Friday, September 21, 2007

Amateur Delivers Northern Wreck

The Labour dominated Treasury Select Committee had a simple job yesterday- to stick responsibility for the Northern Rock debacle on Mervyn King, the Governor of the Bank of England. Darling and Brown clearly wanted that, and so too did the City banks, who have been running a well orchestrated campaign against the man who refused to bail them out over the summer.

But the Committee wasn't up to the job. With one or two notable exceptions, it's full of grandstanders whose repertoire extends no further than taking free hits at City fat cats (eg the resident evil that is private equity- see this blog). Faced with the top notch Mr King, they were hopeless. He totally outclassed them.

Of course, given the whole Northern Rock debacle, that hasn't stopped King being given some pretty mixed reviews, but Tyler thought he was excellent. Key points:

Systemic failure- as we blogged here, Brown's decision to split responsibility for bank stability has been a disaster. Although King valiantly declined to blame the new system, it was perfectly obvious that the split between the FSA (responsible for supervising individual banks) and the Bank (responsible for overall stability) allowed NR to fall down the crack in between.

EU regulation (again!)- the EU's Market Abuses Directive, introduced in 2005, prevented the Bank from adopting its traditional and preferred technique for bailing out banks in temporary difficulties- covert lending that would not frighten the horses (aka retail depositors). Worryingly, the Bank didn't seem to have discovered this until last Thursday at the height of the crisis.

Deposit guarantees- King strongly backs improved deposit guarantees, including arrangements for rapid payouts in the event of a bank failure (the US FDIC pays out in 24 hours- see this blog).

Taxpayers- it was heartening to hear King affirm his concern for taxpayers. Several times he said he does not have the authority to risk taxpayers' money. Let's hope his successors always remember that.

But if King emerged credit enhanced, his Deputy Governor in charge of financial stability came out with an unambiguous junk rating.

Sir John Gieve will be familiar to regular BOM readers. Until end-2005 he was Permanent Secretary at the Home Office, where he presided over a huge catalogue of blunders and disasters. In particular, from his lofty position on the bridge, he never seemed to have a clue what was happening down in the engine room. Foreign prisoners went missing, files got lost, money went walkabout- he was always totally oblivious (see many previous blogs, eg here and here).

Eventually, even the mandarins decided he had to go. So they moved him out of the Home Office and put him somewhere they reckoned he could do no harm- the Bank in charge of financial stability. How hard could it be?

Yesterday we learned his amateur bungling has continued- despite being the Bank's representative on the FSA board, he totally failed to enquire into the nitty gritty of what they were doing about Northern Rock, he failed to even read the worrying trading statement issued by NR in July, and he went on a fortnight's holiday during the height of the crisis.

The Committee Chairman accused Gieve of being "asleep in the back shop while there was a mugging out front", adding "frankly, I do not think you are doing your job."

Which is shocking. But even more shocking is that, despite that lamentable record at the Home Office, and despite public calls for him to be removed from his Bank job more than a year ago (see this blog), this "seriously tainted public official" was left in post.

Result? The cult of the amateur has delivered yet another train wreck. And we taxpayers will foot the bill.

PS How big is the NR bill going to be? We don't yet know. But despite constant assurances that the the operation has value and that a commerical buyer will soon be found, nobody has so far bitten. Lloyds, HBOS, Santandar, ING... all have looked, but so far politely declined. Analysts at Citibank now say it may only be worth £25m, compared to the £5bn it was supposedly worth earlier this year. At that rate of collapse, it's only a matter of days before it's worth zilch. As we've said before, with the housing market teetering, and mortgage rates heading up, a maxxed out geared up mortgage book is the very last thing you want to be holding. The trouble is, we are.

PPS A few days ago we suggested putting your life savings into NR- now fully backed by HMG. But as a commenter noted, the guarantee supposedly only applied to existing NR deposits, not new ones. The good news for rate tarts is that's now been extended: "A statement from the Treasury said guarantee arrangements for existing deposits in Northern Rock would cover all accounts existing at midnight on Wednesday and reopened accounts. The "clarification" that new savers would not be covered except on their first £2,000 and 90% of the next £33,000 sent investors scurrying to the screens to sell banks and Northern Rock in particular." So if like Tyler, you used to have NR deposits- and most rate tarts have- you can now pile back in, fully covered by HMG. Hurrah! At 6.31% instant access, you can now offset some of the losses you'll be making as a taxpayer.
PPPS Excellent article on the same thing by Jeff Randall here.

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