ENGLISH DEYEA NEWS

The Times | A fresh dispute over rewards for banker failure erupted yesterday as Northern Rock said that it was planning to pay bonuses to senior executives even as it reported a £1.4 billion loss.

Patrick Hosking and Francis Elliott

The controversial pay scheme emerged as the nationalised bank – with the backing of the Treasury – announced a spectacular strategic U-turn, abandoning its drastic slimdown policy in favour of a new £14 billion mortgage lending splurge.

The bank said that 100 senior executives were eligible for the 2008 bonus scheme, which was necessary to ensure that it could continue to recruit and retain good people.

Gary Hoffman, the Northern Rock chief executive, declined to put a figure on the scale of bonuses and would not confirm that they would be capped at 10 per cent of pay, the maximum level set for ordinary staff members and junior executives. The payments would have to be approved by the board’s remuneration committee and sanctioned by the Treasury, he said, and they would be paid in loan notes that could not be cashed in until 2010. There was also a clawback feature so that underperforming executives could have rewards withdrawn.

Michael Fallon, the most senior Conservative MP on the Commons Treasury Select Committee, said that the Treasury was to blame for the confusion over bonuses. He said: “The question is why are ministers allowing the payment of these bonuses?”

Vince Cable, the Liberal Democrat Treasury spokesman, said: “Ministers seem to be desperately trying to avoid taking responsibility for banks which they partially own, which is completely the wrong approach.”

A spokesman for the Treasury said last night that it accepted Northern Rock’s explanation that the bonuses were necessary. The bank revealed that its trading position worsened in the second half of 2008, when it lost £800 million, up from the £600 million that it lost in the first half and that it would make further losses this year.

Of the £1.4 billion of losses for all of 2008, £900 million was due to borrowers defaulting on their mortgages, unsecured loans and credit cards, and £300 million was due to investment losses by the bank’s treasury department. Arrears deteriorated sharply from 1.87 per cent of the total loan book in September 2008 to 2.92 per cent by December 2008.

Nevertheless, Mr Hoffman insisted that it was a year of good progress because the bank had successfully repaid £18 billion of the £26.9 billion borrowed from the Government, beating targets set by the Treasury. He confirmed that Northern Rock would initiate a big push to offer mortgages again in a U-turn from its strategy of encouraging borrowers to pay back loans and remortgage elsewhere. The bank plans to offer up to £14 billion of mortgages over two years to first-time buyers and remortgagers.

The lending push will be funded by the Government, which will inject up to £3 billion into the bank and lend it up to £10 billion more, reversing the policy of calling in loans to the bank as quickly as possible. A Treasury spokesman said that the world had changed since the original policy decision.

Jon Wood, the head of SRM Global, Northern Rock’s biggest shareholder when it was nationalised, told The Times that the U-turn exposed the fatuity of the strategy of the past 11 months.

Meanwhile, Mr Darling is prepared to drop the £480 million annual interest bill charged to Lloyds Banking Group if the bank promises to plough money into mortgage lending and lending to small businesses. According to the Financial Times, the Chancellor would convert £4 billion of government preference shares, which carry a 12 per cent coupon. The preferred shares would likely be converted into nonvoting equity to prevent the Government’s 43 per cent stake from rising above 50 per cent.