The bank that rocked
by Kitty Ussher
It’s great that Northern Rock is back up for sale. As a minister in the Treasury in the run-up to its nationalisation, I can confirm selling it was always the preferred option; it was only nationalised because in the febrile environment of late 2007 nobody would buy it in a way that represented anything approaching value for money for the taxpayer. The only option was therefore to sort it out and sell it later. The Chancellor’s confirmation that this is indeed their preferred course of action represents a shift in policy; previously they had proposed selling it to the public in a kind of 1980’s style Tell Sid offering; they now realise that the discount required would be simply throwing precious public money down the drain.
Neither have the calls to mutualise it been heeded. Britain has a long and honourable tradition of mutual ownership but, as I argued in my recent Demos pamphlet City Limits, there isn’t much in the history of the banking crisis that suggests mutuals fared any better than the others. Building societies – such as Dunfermline– went under, as did credit unions, alongside the banks. In fact there wasn’t a correlation between the size or structure of a company and its fate; it was their attitude to risk that mattered.
This is why the Independent Commission on Banking is largely a red herring. Set up to throw into the long grass the suggestion from Vince Cable that the banks should be broken up, it has pretty much achieved its aim by recommending that they shouldn’t. Instead it states that the assets of retail arms should be ring-fenced so they can’t be gambled away by the investment bankers, despite little evidence that that happened in the crisis. Hence it is little surprise that the Chancellor in his Mansion House speech was minded to accept the Commission’s interim findings.
Now that these issues are pretty much resolved, it is time to focus on sorting out the policy issues that led to so much risk in the system in the first place. Aside from rearranging the regulatory deckchairs – the latest plans in this regard were published on Thursday – we also need to have a conversation about how government can curb asset price bubbles in a boom. Regulating the sale of mortgages is one thing. But they must not shy away from property taxes as well. At the very least it would provide more cash in boomtime in case anything needed bailing out in a hurry further down the line...
David Vinter
But to be fair, Northern Rock, was by far he most agressive lender, an appeared to use the most wild capital raising methods. Other mutual building societies were more conservative in their borrowing and lending, and still survive OK.
In the past when I sold mortgages we had very strict limits of two and a half times income. How wise it turned out to be!
Will Davies
As a counter-factual, it would be difficult to imagine the crisis playing as it did, were it not for the following:
- The Building Societies Act 1986, which led to carpet-bagging of building societies. In 2007, Northern Rock was up to its ears in CDOs and other derivatives, which it would have been unable to, were it still a mutual. It would have remained a mutual, had Thatcher not set about encouraging de-mutualisation, and facilitating it with legislation. Do you honestly believe that there would have been a run on a still-mutualised Northern Rock, i.e. an organisation with no access to the wholesale finance market?
- The repeal of Glass-Steagall in 1993 under lobbying heavy pressure from US retail banks.
- The floatation of the major US investment banks during the 1990s. Had they still been constituted as partnerships, there is no way they would have taken the risks that they did. Gavyn Davies and others personally pocketed over £100m each when Goldman Sachs floated. Do you believe that senior managers take as good care of a bank's money when it belongs to shareholders and they are protected by principle of limited liability, as they do when it is personally theirs? On what basis do you attribute such public spiritedness to senior bankers?
I'm not saying any one of these shifts in ownership structures was decisive, or entirely explains the financial crisis. And clearly two of them relate to power politics on Wall Street, not UK policy. But to pretend that ownership and control of banks, and the Glass Steagall issue, are somehow irrelevant, seems bizarre.