Liberal Democrat Shadow Chancellor Vince Cable has attacked the government's naivety in their handling of the Northern Rock crisis. He argues that the government, together with the bank's managers and the regulatory body (the FSA), should be held to account for what he describes as "the most disastrous episode of British banking".


This morning's announcement of the half-yearly Northern Rock accounts reminds us again of the most disastrous episodes of British banking. What is new and worrying is the acknowledgment of the scale of the hit the taxpayer has taken following the decision last September to rescue the bank through taxpayer loans and guarantees. We were assured at the time that the £26bn taxpayer loan was secured against good-quality assets. It now, however, appears that £3.4bn of this money enjoys only minimal security and has essentially been converted into equity. Parliament and the public were misled by the chancellor.

For months after the initial crisis, the bank's private sector managers, the regulator (the FSA) and the Treasury, insisted that the bank, while short of liquidity, was fundamentally a good bank with a good loan book, which offered perfectly adequate security for the taxpayer. This simply does not square with the observation that many of us made at the time, that the managers had been lending recklessly at the peak of the market and in particular were offering ridiculous Together mortgages of 125% the value of the property. The chancellor was repeatedly warned to stop the bank offering these loans once taxpayers' money was being put at risk. He failed for months to act and as a consequence the bank acquired yet more mortgages, underwritten by taxpayers, which were highly risky.

The extent of the damage is becoming apparent as the better mortgages are sold off to other banks to release cash to repay part of the government loan, while the dross is left behind. The dross takes the form of loans which are either unsecured or which borrowers are finding it impossible to service.

Taxpayers have every reason to be angry: with the private-sector managers and directors who behaved appallingly and have never been brought to book; the company auditors who passed last year's accounts without spotting the big holes in the company books; the regulators (the FSA) who also gave the Northern Rock a clean bill of health; and the government, which was at best naive and at worst dishonest when it claimed to have secured the government's loans. I could also add to the charge list the rest of the mortgage lenders – some of whom were almost as reckless as Northern Rock and who are now trying to persuade the government to provide loan guarantees or stamp duty relief to revive their battered businesses.

The nationalised Northern Rock now has no alternative under its new management but to press ahead retrieving what value it can from the company to repay the taxpayer. There is the hope that, in better times, it can be sold on satisfactory terms. Some of the aggression being shown to defaulting borrowers should also now be directed at the auditors and directors.

The government should learn from its mistakes. It is under strong pressure from the banks to use taxpayers' money to shore up the housing market by guaranteeing their loans. That would put yet larger amounts of public money at risk, and it is wrong, anyway, to stop the market from adjusting to more affordable levels. A proposal to suspend stamp duty is more modest but has the same costly logic.

I am not arguing for laissez-faire. The government should require the mortgage lenders to observe a strict code of conduct over repossession to stop many thousands being pitched into homelessness. Repossession should only ever be a very last resort. The government could also use this opportunity usefully to rebuild the stock of social housing, if council and housing associations can identify unsold new private property which is available at a generous discount.

But beyond carefully targeted interventions of this kind, the government must avoid a generalised bank bail out. Northern Rock is expensive enough.

This article was first published in The Guardian, 6th August 2008