30 The Treasury worked with the Bank of England and Financial Services Authority to find a solution and benefited from their advice, but it alone had responsibility for determining what action was in the best interests of taxpayers. UK-based banks have collapsed before, for example BCCI in 1991 and Barings in 1995, but these crises did not involve a run on a significant high street financial institution. The crisis at Northern Rock therefore presented a new situation for the Treasury.
31 The Treasury had been aware of potential shortcomings in the arrangements for dealing with a financial institution in difficulty prior to the crisis at Northern Rock. From 2004 the Tripartite Authorities had undertaken exercises to test their response to a range of scenarios. These exercises had identified the need for further work on how the resolution of an insolvent firm with systemic repercussions would be handled and by whom. As a result, scoping work was done to identify the key issues the UK would face in winding up a financial institution, the practical processes available and therefore the gaps and options to fill them. Prior to 2007, work on improving the existing arrangements was not, however, judged by the Treasury to be a priority in a benign economic environment, compared with other financial crisis response planning. The Treasury started a project in early 2007 to produce a consultation document by Autumn 2007 on how the Tripartite Authorities would deal with a bank in difficulty. Following consultation, new legislation was put before Parliament in December 2008 and received royal assent in February 2009.
32 Once the scale of the crisis was recognised, the appointment of the second Permanent Secretary to lead the Treasury team was crucial to providing clear leadership at official level. The early appointment of a senior responsible owner for the project provided a clear focus for other members of the Tripartite, private sector bidders and others seeking an informed view of the Treasury's likely position.
33 Following the initial guarantee arrangements for depositors, the Treasury brought together a team drawn from across the Department but struggled to maintain continuity in its staffing. The maintenance of financial stability had not, in terms of staff resources, been a major part of the Treasury's work. In dealing with Northern Rock, the Treasury had to respond very quickly to events as they developed. As a result, decision making had to take place largely outside of normal risk management procedures for major departmental projects and made limited reference to the Treasury board, although the board did receive briefing on two occasions over the five months prior to public ownership. The availability of people with relevant skills and experience was severely stretched and resulted in two changes of team leader along with changes to the composition of the team. The Treasury was therefore very reliant on key officials and its advisers for the expertise it needed. In the event, some stakeholders found it difficult to work with the rapid turnover of staff within the Treasury team.
34 The Treasury made extensive use of professional advice for support during the bidding process and preparing the financial analyses of the various options. Professional fees for the Tripartite Authorities have amounted to just under £27 million, including over £9 million on legal advice. Separately from this advice, Northern Rock spent £39 million on advisers to review its strategic options and search for a private sector solution. In addition, the company paid bidders' costs totalling £13 million. With the company in public ownership since February 2008, all the advisory and bidding costs have ultimately been borne by the taxpayer.
35 The Treasury worked closely with its advisers to understand the assumptions underlying the options available but there were weaknesses in the initial contract negotiated by the Treasury with its financial adviser, Goldman Sachs. These weaknesses included, for example:
■ An initial agreement by the Treasury that a large part of the firm's remuneration would consist of a success fee, but no clear definition of what success might look like in a complex and evolving situation. Once the decision was reached to take Northern Rock into public ownership, agreement was reached that it would be inappropriate for a success fee to form part of the final sum to be paid.
■ Although the Treasury discussed the options analyses prepared by Goldman Sachs and tested the assumptions used, it did not request access to the underlying financial models developed by its advisers, which were regarded as proprietary information. This limited its ability to validate estimates of the costs and benefits of each option.
36 There were also weaknesses in the management of electronic records. Following the decision to take Northern Rock into public ownership, the Treasury had to expend significant time and resources to collate relevant records in an accessible form for litigation and audit purposes.
37 The Treasury applied lessons from its experience of Northern Rock to the handling of Bradford & Bingley. In September 2008, Bradford & Bingley experienced difficulties that necessitated Treasury action. Although there were differences to the Northern Rock case, the Tripartite Authorities were better prepared, having kept a watch on the company before market conditions made action necessary. The scale of the problems in the financial markets and the prospect of prolonged difficulties were by this point apparent. At a practical level, the availability of suitable powers on the statute book proved crucial to the Treasury's ability to take action quickly. The Banking (Special Provisions) Act 2008 allowed the Treasury to take into public ownership or transfer to another owner a bank or building society judged to be a threat to financial stability. The Tripartite Authorities' experience in considering the options for Northern Rock allowed the Treasury to take a course of action to protect financial stability, without having to put large sums of taxpayers' money at stake in a company it did not own and therefore did not directly control, although it now has to manage the risks associated with public ownership.