Friday, January 25, 2008

Northern Rock: If Peston & Shephard Knew, Who Else Did?

There was a very interesting interview with BBC Business Editor Robert Peston in yesterday's Telegraph which I have just got around to reading. He has this to say about Northern Rock...
Peston, the man with the golden contacts book, started watching Northern Rock
back in 2003. He could see it was expanding too fast and riding for a fall. "One
day," he predicted, squirming to recall his hackneyed phrase, "this bank will
find itself between a rock and a hard place."

Gillian Shephard also spotted problems back in 2006 and warned Ministers. If both of these astute individuals could see that Northern Rock was heading for the rocks, why couldn't the combined talents of the thousands of civil servants employed by the Treasury, Bank of England and the Financial Services Authority? This should be investigated by the Treasury Select Committee. Who knew what, when?

35 comments:

michael m said...

I could not agree more

As a former Executive of a major bank, I had to deal with the FSA. They always gave us a hard time, seeking expalanations for everything and importantly asking us " what if?" questions.

This was 10 years ago. Surely, if the FSA had asked even some basic "what if" questions about the Rock's business model- e.g. "what happens if wholesale rates increase?" then amber lights would have immediately been flagged.
This begs the question- what thoroughness did the FSA give to their review of the Rock?

It is all very well for Brown/Darling to blame the Rock management, but the Governenments' own monitoring body should have spotted the serious flaws in the bsuiness plan months ago

The scandal can be put down clearly at the door of the FSA

Anonymous said...

easy to say. Unless he horted the shares then I'm afraid this claim has no credibility - it's one this to think a business model is not robust, quite another to take action.

Vindico said...

Good question Iain. I guess the answer is that more people knew than we know about, but they were content to turn a blind eye so long as the music kepts playing. Now th emusic has stopped the severity of the problem has come to light.

blooKat said...

The entire economy is based on the Northern Rock model.

Newmania said...

Was this the article that dealt with the structural problems of the FSA..?
Anyone who has ever had to deal with the FSA would snort and burble at the though they would ever notice anything at all.It is an organisation that tries to achieve the equivalent of playing a Concerto in oven gloves always understanding about 10% as much as the professionals about the business the run.
For consumer protection this may be adequate but they are not qualified to look at the supply of the Product

There is a looming catastrophe in Insurance connected with the licensing of Liability Underwriters outside the UK pass ported in by the FSA. here they actually disguise the fact they have no role in the auditing process. I would say about half the Employers Libility in the UK is now with security un vetted here and everyone knows one of these , perhaps from Holland Lichtenstein or Greece will be a problem.

The FSA meanwhile mess around with filing systems. They would have had no way to know what additional risks were being run bt the unusual profile of Northern Rock`s liquidity. It is a structural problem and it is Gordon Brown`s fault.

Doom mongers on this or that subject are ten a penny and I don`t ascribe much importance to that in itself personally. Private Eye were the quickest to spot this has nothing to do with sub prime. Something of the sort had to happen some time ,....its like hoping it won`t rain in Manchester to imagine otherwise.


You know why the rain in Manchester is Like Iraq. Sometimes its Sunnii but usually its Shi’ite


PS the rescue strategy look an awful lot like the strategy that started the problem(again see Eye)

Paul Linford said...

Bill Blanko in the Guardian also spotted that Peston interview and had this to say:

And now I'm reading an interview with Pesto, the BBC's business editor, Robert Peston, on the soft furnishings pages of one of our stuffier organs. What a card he is! In his lobby days, Pesto was so laid back, regularly seen strolling languidly along the Burma Road corridor (where most of the national newspapers have their offices in the Press Gallery). I'm sure I never saw him rushing anywhere, sweating or dashing into the FT room to file a story. (Perhaps I was perched in Kilfoyle Corner in Strangers Bar at the time.)

Anyway, Pesto tells us modestly. "At my school, it was pretty easy to be the brightest boy in the class." I seem to recall he had the same opinion of himself when he was in the lobby, too. Then he tells us he "spent too many years as a sort of Lothario". OK, so first he was a genius, then a sex god. (Oh, and by the way, he predicted Northern Rock's problems back in 2003, he tells us.)

scunner said...

More to the point, how come Peston knew about NR's problems and the BoE loan before anyone else outside NR and the BoE/Treasury/FSA?
And announced it before anyone had a chance to issue guarantees - causing the run that has lead to the loan...

Chris Paul said...

Perhaps Mr Peston should provide us with a list of other hunches and gut feelings and observations he's made over the last five years? And we can either be pre-warned on those or assess Mr Peston's hit rate.

Seems to me the troubles of Northern Rock are an object lesson in the perils of capitalistic greed. As a Building Society the thing flourished for a century or whatever.

We still don't know what if anything Tories would have done differently on regulation up to this moment, how they would have handled such a crisis over the last few months if it had emerged, and how they would take things forward.

Crash and administration? Nationalisation? Private sale? Osborne and Cameron have dithered like Bullingdon toffs wondering whether to trash a restaurant or club a fox cub with a champagne bottle. First that is. Obviously they do both in the end.

De-mutualisation has not been a tremendous success really. Greed and profits replace safe as houses and for the greater good as spurs.

Friends Provident another ex-mutual is about to be broken up I'm hearing - an org I joined as a member in the olden days. Nationwide of course continues to go from strength to strength and the Co-op's businesses are also looking in good shape.

Back to Peston - he should provide a list of all his hunches and tips along these lines. Otherwise it's a meaningless war story anecdote.

Atlas shrugged said...

The answer is simple and OBVIOUS, but the true exposure of this conspiracy is impossible, and virtually pointless.

Because all of the people or organizations implemented in it, are either, not democratically accountable, or do not give a toss what the masses of any country or nation think anyway.

All we have to be aware of is that it IS a planned conspiracy, designed to control western/world populations by created short and medium term multi-national economic and social meltdown.

Its been done before, it worked last time, and it will likely work this time as well.

It may not be time to start learning how to rub two sticks together quite yet. But it may be time to buy a thick winter coat, buy gold and count your blessings.

To believe otherwise, would require the individual to conceive the possibility that all the smartest brains in the economic, political and financial world, are dangerously and completely incompetent.

Which surly our common sense must tell us they CAN NOT BE.

Anonymous said...

"There is a looming catastrophe in Insurance connected with the licensing of Liability Underwriters outside the UK pass ported in by the FSA. here they actually disguise the fact they have no role in the auditing process. I would say about half the Employers Libility in the UK is now with security un vetted here and everyone knows one of these , perhaps from Holland Lichtenstein or Greece will be a problem."

The FSA do not disguise the fact - it is quite clear under legislation initially drawn up by the FSA to reflect EU Directives - that these activities are passported into the UK and can only be regulated (not audited - that is something else) by the regulator in the parent company's home state. (who as Newmania has pointed out elsewhere may be a better regulator than the FSA)

Newmania may not like the free market in financial services within the EU - but it may surprise him to know that it is something that the UK gains a large net advantage from - look at our surplus on financial services.

Alex said...

Just about every business analyst covering the city. One of the basic rules of corporate finance is that if your turnover & assets grow faster than your return on equity, one day you are going to run out of money, no matter how profitable you are.

The comments above on the FSA are quite correct. This is an organisation that spends most of its time checking whether IFA's are mis-selling life insurance. When I worked at an American bank, new nbankers had to take the SFA's Registered Reperesentative exams, which were mostly about dealings on the Stock Exchange - despite the fact that at the time American commercial banks were prohinited from dealing in shares.

A good policy move for Cameron would be to move bank regulation back to the Bank of England, where they understand asset and liability management.

Penfold said...

Why wasn't it spotted?, well as it was a piece of gravel it fell between the rock and a hard place and didn't show up on the radar of the troika monitoring banks etc., who are too concerned with the easy marks and high profile fines.
Splitting control between 3 organisations was never a sensible option.
But that's NuLab divide and rule was their motto.

Anonymous said...

I am afraid that the elephant in the room is GBs desire for never ending GDP growth at all costs. even with benign economic conditions he borrowed and spent money on the assumption that growth will always continue at current levels. thats why the country is flooded with migrant workers - they boost GDP (although GDP per head), its why a huge credit bubble suited him down to the ground - GDP growth allows him to BORROW massively based on fairytale predictions going forward - "over the business cycle"


GBs greatest con trick has been to hide the debt and massage the figures. if you add in northern rock, PFI liabilities and assume a more realistic level of GDP growth for the coming 3 years this country is bust.

Madasafish said...

You assume :
1. The FSA are vaguely competent.
They are not. History has a near 100% record of failure. Insider trading anyone?
2. The FSA want to know.
They do not.
History shows they prevent little and are surprised when things go wrong.
3. They would do soemthing IF they wanted to know and were competent.
Equitable Life anyone.

I'd abolish them and put in a simple code which says:
here are the rules.
Break them - for whatever reason - and the CEO goes to jail whether he knew or not.

After a few jail sentences of 5 years, things would improve.

It will never happen.

Ed said...

I asked my MP if any MPs or officials had any financial stake in Northern Rock. She declined to answer, saying that it wasn't an MPs job to probe such things. She also suggested that my question was outrageous. She suggested similar when I asked how many ministers have criminal convictions.

How does one get these questions answered?

Unsworth said...

Thw whole sub-prime nonsense has been cited as the cause of Northern Crock's troubles. That is only some of the story. The real cause of its problems has been that a select group of Board Directors have been so blinded by the prospect of unlimited riches that they have deliberately abandoned all probity and common-sense.

Adam Applegarth is a complete inexperienced shyster and spiv. The Board should have easily seen through his high risk 'strategies' and reined him in. But they chose to go along with the games because it suited their pocket-books. Their venality has come home to roost - not with them, of course, but with the taxpayer.

Many people in the City were fully aware of the goings on. Their calculations were based on an assessment of when it would be wise to dump Northern Rock, in the meantime making money as only they know how.

The sub-prime market was being openly discussed in America months before the Crock admitted it was in trouble. Whatever happens in American markets always affects London trading.

The City boys are falling about laughing on their way to the bank. It's the taxpayers who are in trouble now. Just watch how things pan out with Branson. All this garbage about 'saving jobs' is a low-cost low-calorie sweetener. What are a couple of thousand jobs in the scheme of things?

Not a sheep said...

The FSA are always at least two steps behind whatever the latest new structures devised by the investment banks are. They are reactive and staffed by people who are less highly paid and less motivated than the people they are trying to police.

Unsworth said...

@ Chris Paul

It's not the job of any Opposition to provide alternative strategies for a Government. It's the job of the Opposition to hold any Government to account - full stop.

Or do you seriously believe that any Opposition should provide some sort of Think Tank (now there's a word) for a Government to consult when it buggers everything up?

This Government has monumentally buggered everything up, and the Opposition parties are both/all pointing that out rather effectively. If the Government wants help with its self-inflicted problems then maybe it should ask for it.

The incredible garbage about "government of all the talents" has been shown for exactly what it is - complete, lying, and conniving bollocks.

Oh, and it's not de-mutualisation which is the problem. It's the unrestrained greed and mendacity of individual chancers which is. The concept is OK, it's the execution and operators which are suspect.

Patrick said...

Splitting the Bank from the FSA from the Treasury into 3 non-communicating and apparently competing fiefdoms was, of course, the snot gobbler's masterstroke.

Banking regulation focusses mostly on capital adequacy and almost not at all on liquidity. A huge gap in the regulatory environment IMHO.

I'd also recommend rules around asset and liability maturity matching.

I have a reasonably senior role in the finance division of one of the oil majors. The day I joined one of the big cheeses told the fresh faced new graduates of a mess he was resolving: The Forestry division had a problem. They had just planted a gazillion trees that were going to mature for felling in about 8 years time. The capital costs of buying saplings and planting them had been financed with rolling 3 month loans! If at any time the banks foreclosed or refused a rollover on the 3 month debt the whole division would be sunk. If your asset matures in 8 years then you need 8 year term loans to finance it - not rocket science.

Borrowing short term to buy long term assets is precisely the Northern Rock snafu is it not? A child could see this sort of thing coming. But not the FSA it seems.

Or Derek Wanless - Labour arsewipe / government advisor and Chairman of the NR Audit Committee.

Barnacle Bill said...

I think ED 11:53 has a very valid point, I asked our local MP, Mrs Balls, if they had a mortgage with NR.
Also the number of NuLabor MPs who might have a mortgage thru NR.
Still awaiting a reply, but I do know she has moved her constituency offices and the new opening hours!

Snafu said...

Iain, just what are the FSA expected to do!?!

Should they instruct Northern Rock to stop selling 110% mortgages, change their funding model when it was working fine or advise shareholders to sell their stakes and risk potential litigation!?!

Should the FSA advise (tell?) the Government to stop spending more than it earns in tax revenue every month!?!

Mr Jabberwock said...

Three separate points:

The FSA is not there to make failure impossible, they are there to protect the public; those are different things. Over regulation will increases costs for us all. A bank should fail in extremis, just like any other business. But you and I should be protected from the consequences of it.

Having said that I, who have no elevated position in finance, knew from casual conversations with people in and around the city that Northern Rock sailed close to wind for many years. So I chose not to deposit money with it.

Finally is Preston like an economist who forecast 12 of the last 3 recessions.

neil craig said...

"If both of these astute individuals could see that Northern Rock was heading for the rocks, why couldn't the combined talents of the thousands of civil servants"

Because the intelligence of an organisation is not the sum of the intelligence of sll its members it is an average & a very slowly acting average.

This is why small organisations usually outperform large ones. Governments, where everybody covers their ass by ensuring that all decisions go through innumerable committees to make sure they aren't wrong, are more likely to ensure they aren't right.

judith said...

Since NR was Labour's favoured bank, and kept everybody happy in Labour's heartland, including handing out lots of moolah to 'charity', you can see why no-one wanted to pop their head above the parapet.

Tone made me do it - he's a bad influence said...

I have watched Robert Peston very closely since his exclusive on the BBC 10 o'clock news on the evening of 13th September which precipitated the run on the bank on Friday 14th September.

He is too clever by half.

He is either acting for forces he doesn't understand or is being used by them.

The leak was put to him either by

1.The government determined to ensure that Melvyn King was NOT reappointed to run the Bank of England for a further 5 years.

2.Short sellers of Northern Rock, out to make large amounts of money.

Either way Peston and the BBC should be under the microscope: all Banks are bust if everybody wants their money back at the same time - its not their job to precipitate runs.

The Northern Rock model was VERY wrong, but in the old days of B of E regulation, the other banks in a smoke filled room at the Bank of England would have been forced to rescue it over a weekend. With a fait accompli presented on a Monday morning.

The reputation of London as the banking centre of the world was maintained for 200 years in such a manner.

These days, ordinary peoples savings, jobs and small banks are used as instruments to implement personal vendettas to "get" people who a PM doesn't like.

Its a fucking disgrace.

Savonarola said...

Tone is spot on.

There must be a public enquiry. FSA files on NR should be opened. What meetings took place, when , who ,minutes.

What meetings between Treasury Bank and FSA?

Cover up of incompetence. Peston is an arsehole. His trouble is that he thinks he has got more brains than he has. Hubris. Pygmy.

tapestry said...

Gordon Brown had never heard of the Northern Rock Building Society until it crashed, other than blocking the Lloyds TSB takeover.

If another bank crashes tomorrow, then Gordon will no doubt never have heard of that one either.

Meanwhile, from his article inspired by Davos in the FT it is clear that he hopes to run An International Financial Government. See http://the-tap.blogspot.com/2008/01/brown-analyses-worlds-ills.html

Mark M Heenan said...

Well my dad knew they were on a high-risk strategy, and he's just a humble building society manager...

Newmania said...

Chris Paul way out of his comfort zone and spouting half digested doctrine form some over thumbed text book . The problem with Northern Rock stems ultimately form the companies history as a quasi ‘social entrepreneur’ going back to its support for the miners and close connections with the corrupt local Labour party , as we know , in the NE (Abrahams .. Posgate ). Like many amateurs they thought they knew best and followed strategies that others who regard money as a trust not a game did not.
Amongst those who think they know better than the accumulated experience of proper business are Margaret Hodge and Ken Livingstone but this tendency to adopt ultra risky strategies is one that is common in a culture where there is little sense of how money is earnt . They are Labour through and through why else did they not go the way of Equitable life of the thousands of other companies who go out of business every year in competition.
All those facing the possibility of redundancy (and it is always there), will with justification ask the beneficiaries of our largesse in the North east what they are going to lend us !Years ago we decided that the rest of the country did not owe favoured businesses a living and it was over the miners strike . It seems that battles has to be fought again
If anyone can explain how the £38 billion golden rule sits with this £25 billion of our money Brown has lent out to his chums please do....

This has nothing to do with capitalism and everything to do with the arrogant and foolish Labour Party

it's worse than that said...

While Northern Rock is only the tip of the iceberg of the economic problems heading our way in the UK the architect of many of those problems, Gordon Brown, is in Davos laughably trying to lecture the rest of the world on financial prudence.

The reality, however, is somewhat different to that he describes. Our "unprecedented period of sustained economic growth" is actually only an unprecedented period of sustained and ever-increasing consumer borrowing. People pay a lot of tax on the goods they buy with money
they haven't yet earned. Even with record level of taxes including
those paid from such borrowed money, the government is so profligate in public spending that it can't put up the cash for hospitals and schools so buys these on credit. It can all only be sustained by ever- increasing personal debt, but that fails when people need all their disposable income to service debt, reach their credit limit or when credit becomes scarce and rates rise. It has, in effect, all the illusion of success and ultimat sustainability as a pyramid selling scheme.

It is now hitting the buffers. That's why they're holding out
against backdating the police award. That's why our wee pretendy
unelected prime minister is try to pursue three year below inflation
public pay deals. That's why MPs have just rather quietly settled for 1.9% for themselves. The spin is that the underlying economy is fine.

The actual situation is somewhat different.

Anonymous said...

Alex said

"Just about every business analyst covering the city."

Was that before or after they made all the buy recommendations which pushed the share price up to its ridiculous levels? Or was it only those in rating agencies who kept the Rock's rating overly high and allowed it to become overly reliant on wholesale funding?

If you think the City is blameless on this you are very mistaken - if the market had operated efficiently it would have given the NR the funding to allow its over expansion.

It all looks very similar to the collapse of BCCI - the problem looks to be weak regulation not whether it was performed by the FSA or BoE (and the other 11(?)regulators which were merged into the FSA).

dearieme said...

"Gillian Shephard": thank you for that reminder of the days when some cabinet ministers were intelligent citizens.

Anonymous said...

As a humble GP, currently taking a fair amount of political stick for trying to get on with my job, even I could have told anyone ages ago to avoid any business with Derek Wanless on the board.

£86,000 a year for a part-time, non-executive role chairing the company's "Risk committee" says it all really. He has been a guru to the NuLab party over the past 10 years about the NHS with no true understanding of what he's talking about. Why is anyone surprised that a labour stooge on the board at NR was incapable of noticing that the risk to the company of their strategy was that it was likely to end in tears.

I wonder if anyone knows if he's still being paid, and what bonuses he's received since being employed for his "expert knowledge" at NR.

Lets see the details of what his committee came up with over the past 1-2 years regarding risk management at the company.

The ultimate blame for NR collapse lies with the board. The fact the current position with NR is very unsatisfactory and politically led, shouldn't detract from the company's negligent management.

Troll Patrol said...

The facts of Northern Rock are easily forgotten but they acted within the guidelines which all banks follow ie. Basle Capital Adequacy. Most banks are highly leveraged, much more so than ordinary companies. Their mistake was that their funding was short-term rather than medium term (a so called MTN or medium term note program). Their asset book was and is sound - they took on the additional funding risk on this basis.

I regularly talk to Bankers and I can honestly say that not a one of them has been overly concerned about funding risk until now. Since NR they all want to know how to build it into their models.

Pesto has a book to sell - no doubt his publishers are talking up his market precience. After every crash the bears come out of the woods claiming they saw it all coming. In his case 4 years before it did! Probably predicted 6 of the last 3 market crashes as well like Soros.

There is a more serious crisis than NR and it's the bond insurers getting downgraded. I am suprised that no one is bandying about the term "Super Senior" (or its rapper like cousins "Junior Super Senior" and "Leveraged Super Senior"). These are the CDO tranches that sit above the previously "risk free" AAA tranches that pension funds thought were a source of risk-free money and are now being valued at a heavy discount.

The real villains are the ratings agencies who couldn't keep up with the demand for AAA ratings on dubious structured credit products like CPPI and CPDO. A Tier 1 investment bank I know well was allowed to use its own internal ratings model and just emailed the results to the ratings agencies who then put them out as their own. Recommend a look at Janet Tavikoli's website HERE

She really did see this shite-storm coming.

Alex said...

anonymouse: "Was that before or after they made all the buy recommendations which pushed the share price up to its ridiculous levels? Or was it only those in rating agencies who kept the Rock's rating overly high and allowed it to become overly reliant on wholesale funding?"

If you compare the performance of NR's share price against the FTSE from Feb 07 to about Sep 07 before it announced its problems, I think you will find that the NR shares fell from around 1300 to 650, whereas the FTSE stayed about the same.

That didn't go unnoticed, and the analysts knew the reason for the fall.