Introduction  

As part of its inquiry into the banking crisis, the Treasury Committee held an evidence session with Northern Rock and Bradford and Bingley. The session focused on the recent events involving these banks, their current structure and governance, the financial performance and the future plans of both banks.  

On 18 November 2008, the Treasury Committee held an evidence session with the nationalised banks, Northern Rock and Bradford and Bingley, as part of its inquiry into the banking crisis.  

Richard Pym, Chairman and Rod Kent, former Chairman, gave evidence on behalf of Bradford and Bingley, with Ann Godbehere, Chief Financial Officer, Gary Hoffman, Chief Executive Officer and Ron Sandler CBE, Non-Executive Chairman, representing Northern Rock.  

Bradford and Bingley: general overview

“Shambolic organisation” and a “great headache” was how John McFall, the Chairman of the Committee, concluded the evidence session about Bradford and Bingley.  

To begin with, Richard Pym and Rod Kent were both pressed by the MPs on the details surrounding the events which took place between 25 September 2008, when Richard Pym, the then recently-appointed chief executive, made a statement that “[we] have a business which is fit for purpose going forward”, and 27 September 2008, when its was decided that the bank was to be nationalised since it was no longer meeting the FSA’s threshold conditions.  

Bradford and Bingley’s representatives explained that the bank had enough capital and was otherwise in good shape at the time of making the statement, which was approved for release by the FSA. The capital outflows that happened over the next few days as members of the public withdrew their funds, both online and through the bank’s branch network caused the capital resources to deteriorate to the extent that less than forty-eight hours later the bank was no longer able to meet the relevant threshold conditions. However, it was still solvent and had more than the minimum regulatory capital. Nonetheless, Richard Pym did not think that “the FSA pulled the trigger too quickly”.  

Mr Pym went on to explain that after the collapse of Northern Rock, Lehman Brothers and Freddie Mac and Fannie Mae, Bradford and Bingley became the focus of media attention since it was the only bank whose portfolio had a large element of self-certified and buy to let mortgages, which in Mr Pym’s words was “not ideal”.  

Next, the Committee members tried to ascertain the scope of the Government’s exposure by assessing Bradford and Bingley’s business model, strategies and recent financial performance before moving on to address the role that the incentive structures may have played in the bank’s subsequent nationalisation. Perhaps not surprisingly, Bradford and Bingley’s portfolio of self-certified and buy to let mortgages, originally purchased from GMAC-RFC, was the focus of some intense questioning by the Committee.  

Rod Kent, the former Chairman, who recently stepped down on 14 November 2008, made a statement that Bradford and Bingley’s board accepts full responsibility and is “massively disappointed” and “deeply sorry”.  

GMAC-RFC portfolio

Under a deal signed in 2006 with GMAC-RFC, the British subsidiary of US-based Residential Capital Corp, Bradford and Bingley has so far acquired £6.5 billion worth of prime, self-certified and buy to let UK mortgages, which have resulted in higher arrears, mortgage defaults and loss of earnings. Bradford and

Bingley must still buy around £1 billion worth of mortgages from GMAC-RFC by the end of next year. John McFall, Jim Cousins and Andy Love all questioned both the rationale for the deal and Bradford and Bingley’s overall business strategy which led it to build up a £40 billion portfolio of undiversified self-certified and buy to let mortgages at the top of the housing price cycle.  

Richard Pym argued that Bradford and Bingley’s business strategy of being a specialist mortgage lender was profitable at the time. The GMAC deal was done to secure business in a highly competitive market, explained Rod Kent. The strategy was based on risk adjusted valuations but it was never clear that these did not incorporate the full extent of the forthcoming crisis.  

When asked whether, in hindsight, he would do this deal again, Mr Pym conceded that the contract had one key weakness, in that it did not allow the bank to exercise control over what was and is coming onto its books during an especially adverse economic period. The MPs remarked that the contract was thus concluded with a very short-sighted view of the market.  

Arrears, capital requirements and fraud

Rising arrears liabilities, the difficulty in estimating future capital requirements and fraud were the main risks cited as most relevant in relation to Bradford and Bingley.  

These problems are further exacerbated by valuation difficulties: it is hard to predict the arrears in the buy to let sector, which accounts for 60 per cent (or approximately £24 billion) of all Bradford and Bingley’s mortgages and for 20 per cent of the UK market in this sector. It is also extremely difficult to know what level of house prices should be used for stress testing in terms of future capital requirements. Finally, Richard Pym revealed that the bank is facing increasing instances of mortgage fraud in relation to its buy to let portfolio, although the precise number of affected mortgages is not yet known since Bradford and Bingley has not yet estimated the fraud element of their book.  

What next for Bradford and Bingley?

Richard Pym explained that the Board in its current form will continue to manage arrears, as a first priority, and the business overall until summer 2009, when Mr Pym and other executive directors will leave the company.  

Mr Pym will leave without any compensation.  

Furthermore, Bradford and Bingley is currently working very closely with the Treasury on its Business Plan for the coming year, which is expected to be published in March 2009.  

Northern Rock: general overview

Reporting on achievements in the last six months, Ron Sandler said that notably Northern Rock has repaid a considerable proportion of government debt, completed a significant restructuring and acquired a new management team. Nonetheless, Mr Sandler expects the bank to continue at a loss through the next year and to start breaking even only after 2009. He also accepted that there is “very little likelihood” that Northern Rock will come back to the private sector in the near term given the circumstances.  

The Together product

In the second part of the evidence session, Ron Sandler and Gary Hoffmann faced some intense questioning in relation to its Together product, which is particularly troublesome in terms of repossessions and arrears. This product allowed customers to borrow up to 125 per cent of the value of their homes using a mixture of personal loans and traditional mortgages. It was revealed that the level of repossessions in relation to Together mortgages is three times higher than the national average. Together customers also account for 50 per cent of Northern Rock’s arrears and 75 per cent of its repossessions. Mr Hoffman admitted that an increase in unemployment as predicted at the moment would spell a significant deterioration of these figures and called for the industry to develop mortgage rescue products and greater forebearance in relation to troubled customers. He also pointed out that 97 per cent of Together customers were not in arrears.  

Repossessions

The Committee especially criticised Northern Rock for its aggressive stance on repossessions, which are also above industry average. In fact, at the end of September 2008, Northern Rock had 4,201 repossessed houses in stock.  

Gary Hoffman gave comfort that these statistics were not due to the bank’s policies and procedures but a consequence of Northern Rock holding a portfolio of mortgages, 60 per cent of which is comprised of high loan to value mortgages, which are more prone to defaults. Mr Hoffman added that Northern Rock operates in line with all industry standards and codes. Two thirds of the houses that it repossesses are more than nine months in arrears and only less than one per cent of houses are repossessed in less than six months.  

What next?

The final evidence session of the Committee’s inquiry scheduled for this month, will take place on Wednesday, 19 November 2008. This evidence session will cover incentive structures and remuneration policies within financial institutions, and their potential effects on financial stability, both at the institutional and system-wide level.