Martin Vander Weyer examines who should be held responsible for the Northern Rock crisis and finds that as much as any individual, the system that Gordon Brown put in place in 1997 should be held responsible.
Martin Vander Weyer
The search for suspects goes on, the theories become more bizarre by the day, and yet no one’s quite sure whether there’s really a body.
I speak of course of Northern Rock. Is it dead on its feet, creditworthiness destroyed, business model incapable of withstanding the stormy market conditions ahead, its management humiliated? Or will it now stagger on under its Treasury guarantee and award chief executive Adam Applegarth and his team a round of handsome bonuses at the end of the year to recognize their fortitude? That would indeed be the strangest of outcomes of this astonishing week, but it is beginning to look possible.
As journalists – some with a fair grasp of what’s happened, many without – swing their torches around searching for someone or something to blame, and the forces of Downing Street are deployed to ensure the beam does not come to rest on the Prime Minister and the Chancellor, Northern Rock’s managers seem for the time being to have ducked out of sight. But I’m quite sure we’ll be coming back to them. The Rock is not innocent: there were warning signals for months that its aggressive expansion strategy was unsustainable. Heads must surely roll up there in Gosforth, at executive or board level or both.
Meanwhile, the spotlight has been resting firmly on the Governor of the Bank of England, Mervyn King. His decision to pump liquidity into the market only a week after he swore he had no intention of doing so looked like both an admission of failure and a craven submission to Downing Street: so much for the much-vaunted ‘independence’ of the Bank. The Governor’s policy of not speaking to the press has not helped him. On the other hand, his measured self-defence against grandstanding Brown henchmen on the Treasury select committee certainly has. Most commentators swiftly accepted his argument that stock exchange and takeover rules made it impossible to execute a covert rescue of Northern Rock before depositors started to panic. Mr King’s head looks likely to stay on his shoulders for the time being – though there are doubts whether his tenure will be renewed when his five-year term expires next June. His more hapless-looking deputy, Sir John Gieve – responsible for financial stability, and also a non-executive director of the FSA, which had a direct view of Northern Rock’s looming problems – may be sacrificed sooner than that.
And what of the FSA, which did nothing for six weeks after Northern Rock’s impending funding crisis became obvious. ‘I think Callum will be next in the target area,’ a very senior City figure remarked to me yesterday. FSA chairman Sir Callum McCarthy and his chief executive Hector Sants are more media-friendly than their counterparts at the Bank, so have had an easier time of it so far. But the regulatory authority surely could—and should—have warned Northern Rock to ease back on the accelerator earlier in the summer. Expect McCarthy and Sants to come in for a lot more flak as the inquest continues – and expect them also to plead that rules set by the Treasury constrained them from interfering heavily while Northern Rock was still solvent.
So the one villain everyone seems likely to point to in the end (apart from those pesky US subprime lenders and borrowers who started the rot in the first place) is ‘the rules’. Would those be the rules drafted by Gordon Brown as Chancellor with the help of Alastair Darling as his first Chief Secretary in 1997? Oh yes they would. The ‘tripartite’ system of banking oversight, with no one in overall charge between the FSA and the Bank until the Treasury wades in, simply has not withstood its first extreme test.
Ask any Brown supporter to list the great man’s achievements: ‘independence of the Bank of England’ will trot out top of the list. But now we can see clearly for the first time that giving the Bank limited independence in interest-rate setting (albeit via a committee whose membership, one way or another, can be readily fixed by the Chancellor) was little more than window-dressing. It disguised the demolition of the Bank’s traditional City authority in favour of a bureaucratic tangle which would be easier for the Treasury to dominate. It was in fact a classic Brown exercise: over-complex and designed to hide its real intent, which was to hold ultimate power to himself.
It is not Brown’s fault (as David Cameron feebly tried to suggest) that a global debt binge has sent markets into crisis. It is not his faulty that Northern Rock’s managers let their lust for growth overwhelm their prudence. But it is squarely his fault that the system intended to prevent catastrophe when those factors collided has proved so utterly inadequate to its job.
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