Mervyn - still on Rocks
What happened at Northern Rock, the first run on a British bank in living memory, has caused deep shame and embarrassment in the banking industry.
It is not the sort of thing that is supposed to happen here.
Senior bankers are livid and looking for someone to blame.
First in their sights is Mervyn King, Governor of the Bank of England.
His refusal to flood the banking system with cash over the past few weeks is the cause of the humiliation of their industry, or so they claim.
Just over a fortnight ago, the biggest UK banks – HSBC, Barclays, HBOS, Lloyds TSB and Royal Bank of Scotland – met with Hector Sants, chief executive of the Financial Services Authority.
Sants asked if there was anything the FSA could do to ease the conditions in the money markets.
They replied that there was little the FSA could do, but it would be helpful if the Bank of England would widen the collateral it was prepared to accept from banks in return for providing short-term funds.
The FSA communicated this demand to the Bank through the tripartite group of Treasury, Bank and FSA whose job is to steer the UK through financial crises.
Sants and the FSA’s chairman, Sir Callum McCarthy, were broadly sympathetic to the demands of the banks.
In a way, that is predictable. They are both former investment bankers, with a visceral understanding of markets.
However King – a world-class economist with an intellectual grasp of markets rather than an emotional one – said no.
He feared that he would in effect be bailing out some banks and financial institutions which – for the future safety of the financial system – ought to feel the pain of their imprudent lending and investments.
Minimising moral hazard is, for King, paramount.
What’s more King received representations from one or two banks which had taken the brave decision not to follow the pack into some of this dodgier lending and were therefore outraged at the idea that their injudicious rivals would be bailed out.
So the Bank stuck to its own rulebook of how much it would lend into the banking market and how it would do so.
There was no recovery in banks willingness to lend to each other and - with a grim inevitability - Northern Rock started to fear it would run out of cash.
An attempt to sell itself to Lloyds TSB foundered on the Bank of England’s refusal to effectively subsidise the deal by providing guaranteed credit to finance Northern Rock’s loan book.
So Northern Rock had no option but to request an emergency loan from the Bank of England – which it was duly given last Thursday night.
What followed has been a shocking new chapter in the annals of banking history, as images of queues of anxious customers flashed across the world.
The Government too has been humiliated. All its reassurances to Northern Rock depositors were ignored, until - with all the appearance of panic - it ditched its existing limited insurance scheme for depositors by promising that no Northern Rock depositor would lose a penny.
The Chancellor, Alistair Darling, was bounced by the crisis into pledging that in a worst case of Northern Rock running out of funds, it would be nationalised.
So for many banks, King's purist refusal to provide succour to all of them eventually forced the new prime minister, Gordon Brown, to agree that £113bn of mortgages made by Northern Rock could go on the public sector balance sheet.
Again, that is just not the sort of thing that is supposed to happen in a well-functioning economy.
Is King at fault?
It is too early to say.
As of this moment, no depositor has actually lost any money.
And it is unclear precisely how much the seizing up of the money markets will slow down the wider economy.
More germanely, few would dispute that the Bank must take enormous care not to reward foolish lending or investing – because that would only encourage foolhardy institutions to behave even more stupidly next time, to the detriment of all our future wealth.
That said, top British bankers – who met the FSA again yesterday – are sickened that their industry, the very heart of the economy, should have been tarnished by those pictures of anxious depositors scrambling to withdraw funds.
Their anger at the Bank of England shows no sign of easing – and it is shared by one or two members of the Government.
For the sake of his reputation and that of the Bank, King has a lot of explaining to do.