Bill Jamieson: Let's forget 'business as usual' until bankers are brought to book

FOR followers of recent financial history, there was a telling development this week which should cause everyone to sit up and take notice.

It should certainly have caused former senior executives in Scotland's two stricken banks to take notice, and those hundreds of thousands of shareholders who suffered a near total wipe-out of their investments.

I refer to the astonishing case of the fines imposed this week on two former executives of the failed mortgage lending company Northern Rock.

For here, amid the growing clamour to "draw the line and move on" in the banking sector, is a reminder of a mass of unfinished business arising from the banking crisis: the calling of bankers to account and the prospect – still, I am afraid, distant – of any redress for RBS shareholders. Advised by the board of directors, they subscribed 12 billion by way of a rights issue of shares in the bank at 200p, only to see that investment all but wiped out within months.

Already there are calls for an early sale of the government's huge shareholdings in Lloyds Banking Group and RBS. The Conservatives are even talking about a "tell Sid" share offer to entice the public.

Much as I would like to see taxpayers reimbursed at a profit for the use of their money, there has still to be a reckoning.

It is unthinkable that any share sale should proceed until there is a full accounting of what went wrong, and the bankers are brought to book. A sweeping reform of the rotten corporate governance system within the banks has still not been forthcoming.

As for the equity holders, who have been appallingly treated and whose legitimate grievances have been swept aside as somehow of no consequence, this is one of the biggest unresolved scandals of our age.

And it may well be that the Northern Rock affair could trigger a campaign for redress through a wave of class actions that could stymie early state disposal.

Why is the Northern Rock development this week so salient? Consider the facts. David Baker, the former deputy chief executive of Northern Rock, was fined 504,000 by the Financial Services Authority. Richard Barclay, former managing credit director of NR, was fined 140,000.

Baker has been prohibited from performing any function in relation to any regulated activity. And Barclay has been barred from performing "any significant influence function" at an FSA-regulated firm.

What did they do to merit such sanction? As deputy chief executive, between January 2004 and March 2008, one of Baker's responsibilities was accurate internal and external reporting at NR. He had overall responsibility for much of this time for the firm's debt management unit which managed its secured loan book.

Despite becoming aware in January 2007 that there were 1,917 loans omitted from the mortgage arrears figures, Baker failed to raise the matter internally and agreed a course of action which resulted in the loans not being reported.

He also made misleading statements regarding these impaired loans to analysts and fund managers, quoting inaccurate figures. If the 1,917 loans had been reported as being in arrears, the figures would have increased by some 50 per cent. Alternatively, if the loans had been reported as in possession, the number would have increased from 662 to 2,579.

This matters, because NR made a big point of below-average arrears and repossession experience in the 2007 accounts, effectively underpinning its dash-for-growth lending and the group's share price.

Indeed, its 2006 annual report sent out to shareholders in the late spring of 2007 trumpeted a 23 per cent surge in lending. However, added chief executive Adam Applegarth, "we have not sacrificed quality of lending and saw three-month-plus' arrears numbers fall in the second half of the year to 0.42 per cent – less than half the industry average."

The procedures were passed by the board, by the internal controls committee, by the audit committee and by the risk committee.

So pleased was the remuneration committee with Mr Baker's performance that his total pay package that year was hiked from 720,000 to 890,000, including a 435,000 bonus.

This fantastical ensemble of corporate governance was duly completed by a clean bill of health from independent auditors PricewaterhouseCoopers.

Seldom has a case more highlighted the culture of growth-at-all-costs fired up by breathtaking pay levels and bonus awards that brought many banking institutions to their knees.

This governance model for financial companies today is utterly discredited. Whether or not sensitive information was withheld from the other directors, rather than information being knowingly suppressed at board level, matters less than the fact that such highly material information was withheld and Northern Rock allowed to present itself as something other than it was.

The potential repercussions of this case across the banking sector are huge. Investors will rightly want to know the extent of any read-across from the NR case to other institutions.

In the case of RBS, who knew, or who had cause to know, the real extent of toxicity of non-performing loans in the debt instruments that it held? Was due diligence done for that rights issue?

In the case of HBOS, who knew, or had cause to know, the dangerous concentration of the corporate loan book on property related assets? How did its risk committees and audit committees think there was nothing odd?

Class actions may now be under way. They are fraught with problems. They are cumbersome, expensive and could take years to resolve. Whether they surface or not, far more needs to be done to clear up these questions before there can be any return to "normality" in banking. This week's case is an apt reminder of a ton of unfinished business ahead. Back to business as usual? I hope not.