
but steady, progress.  Although it is expected to have losses 
through 2009, it has undergone a substantial restructuring and has 
made good progress on repaying its government debt, said its 
executives.  However, it is unlikely that the bank will return to 
the private sector as quickly as anticipated, given the current 
economic environment.  The MPs were particularly critical of the 
remuneration policies of both banks and held a separate inquiry into 
the role of bonus structures in the financial crisis.  End Summary. 
 
 
Bradford & Bingley - The Story So Far 
------------ ------------------------ 
 
2.  (SBU) Bradford & Bingley's (B&B's) GBP 40 billion mortgage 
business, currently in public ownership, has been put into run-off, 
ceasing to accept any new business, and will not return to the 
private sector.  Richard Pym, the bank's Chief Executive, told MPs 
on the Treasury Committee (November 18) that he expects the bank's 
loan book to lose GBP 600-800 million in value from the housing 
market downturn.  He added that this estimate was based on an 
assumption that house prices will fall 25 percent.  The bank is now 
stress-testing for a much larger fall in prices.  He told the 
Committee that at the end of September, the proportion of borrowers 
in arrears stood at 3 percent, significantly higher than the 
industry average.  The buy-to-let market, in which B&B specialized, 
has been hit harder than the residential market, but Pym said the 
recent cut in the Bank Rate to 3 percent would have a "significant 
effect" in assisting landlords by lowering their mortgage 
repayments.  MPs expressed concern that HMG, through B&B, is now one 
of the biggest players in the UK's vulnerable buy-to-let market. 
 
3.  (SBU) There have been 2,000 job cuts at B&B since the end of 
August.  Pym said that the bank is "mindful of its obligations" to 
the community in West Yorkshire and said further job losses would be 
in phases.  They currently have a voluntary retirement/dismissal 
program and an agreement with HMG that there will be no compulsory 
job dismissals before March 31.  Former Chairman Rod Kent said the 
Board takes full responsibility for what happened and apologized to 
MPs for the Board's stewardship of the company, whose reliance on 
wholesale funding and niche mortgages led to its difficulties. 
 
4.  (SBU) Jim Cousins, a Labour member of the Committee, expressed 
astonishment at the 2006 deal B&B made with General Motors 
Acceptance Corporation (GMAC), under which, he said, the bank 
continues to have to buy inferior mortgages.  (Note: In December 
2006, B&B made a deal with GMAC to buy a minimum of GBP 350 million 
of its loan assets per quarter for three years.  The hearing 
revealed that B&B has actually acquired a total of GBP 6.5 billion 
so far and will need to purchase more of GMAC's loan book, which 
consists of mainly buy-to-let assets, until the deal expires at the 
end of 2009.  End note.)  By spring 2009, he said sardonically, HMG 
will be the proud owner of GBP 7 billion of such mortgages and added 
that it is good to know HMG is supporting the U.S. car industry. 
Kent said that it had been a commercial deal to secure business in a 
highly competitive market but acknowledged that the arrears rate on 
these mortgages is higher than B&B's average.  Cousins pressed Pym, 
who was not at the bank when the deal was made, whether it was 
mutually beneficial.  Pym said that ideally, the underwriting terms 
would have been more flexible. 
 
Northern Rock - Slow Progress 
------------------------------ 
 
5.  (SBU) Over the last six months, Northern Rock has repaid a large 
proportion of its government loan, has completed a workforce 
restructuring, and is on its way to returning to the private sector, 
according to Ron Sandler, a senior bank executive.  However, he 
added that the bank had substantial losses in the first six months 
of the financial year and is expecting further losses in 2009.  The 
main risks to the bank are external, namely a continued 
deterioration in the economic environment, particularly the housing 
market.  NR's executive team told MPs that there is little 
likelihood that the bank will return to the private sector in the 
near-term given the economic environment. 
 
6.  (SBU) The Committee MPs quizzed NR's management about the 
perception that the nationalized bank has a particularly aggressive 
repossession policy.  (Note: NR expects to be responsible for 10 
 
LONDON 00002909  002.2 OF 002 
 
 
percent of all repossessions this year. End note.)  NR executives 
told the MPs that its repossession rate, of 0.56 percent, is three 
times the industry average but that this has nothing to do with its 
repossession policy or desire to quickly repay the government debt. 
Instead, they blamed the high rate on the bank's controversial 
'Together' loans, which were mortgages of up to 125 percent of the 
value of the property.  MPs suggested that NR should show a greater 
level of forbearance given that they were bailed out by the 
taxpayer.  The executives told the Committee that they are working 
on an industry-wide solution for mortgage forbearance to help 
customers at risk of losing their home through new mortgage rescue 
packages. 
 
Executive Remuneration Under Attack 
----------------------------------- 
 
7.  (SBU) Executives from both banks were questioned about the 
levels of compensation paid at the senior management level.  The MPs 
said that executive remuneration with a short-term focus leads to 
excessive risk taking.  They questioned the fairness of the staff 
bonus system at B&B where the remaining 1,100 staff are in line for 
a bonus of 9 percent of salary, while senior executives accrue 
bonuses of up to 150 percent of salary. 
 
8.  (SBU) At a separate Committee hearing (November 19) the Trades 
Union Congress (TUC) and Institute of Directors (IoD), which 
represents the financial industry, surprisingly agreed that there 
needs to be reform of City bonuses in the wake of the banking 
crisis.  There was consensus that remuneration structures need to be 
examined and aligned more closely with risk. Brendan Barber, TUC 
General Secretary, and Miles Templeman, Director General of the IoD, 
agreed that there is need for urgent reform of remuneration 
committees, calling for more independent and knowledgeable people. 
Carol Arrowsmith, a partner at Deloitte, denied that remuneration 
structures had caused the crisis and said that performance-linked 
remuneration is a good thing.  But she added that a model where 
bonus forms such a large proportion of individual's pay may 
encourage risk-taking. 
 
9.  (SBU) Comment:  The liabilities of Northern Rock and Bradford & 
Bingley have substantially increased HMG's debt burden and are 
likely to remain on the public books during and long after the 
economic downturn.  These liabilities will have a significant impact 
on Chancellor Darling's Pre-Budget Report (November 24), limiting 
his fiscal flexibility.  The Chancellor is expected to outline new 
fiscal rules, having already broken HMG's self-imposed sustainable 
investment rule that debt not exceed 40 percent of GDP.  In October, 
government debt stood at GBP 640.9 billion, or 42.9 percent of GDP. 
 
 
TUTTLE