The governor speaks
Broadcast interviews by , the governor of the Bank of England, are as rare as optimistic bankers in the City of London鈥檚 current gloom. And what the governor told me, in a conversation recorded for a documentary to be broadcast tonight, gives fascinating new insights into the seizing up of money markets this summer and the crisis at Northern Rock.
I spoke to him in an elegant meeting room next to what the Bank calls his parlour, at the heart of his neo-classical fortress in the City. We spoke for more than an hour about what he did and why, in the run-up to the Northern Rock crisis and during the first run on a British bank for 141 years. Such was the insight he gave into his actions and his state of mind that the difficulty we had was deciding what not to broadcast, since so much of what he had to say was gripping.
One of the most important questions was why he did not attempt to rescue Northern Rock over the summer in a quiet, inconspicuous way 鈥 which would have avoided all the drama of providing an emergency loan 鈥 by pumping additional liquidity into the banking system. Apart from anything else, that was what many big banks had been demanding and my understanding is that the City watchdog, the , supported their case.
Northern Rock鈥檚 chief executive, Adam Applegarth, told MPs on the Treasury Select Committee that if his bank had been based on the continent, it would never have suffered a crisis. He claims it would have been able to raised sufficient funding by exchanging its mortgages for loans from the in a way that wasn鈥檛 then possible in the UK.
King was blunt in dismissing Applegarth鈥檚 claim. He says the Rock chief executive is wrong, because it was clear from the start that Northern Rock needed far too much money to be propped up in a way that would not have raised the alarm to the market about its funding difficulties.
The governor says that the Bank calculated that Northern Rock would need 拢30bn in support. And that it was impossible to 鈥渞ig鈥 a money market auction to direct that level of funding to it without alerting journalists and other bankers to what was happening. What鈥檚 more, an 鈥渦nrigged鈥 auction would have been ludicrous, because it would have involved injecting mind-boggling sums into the banking system 鈥 thus raising fears that the entire banking system was effectively bust.
So, for him, there was no option but to direct support to the Rock using the Bank鈥檚 role as lender of last resort 鈥 once, that is, the Rock concluded beyond any doubt that it could not fund itself in the normal way from commercial sources.
So the decision of the Treasury and the Bank to provide in this form was their first momentous decision.
Their second momentous decision was not to announce, at the same time as providing the loan, that no depositor at the Rock would lose a penny 鈥 that the Treasury was guaranteeing their savings.
This was eventually made by the Chancellor, on the evening of September 17. And it did stop the run. But by then the run had been raging for four days in branches and on the internet.
And it was the run that did so much damage to the reputation of British banking. As the governor describes, for a few days during and after the run, there was an international flight of capital out of the British banking system by global managers of great pools of cash, because they had been so shocked by the television pictures of the run.
If that capital flight hadn鈥檛 been stopped, well who knows what damage could have been wreaked on other substantial banks? The chairman of one big British bank was so worried that he went to see the head of the civil service and the head of the Treasury to express his concern.
What鈥檚 more, this retail run contributed to the steady withdrawal of funding from Northern Rock by other banks and financial institutions 鈥 such that the Rock has now borrowed some 拢20bn from the Treasury and expects to have borrowed 拢30bn by the end of the year.
There is therefore a fair body of evidence that the run has had damaging long term consequences both for the Rock and for confidence in the British banking system.
It is also likely that it could have been avoided if the chancellor had guaranteed that savers would not lose a penny right at the outset.
So why didn鈥檛 that happen? Well you will have to listen to File on 4 tonight for the detail.
But both King and 鈥 the FSA鈥檚 chief executive who was also interviewed by me for the programme 鈥 say that there was discussion of the possibility of a run before the emergency loan was granted. And that the idea of providing a 100% guarantee to depositors was raised by them in conversations with the Treasury.
And, as Sants says, only the chancellor could provide this guarantee.
They did not regard a run as inevitable however 鈥 which seems to be why the Treasury did not provide this guarantee till the run was raging in full frightening force.
But neither Sants, nor the chairman of the FSA, , nor Mervyn King were prepared to give media interviews to reassure Northern Rock鈥檚 depositors during the run because they all regarded the existing system of deposit insurance as inadequate. King actually says it would have been 鈥渄ishonest鈥 to tell the Rock鈥檚 savers they had no reason to worry.
Which in the starkest terms shows why the delay by the chancellor in guaranteeing all Rock savings was momentous.
You can read the full transcript of Mervyn King's interview .
I'm 
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The Governor comes across with a considered logical approach to the crisis. Clearly admitting regrets under his control and suggesting where others could do better. Of course hindsight is a strength in an individual who wants to understand, analyse and improve systems.
That the run didn't seem inevitable to King and Sants seems a little unlikely. Simply put who would risk their life savings at all. If you put money in a bank you do so because you accept zero risk relating to that investment. It may be part of a wider strategy with riskier investments elsewhere or simply because an investor is not prepared to risk capital for a higher return. If the capital suddenly seems threatened then twenty seconds of research on Google shows how little protection is available. The next action is to get the money out and distribute it across the very biggest banks.
Somebody will catch the merde though. Unfortunately Alistair Darling will have little difficulty spinning the Northern Rock crisis, avoiding issues regarding his frantic U-turn exacerbating the situation, and I fear Mervyn King's analytical mind will not see it coming.
Robert, thanks once again for insightful but easy to read blog. I am learning lots and lots.
Guy
Well done, Pestoni ! Now you know why people give you such a kicking - you keep getting the scoops !
Please forgive me for my ignorance but I need to get this straight in my mind...
...If NR is being loaned 拢30bn, which I gather is rather a lot of money (mind you, with the global figures being bandied about, we've all become inured to such numbers) - how is it going to pay it back?
After all, if I go down to the bookies and back trap 6 to the tune of 拢1k and it loses, I will have to borrow money to pay my rent this month. I will be paying off that money for many months. 拢30bn seems quite a lot more to be committed to repay, with interest.
Am I right in assuming that NR has simply gambled with 拢30bn and lost it (like, I suspect, many other banks that haven't come clean about it...yet) and that the Treasury HAS TO keep giving them loans to prop it up, not because they are great fans of NR, but because if they didn't, the whole damn system of banking would face meltdown? Is that close to the mark?
Why have we provided a 拢30bn state subsidy to a private company? Is this legal? Where has the money come from ? This has not been made clear.
If this has been a hospital or school or even a private company in crisis would the government have bailed it out ? In the seventies maybe (remember British Leyland etc), but this is not approriate in 2007.
How is it that the state can find 拢30bn to prop up a failed bank but is unable to find 拢2bn to expand the Tram network here in Manchester?
Any answers please
The northern rock board is an absolute disgrace.
They could never have raised enough money in the market to deal with problems setting in. Your bank would never allow you to run your business in that way.
How is the banking industry allowed to operate in this way and get away with it - which they have ?
Typical mix of British institutional incompetence and greed.
It seems to me there are several points worth noting from this.
Before the run on the Rock, Lloyds would of taken it over if the BoE had been willing to give a 拢30billion, 2 year, guarantee. It wouldn't because 拢30billion is 'rather alot of money'. It is now accepted that the BoE will have, by the time this crisis is over, supported the Rock to the tune of atleast 拢30billion! It was in August and still is now....'an awful lot of money'. Call me naive but what is the difference?
Then there is the dithering darling of the Treasury, Mr Darling. Not offering to guarantee retail savings for 4 days, after announcing the emergency funding to the Rock, is the key failure that prompted the run on the Rock. If his was the decision not to give it, then it is he, Mr Darling, who should resign.
Robert,
Thank you for an excellent article, but Merv the Swerve missed an opportunity to give assurance to potential savers.
Can you please advise what has happened to Mr Darling's review of personal savings protection being lifted to 拢100,000, as publicised a few weeks ago or was this more government spin?
A possible solution could be that the Building Society etc. offers two interest rates on fixed term to the saver eg. 7% with the present level of protection and 6.3%, a differential of 10% less, with the new level of protection.
If the additional protection is given now it will be a significant contribution to reduce the possible problems anticipated by the BoE in the future months.
Saver confidence is essential, did we learn anything from the NR fiasco?
Robert,
Did you ask the Governor if your aggressive 'outing' of the troubles at Northern Rock hindered any behind the scenes rescue effort?
It was a great bit of investigative reporting, but it also changed the course of current events, something I think crosses the boundary of responsible journalism.
So did the Governor have any comment on why there was the delay. I think it was obvious that such a guarentee would have to be forth-coming once the run started as the consequences of not providing it would have been big so why was it not given immediately. My only thought is that it relates to the oft-stated aim of 'punishing' the NR - ie making an example to focus others minds. Without the run the Rock might still be looking at trading its way out of the difficulties with the brand intact, the run has almost certainly prevented this from happening.
This brings me back to the question of where the blame lies - obviosly all the spin says it was the Rock imprudent model but the reason for banking regulation should be to identify where unsuitable risks are being run. I see two possibilities, either the FSA did not realise that the model was so risky in which case they failed in thier main role which is a worry for all aspects of their regulation or that they were aware of the risks but failed to prevent NR from pursuing an unsuitable strategy, again a regulatory failure.
Is the root cause of this failure the separaton of the regulation of individual businesses from responsibility for the stability of the financial system? And we all know that it is not the occupier of 11 Downing Street who made that decision.
Of course none of this matters - the story that will be remembered is that the greedy NR managers were imprudent, the BoE was too cautious but the PM and Chancellor through their brilliance saved the day...
As someone who was caught up with large deposits in NR, I was faced on the Friday that the difficulties became known with the possibility , however slight, of facing a catastrophic loss. The only acceptable reassurance would have been a guarantee, and I still cannot understand why that was not given as part of the announcement of NR's problems. That would have been good management and also would have meant taking a tough decision, something this government is always saying it is prepared to do until it actually has to take one.
I got my money out of NR on the Saturday and the way things have developed I feel mightily relieved that I had done so.
I will be listening tonight and while I am sure that Darling will try and shift culpability, there is no excuse for the fact that he did not do the one thing that would have made the difference until it was too late.
Robert
What we haven't seen yet is any analysis of the quality of the NR loan book and no analysis of the amount of business put "on the Rocks" by IFA's with self certified salary declarations.
We have however seen occasional press reports about 120% loans and 5 times earnings
If the loan book is good surely the NR could pass on these loans to other building societies and reduce the size of their liability but this doesn't seem to be an option: Why?
Excellent material, I look forward to the broadcast this evening.
What concerns me and what I actually resent about this matter is that how dare the Chancellor use tax payer's money to bail out a private bank. If the Northern Rock ultimately fails what happens to the huge amount of money loaned. Is it simply written off? Irrespective of "confidence in the banking system" public money should not be used in this way.
Perahaps it was an instinctive socialist desire not to 'bail out' fat cats and shareholders that caused the delay in government action.
Mr King's reported comments are a further alarming indication of just how tattered the BOE's policies towards debt encumberment have become. It was clear at the time of NR's collapsed credit rating, and is still the case now, that quick effective shoring up is a pipedream when depositiros sense that quicksand is gathering between themselves and their funds. For several years, the BOE, FSA and banking industry have behaved like the threee wise monkeys. It was inevitable that almost unrestricted credit access would over gear borrowers and not only tear at their repayment schedule but topple the value of their properties. Let us be honest we also need to factor in the 'big' players who have geared up much of their property portfolios with interest free mortgages and disastrous contract-for-difference trades. The next quarter (march 08) will really reveal just how much culling is still in the works.
Surely the moment that the Gov "guarantees" NR, or any failing/failed bank is the moment when currency is worthless. How it is even possible to guarantee deposits in a fraction reserve banking system? Not momentous, just ridiculous.
Paul Armstrong:
they bailed out the fat cats almost immediately, erm... I mean, "helped shore up confidence in the banking sector preventing damage to the economy".
What they took quite a bit of time over was whether to protect the ordinary man with his savings in the bank.
Thatcher was more socialist than NuLabour is!
What staggers me is the lack of understanding given that this has been a well reported (as in thoughtful & comprehensive) event on the Beeb at least.
NR have effectively borrowed the money from the BoE but have to pay a penalty interest rate... thus it is the shareholders that suffer and the BoE makes a steady return on it's loan. Thus it is not a gift, subsidy or much of a gamble.
The loan is secured on the NR lending, which none of the reports suggested was bad.
To Dee post 12;
Don't you think that Robert would have told the world (smugly) by now if he had any whiff of 'sub-prime' lending by NR? (n.b. 120% loans to folks with ample salaries and good credit histories is not the same thing at all). Doesn't the fact that NR repossession and arrears are much lower than the industry average tell you something? Or do you think Price Waterhouse have been lying about their accounts all these years? If so, where are the streams of 'sub-prime' NR victims that Robert and others would surely have rolled out on the telly by now?
I agree though that finding out whether any UK banks/building societies have taken part in real 'sub-prime' lending (i.e. to those who have no hope of paying it back) would be interesting -I presume YOU haven't got a vendetta against NR in particular have you?
On the Beeb this morning Mervyn described a system of allowing a bank to collapse in a controlled fashion. In essence the bank being propped up long enough that savers can move their deposits to another account and then allowing the now unviable business to fold in the usual manner. This way savers are protected and everyone else involved falls with the bank.
Mervyn stated that he would like the ability to do that in this country and it seems like a fair idea to me. Failing businesses should be allowed to fail.
Excellent article. I find the whole episode very interesting and it's certainly managed to get central bankers et al back on their toes. I would have to point the finger first and foremost at NR for taking on such a risky business strategy; however, the FSA have got a lot to answer for. They're supposed to be ensuring that banks, which are special institutions (and can therefore not be treated like other companies), are pricing risk and acting appropriately. Unfortunately, the FSA are primarily concerned with monitoring credit risk (which is very important), but not liquidity risk (which, as NR has proven, is arguably of equal importance). The BoE and particularly HM Treasury could nonetheless have handled the situation better. Both should have realised the near-certainty of a bank run as we (my colleagues in work) discussed the possibility a few weeks before it even happened. This was especially obvious given the UK's antiquated depositor protection laws and so the need for Darling to give a guarantee. However, a 'good thing' to come from all of this, which hasn't been discussed as far as I know, is that by taking a tough love stance, the "moral hazard" that Mervyn has repeatedly talked about is likely to be avoided. But we'll never know as although prevention is better than cure, you never know for sure what you've prevented. How annoying!
Much of this sub-prime debacle seems to me to be due to people taking risks with other peoples' money for their own gain - mortage commission, investment bankers' bonuses and CEO's pay rises. The resulting irresponsible lending in addition to artifically low interest rates has caused disastrous asset price bubbles which risk recession or worse if there is a house price crash. Their misbegotten bonuses safe, there are outraged screams from the city because the BoE did not capitulate like the Fed and ECB in pledging state aid to rescue them from the results of their greedy imprudence. Mr King was caught in an impossible situation, one he had tried to avert with his warnings about debt.
Wouldn't it be more sensible if bonuses and commission were spread over the period of a loan instead of paid up front - something we should have learned from endowment and pension mis-selling.
Clearly the reaon for the run on NR was the lack of a guarantee to NR savers. The FSA and the BofE knew that the deposit insurance scheme was insufficient. I don't think they came to that conclusion over the course of the summer; they have always known that to be the case, as have the banks themselves. (I say this because the first time I heard of it, that was the most striking thing about it.) Surely the banks are responsible for themsleves? Or are the ultimate capitalists saying that they need government to tell them how to run their businesses? They should have got their act together and put in place an effective desposit insurance scheme decades ago.
Whilst I'm no apologist for the government's ineptness in recent months, I can imagine that when faced with a decision on whether to provide a guarantee to NR's savers, Darling Brown's first thought was "Why should taxpayers bail out a failed company?" Presumably the answer was eventually that if they didn't the collateral damage would cost the taxpayer more. If there had been no expectation of a knock-on effect to other banks and ultimately the economy in general, wouldn't Darling Brown have just watched NR sink, like any other company, and rightly so. (I say that as a NR shareholder, although not a saver.)
Of course, there were all sorts of political considerations too, but it seems to me that people who don't like the government want to blame it regardless of what it does, and an awful lot of people seem to think that it is the government's role to remove risk from their lives and to compensate them when they get it wrong.
Someone said that there was a lot of spinning against the NR board and that even the FSA failed to realise that the NR model was too risky. Well, it's demonstrably true with hindsight that NR's strategy was too risky. And all of the banks that lent to NR either failed to realise it, or decided just to make money our of it while the going was good, effectively propping up a bank that risked damaging the whole banking system. This is their business and they know much more about it than the FSA does -otherwise, they should go work at something else. NR's Mr A's suggestion that the government should take on its dodgy mortgages is very funny. That guy should write sitcoms.
The Governor has 'shopped' the Chancellor. Is the Governor planning to retire early? If not he must assume Mr Darling will go. NR is worse than September 16th 1992. Exit from ERM did no permanent damage to this country's reputation for financial probity, the mishandling of NR could.
To answer FR (post no 4)
The problems at NR arose because of this:
Usually a bank will receive deposits from its customers and use this money to make loans to different customers, which may also include lending money on the money market to other financial institutions. The bank then makes money on the difference between the rates paid on deposits and received on loans made (called the margin)
As part of this a bank also has to retain a certain amount of regulatory capital to be able to finance it's ongoing expenses and natural fluctuations in the depositor base.
NR's business model however was focused more on the loan book and so to finance these loans they had to go to the money market (i.e. other banks) to raise funds, these loans would then be repaid each day, week etc with new money market loans.
Now, the loans you get on the money markets generally vary from overnight to several months which is rather different to the 25 years you might grant to a mortgage holder. A serious mismatch of cashflows!
Unfortunately for NR the global credit crunch caused the money markets (MM) to dry up, therefore when the overnight, week, etc loans they had raised on the MM were due for repayment they could not find any cash with which to repay them. Going back to the customers with retail mortgages/loans and demanding instant repayment is unfortunately not an option!
Therefore they had to go cap in hand to the BoE to ask for a loan as the only institution willing to lend them money to repay the MM loans and enable the business to continue.
This situation was made worse by the run on the bank as NR also lost the loans from their depositors, requiring even more money to be borrowed from the BoE.
Now, the question is will the BoE lose money over this?
The answer, in my opinion, is most likely no. Assuming the majority of the customers who borrowed money from NR are able to repay their loans that money *should* be used to repay the BoE loans and any interest thereon. Arguably to the benefit of the common man as a complete collapse of NR is unlikely and this is a source of income the BoE would not have had before this fiasco!
One other question was raised by a previous poster regarding selling the loan book, the total loan book of NR is in the region of 拢40bn, a mighty wedge of cash for even the largest bank to find so it does not surprise me no offers have been forthcoming!
An interesting episode in the history of British banking, though not one I would wish to witness again!
Frankly I don't give a stuff about NR as a bank or brand. Best thing to do is to consign it to the waste bin of history, package the business up into chunks and sell it off at a loss. Lose a couple of Bn, so what - many PFI deals will cost taxpayers more when the beans are counted! Better to put this to bed asap and move on since the stink is lasting longer than it needs to.
Surely most of NR's business is simply mortgages that the punters will continue to pay up for........... does anyone know the split of their books in terms of - might as well accept they are belly up / probably okay / no problems?
A very good interview, Robert.
Ultimately, responsibility for bank safety lies with the banks themselves. Mr King says the Rock could have taken insurance against liquidity risk, but chose not to. It could also have financed itself with longer-term funding but opted for short-term markets, creating a fatal mismatch of maturities. Northern Rock鈥檚 problem was not risky lending but reckless borrowing. The run on the Rock began more than a month before queues formed outside branches.
Your blog is educational, informative and investigative reporting at its best.
I'm no conspiracy theorist, however when someone does something rather unexpected (such as Mervyn King giving an interview like this, particularly to the 成人快手) you have to ask why?
Either MK is indulging in some pre-emptive backside covering by attempting to divert the blame elsewhere or there's an "I'll scratch your back if you scratch mine" angle with Robert Peston.
This seems to increase the odds that the source for RP's original story on Northern Rock was somewhere in Threadneedle Street, I think. Unless your know different, of course!
In my view MK, Darling and the FSA are all tarred with the same brush. Their only objective is to protect the reputation of the City..
Too little too late I'm afraid. Having recently read an article somewhere that was anticipating another round of bumper bonuses for City types this year whilst it remains immensely difficult to raise any risk equity capital for start-ups and spin-outs then it's obvious this particular set of leopards will never change their spots.
The BoE and the FSA need to be run by someone from outside the City band of brothers who will exercise some real influence and tell this bunch some home truths.
Robert,
I admit to being hugely critical of your reporting of the events surrounding the run on NR and the events that have followed. The one thing I can not understand is why you are not now reporting the name of the other bank that is clearly borrowing from the BoE like NR. NR have said that the amount the press are suggesting they have borrowed is too high and that means there is clearly someone else using the facility. In the pursuit of a fair unbiased press surely it is now time to report this story and who it involves.
Thanks
鈥淣R have effectively borrowed the money from the BoE but have to pay a penalty interest rate... thus it is the shareholders that suffer and the BoE makes a steady return on it's loan. Thus it is not a gift, subsidy or much of a gamble.鈥
Not quite I鈥檓 afraid! Yes it is a subsidy. NR can鈥檛 borrow the money on commercial terms therefore it is getting the money on better than commercial terms.
Shareholders are being saved from a great deal of suffering. NR is not commercially viable, a 3+ month 30bn government loan is arguably illegal and I hope the question of Nationalizing is properly addressed in tonight鈥檚 programme.
Good article and I hope the interview is available on podcast!
I am curious - there seems to be no discussion of whether the current state of the financial services industry is the result of a failure of regulation. Why were they allowed to get into this much of a mess?
And a much more interesting question is also not addressed. The "credit squeeze" is portrayed as being a result of a failure of confidence in of the banks in each other. If they don't trust each other, why should anyone trust them?
The Governor is being slippery; are you too Robert? The question is not -
'why he did not attempt to rescue Northern Rock over the summer in a quiet, inconspicuous way 鈥 which would have avoided all the drama of providing an emergency loan 鈥 by pumping additional liquidity into the banking system.'
The question is ' why did you not act in the same way as other central banks and ensure normal liquidity in the market?' period.
By linking this question specifically to NR you have given him wriggle room with which to avoid the real question. So he produces a red herring - rigging the market to direct funds to NR. If he had ensured normal liquidity why would there be any need to direct funds at any institution! The market would have allocated the extra liquidity without his intervention. To argue differently is just self justifying conjecture on his part.
The comments made by Mervyn King stating that it was always known that Northern Rock would need 拢30bn does not add up. If NR has borrowed 拢18bn up to date (as stated by the new chairman last week) from the bank of England and according to the Times 拢14bn has been withdrawn from the bank by depositors it would appear that had the run on the bank been avoided a short term loan of 拢4bn to date and perhaps 拢10bn in total would have been required
Hindsight is a wonderful thing! Unless further unhappy facts emerge re NR surely the msnagement's classic mistake was simply to borrow short and lend long and then to compound that by expanding the loan book too quickly? Basic banking errors no doubt masked by greed and anxiety to outperform the bank's peers. If the loan book is sound, The BofE will ultimately recoup with handsome interest.
Indeed the NR model was rather good in terms of cost ratios, because raising money on the wholesale money market has to be cheaper than raising it at similar rates from greedy retail customers.
Had it not been for the coinciding sub prime lending market crisis the NR hierarchy might just have got away with neglect of a basic principle of banking and been commended for their efficient business model!
Mark H at Number 25...
NR's mortgage book is 114bn, not the 40bn you mention. Other than that, a good summary though!
It seems to me that the real culprits are the money markets (presumably other banks) who were willing to lend NR all this money in the first place. NR made a speciality of making high risk loans (120%? 5 times earnings?) which these other banks wouldn't risk themselves. Yet they were happy to lend money to NR to finance this policy.
One can only assume that the other banks didn't feel that they were exposed to the risk because they knew that if everything went pear-shaped the Government would bail them out.
Perhaps the answer is to ensure that the people with ordinary savings in a bank have first claim if it gets into difficulties, so money markets making short-term loans have to bear most of the risk and are therefore more careful who they lend to?
There are some very ill informed comments on this blog - though not from Mr Peston, who continues to be a source of considerably informed opinion. 3 major points need to be clarified
1 Northern Rock did not lose 拢30bn, as one person suggested. It has debts that need re-financing, which BoE has agreed to do.
2 It is not a 'government subsidy' or even the taxpayer footing the bill. The taxpayer has, in truth, made a rather shrewd investment by requiring a rate of interest somewhat in excess of normal money rates. As the future of Northern Rock is, to some extent anyway, in the hands of the government, it can be said to be having its cake and eating it.
3 One commentator said Northern Rock should give away its mortgages to other bank and building societies, being as they are liabilities. Er wrong on that I'm afraid....mortgages are assets.
Basically the level of responses demonstrates the level of financial naivety within the public at large. Maybe not surprising. If borrowers in America had been more shrewd then they would not have taken on the awful loans they did, and we would not now be in the position in which we now find ourself.
The most astonishing thing about the Governor's retro defence is his apparent inability to recognise that his first responsibility is to ensure (so far he can) the stability of financial markets. It is not to take high moral ground, it is not to deliver hard lessons, it is not project macho image... it is to make sure the system does not fail. Not only did fail to attend the fire he did not put water in the pumps of those who might have.
Robert why did you not ask him why he stood back for so long while the Fed and ECB were attending their responsibilies?
On 06 Nov 2007,
Geoff Browell wrote:
"There are some very ill informed comments on this blog [..] Basically the level of responses demonstrates the level of financial naivety within the public at large.If borrowers in America had been more shrewd then they would not have taken on the awful loans they did, and we would not now be in the position in which we now find ourself."
Correct - though if we accept that borrowers are naive and still ill-informed, then doesn't that point to a sales process that has failed?
Is there a progression here in the Financial Services industry woes:
'mortgage endowments'
'mortgages'
'mort' for customer relationships based on trust?
The Treasury's reported response to Mervyn King's robust and refreshingly honest interview of "shock at Governor's naive interview" totally confirms that the Treasury is still run on spin as a substitute for knowledge and experience. An alternative explanation would be that the Treasury plan to make The Governor the fall guy is being invalidated by cold facts. Why does the Treasury not face the fact that the tripartite regime which they thought would enable them to divide, rule and spin has totally failed.Darling (and no doubt Brown) rejected the Bank of England's advice on the sale of Northern Rock to Lloyds and then panicked on seeing the queus that threatened their general election plans.
Robert,
Excellent stuff as ever.
One specific question: what is the actual cost of the Bank of England's financial support to Northern Rock? If there is 拢30bn of taxpayer's money in NR, that money has got to come from somewhere and the hole it has left behind is surely costing someone something? In addition how much of this money will ever come back to the Bank? Surely anyone buying NR will try and negotiate to keep this money in. Will NR end up being another debacle for Labour like the Rover fiasco?
Geoff Browell, number 38 - harsh, but oh so true.
I have to agree wholeheartedly with 38 about the stupidity of some of the comments on this blog (and others relating to this issue).
Take the words insolvent, sub-prime, subsidy, high risk loans and Northern Rock, mix them up in an insane, uninformed and irrational rant and finish with an explanation mark or two!! Click on Post.
Don't worry, at nearly $100 a barrel there'll probably be a petrol protest by haulers soon and you lot can get out of the Northern Rock queues and go and drain your local petrol stations dry.
Some of you worry me, you really do.
An unconditional guarantee to underwrite 拢30bn deposits is indeed a government subsidy, and quite separate from the loan facility.
If you don't think so, try going to the insurance market to get a commercial bond to guarantee deposits (as travel companies have to do for example). It will cost you 4-5% a year. So a free government guarantee, in effect a bond, would have cost 拢1.5bn on the open market from an insurer. Nice subsidy if you can get it.
The Governer is getting a bit of a pasting in the financial press this am. Self serving re writting of events and what looks to many like a craven attempt to slide away from responsibilty seems to be a common theme.
He failed to ensure there was enough water in the pumps to put out the fire raging through the industry on the high moral ground that it might be used to save some undeserving outfits. It just takes the breath away especially in the light of his U turn. Yet again we see the validity of the Economist's assessment ' The BoE - The Bank that Failed'.
Is this not simply a case of Merv saying, "I am not going to help this bank buy this other bank. Now Mr. Chancellor, dare you overrule me?"
Could he have helped NR on the quiet? The concensus among commentators seems to be that he could not without himself causing a run.
Could he have helped the other bank to acquire NR? Again, the concensus appears to be no - unless he wanted to break his own rules and set a dangerous precedent, putting our financial system under the microscope of Bruxelles in the process.
Could he have acted to make the market more liquid? Everyone seems to say yes, but in my niave understanding the banks were still lending money to each other - they just may not have been lending it to NR. If other banks understood the fragility of their business model - can anyone realistically blame them.
I am, however, disappointed in Merv as his interview cannot really be seen as anything other than political blame-shifting and points-scoring. Given his account of events shows an effort to take the political out of the financial - bad case of double standards methinks.
At 06:58 PM on 06 Nov 2007, Geoff Browell wrote:
...If borrowers in America had been more shrewd then they would not have taken on the awful loans they did, and we would not now be in the position in which we now find ourself.
Quite right Geoff, you're a genius. It's all the fault of the poorest of the poor Cleveland inner city recently homeless. Don't they realise their responsibilities to bankers in the City of London? How dare they! They should be sacked, those few that have jobs.
Robert,
Your blog is great entertainment as well as thought provoking and informative. Some of the posts are obviously sheer nonsense but some make a lot of sense. Some are difficult to evaluate. Ever considered a rating system ie a caution on comments whicha re probably nonsense. Teddy sometimes gets confused. Anyway he would like to send everybody on the blog his early best wishes for christmas and the new year.
Blog 22 is getting to the heart of the matter.
Margaret is right - money lending requires responsibilty, and an understanding of the impact that bad loans have on the well-being of the borrower, and eventually, on everyone when "chickens come home to roost" (as they always do).
It is true, there are irresponsible and crooked borrowers, but the incentive to encourage such activity through commissions,increased profits/bonuses etc. points to system and moral failures.
What we need is a new economic system based upon morality (good business practice) which recognises that the power a borrower has, naturally needs the exercise of care for the lender.
Bankers etc. take note!
I listened to FileOn4 tonight and again found no comment on the abnormality about the guarantee to Northern Rock depositors. If you look at the web site of the Irish subsidiary, you will see that Northern Rock are stating that the Treasury guarantee applies equally to Irish depositors. It appears that the Chancellor has offered an open ended guarantee of British taxpayer鈥檚 money to foreign non-residents. This cannot be right, even if it is legal, but I have seen no comment on it in the press. Neither has any Politician raised the point.
The government has not spent 30 billion just like that. The Rock has assets, these are mortgages entered into by borrowers and these provide a future cashflow and are secured on the properties purchased. The government has accepted these mortgages as security. And actually few of these NR mortgages are "sub-prime", ie ultimately to those with poor credit histories. It is probable that the end result will be no government outlay, if there is a cost it is unlikely to be the loss of the whole sum.
Was it wise to give such support? Not yet clear - but the consequences to the UK banking system of letting NR fail could have been a cascade of runs on multiple banks.
On the whole i am quite happy that the support was given.
The real culprits are those in the US who made daft loans, and those who bought such mortgages without the basic checks on the riskiness of the people who had taken them out.
Banking's an unusual, strategically important activity. Banks though, are run a bit like grocer's shops, with products to sell, and shareholders to please etc. But the consequences of poor business decisions in a bank have the power to rock our entire system. By comparison, a grocer would simply go bust, little ripples in his wake.
I'm not sure what the answer is, but clearly, this element of strategic risk to the economy is a kind of external cost currently borne by taxpayers. It was Darling's promise of a total guarantee that stopped the run. It was the massive external costs to the economy as a whole that forced this action. Classic rock or hard place. The Government must seek ways of making the banking industry, and savers, pay for their own safety net.
Why the extra billion?
And the reluctance to let Arnold go over the books?
Any chance of them revealing that Applegarth may have cashed out earlier this year with material knowledge about strains in financial market funding not yet in the public domain?
Plod demanding the keys to the new Aston Martin (and the wife's Ferrari)is just what this soap opera needs next to complete the surreal air surrrounding the whole affair.
One thing that concerns me about the Northern Rock crisis is why The Bank of England did not alert management of NR at the vast timing mismatches that must have been obvious in its funding ie it must have been patently clear that NR was lending long and borrowing short.
I have not read any criticism of The B of E role in supervising NR and this seems to have been ignored as attention focussed on the crisis.
On the face of it this looks like a good bit of business by the BOE and consequently HM Treasury. They have loned some 拢25Bn at a penalty rate somewhere around 6.75% secured against mortgage collateral of some 拢40Bn which must at least equate to property assets of 拢50Bn. Unless there is a 50% fall in house prices this looks like a pretty secure loan. I wonder what bond rates have been used to raise this extra cash(currently running a budget deficit so would have to borrow) and what margin will be realised from this deal? It will be particularly good business if we are at the top of the interest rate cycle and the loan rate is fixed. Perhaps messers King and Darling are not as incompetant as they may first appear.
I find quite worrying to read the facts illustrated in post #51 - that the BoE and HM Treasury are also guaranteeing the money of Irish depositors in Northern Rock Ireland. Surely it must be a big bluff, if they end up having to honour the guarantee I can't see how they would be able to get away with using UK taxpayers money to bail out Irish account holders. I wonder why the Irish Treasury didn't stand up and take some responsibility for its share. Maybe because they thought the Rock's troubles are entirely UK's responsibility.
All this could have been avoided with a good deposit insurance scheme in place, and not just for the UK but EU wide, it is increasingly naive to treat banks these days as isolated national businesses.
I do not know the reason for Mr King's delay in bailing out the Northern Rock as we have never had a chance to talk about it but I think very prudent. Initially the people who deposited saving should be reimbursed until the money 鈥榬uns鈥 out then and only then if there is no money left for the account holders should the Bank of England step in to help the everyday British citizen . Not to help out some corporate giant whose decision makers should be made responsible for the losses most certainly not the everyday trusting British citizen. In your article are you suggesting Mr King should have given the money sooner so they could make more bad bets???
Mr King has proved himself to be competent and shrewd enough to run the Bank of England If only journalist had to go through the same sort of selection process
re post 38, surely the British public have shown themselves to be immensely shrewd? Borrowing 114bn at rates the Rock couldn't finance on the money markets sounds to me like they got a pretty good deal.