BBC BLOGS - Peston's Picks
« Previous | Main | Next »

Saving the banks

Post categories:

Robert Peston | 08:00 UK time, Tuesday, 18 September 2007

If the run on Northern Rock isn’t stemmed by the Government’s decision to guarantee that no depositor will lose money, well then nothing will stem it.

The decision is without precedent. Historically, all British governments, regulators and the Bank of England have been persuaded that to “make whole” all savers would be to create a serious moral hazard problem.

northern_rock.jpgThey have believed it really important that Mr and Mrs Bloggins should live in fear that they could lose some money by having their savings in Northern Rock or any bank, in the rather naïve believe that the Blogginses and other depositors would put pressure on said bank to conduct its affairs in a prudent way.

The theory is, of course, utter nonsense in complex modern capital markets – where even the specialist watchdog, the Financial Services Authority, has difficulty understanding the precise risks being run by individual banks (as we have seen in recent weeks).

And in practice the puritanical theory that everyone has to lose something has led to the near-collapse of Northern Rock.

Why?

Because when Northern Rock was singled out as a vulnerable bank after it was given emergency support by the Bank of England, the one thing the Blogginses remembered was that the official deposit protection scheme only guaranteed that a portion of their savings would be safe – and they may also have recalled that it would be months before they received even this limited compensation, in the event that Northern Rock collapsed.

So even though Northern Rock was not bust, it was not rational for the Blogginses – and all those other savers – to keep their money in Northern Rock, once even the faintest question was raised about its viability.

What the Northern Rock panic demonstrated is the huge potential for there to be runs on banks, when savers have so many banks to choose from. And, if Northern Rock’s website had been a little less prone to falling over, it would also have shown how technology has increased the risk of capital flight in these circumstances.

mccarthy.jpgHowever, there is no point in providing this protection for simply Northern Rock or any other bank that faces a funding shortage in the current market turmoil (the chairman of the FSA, Sir Callum McCarthy confirmed to me last night - you can watch the interview here - that such protection was being extended to all other British banks).

The Government must swiftly legislate to formalise this new approach to the public insurance of savers’ money.

The good news is that senior officials tell me such legislation in on the cards.

However, some important details are yet to be worked out.

The Bank of England would like elements of the US model to be imported, such as a provision for all small depositors to receive their money within days of a bank going bust.

But perhaps the most important question is where the ceiling on insured deposits should be set.

In the current crisis, the Treasury is saying that no depositor will lose his or her money, no matter how big the deposit.

That is not sustainable as a general approach, because it would create a serious moral hazard issue. It would effectively be extending protection to sophisticated professional money-market players – which would have the effect of reducing the pressure on banks not to take excessive risks, because they could take comfort that the Government would pick up the tab if it all went wrong.

The pressure on banks not to take excessive risks must come from the substantial providers of capital, those who buy their shares, purchase their bonds or finance them in other ways through the wholesale money markets.

Make no mistake, Alistair Darling has bailed some or all of them out in the Northern Rock case. And that is a very unfortunate precedent.

If it became the general rule that all deposits were protected, well the financial system would soon go to hell in handcart. As one bank after another took stupid risks to inflate profits, they would all end up in public ownership.

Comments   Post your comment

  • 1.
  • At 08:30 AM on 18 Sep 2007,
  • Jim Urbonas wrote:

We don't know the details.

The Chancellor has given a press conference saying the money is safe. But we've not seen a proper statement in parliament, no documents and guidelines have been produced.

In the unlikely event of a bank collapse, how long would it take to get my money back? Would I lose out on interest earned this year (but not paid) in the event of a collapse? If Northern Rock has £24billion in savings deposits, could the government afford to save more than one bank?

Too many questions for me, if there's a whiff about other banks, I'll place my money somewhere safer.

  • 2.
  • At 08:44 AM on 18 Sep 2007,
  • Dalrymple01 wrote:

As things stand it seems that both savers and shareholders have been protected.

Clearly protecting savers is a good thing, but shareholders invested for potential reward and with that comes risk. As things stand, however, they have retained access to upside and, through NR management ignoring a primary business risk, been protected from downside.

In any business lacking politically damaging media coverage, if a business runs out of cash the business goes bust or someone steps in to provide cash in exchange for at least several pounds of flesh. Here the media coverage has been politically damaging and so the taxpayer finds itself stepping in but without any reward for doing so. That is unacceptable.

Maybe now is a good time set up a bank and take inordinate risks? If it comes off I will do very well. If it does not come off, well it would seem I will still do well and customers will be protected too.

  • 3.
  • At 08:54 AM on 18 Sep 2007,
  • F James wrote:

It seems to me that the most dangerous thing about the Northern Roack case is that when the government put up the chancellor in the first instance to calm fears, nobody believed him. It is almost to say that when the government says one thing publicly, the country deconstructs it, and then believes the opposite.

  • 4.
  • At 08:59 AM on 18 Sep 2007,
  • patrick wrote:

What a cynical view of the morals of the management of the banking industry. Hardly fair, and hardly balanced...but makes good reading and will provoke debate, which i am sure is the main point.

  • 5.
  • At 09:02 AM on 18 Sep 2007,
  • Sephus Jay wrote:

The fact that people will remove the money from a bank IS the best safeguard to a bank doing the sort of mad ponzi scheme that they are all currently engaged in.

Fractional reserve lending is much less likely to happen if punters are aware of it and bankers face real consequences for doing it. This is good, because fractional reserve lending is fraud.

Total destitution, prison sentences for executives and so forth - i.e. self interest on the part of the bankers is a much better way of ensuring decent standards than regulation. (How anyone can argue for regulation when it's just been shown to not work is beyond me).

  • 6.
  • At 09:02 AM on 18 Sep 2007,
  • John Barden wrote:

With the proliferation of internet savings accounts from the likes of ING and Landesbank in Iceland, can someone please give me a comprehensive list of all the banks that are covered by the new goverment guarentee. And does this list include popular savings accounts like those above.

  • 7.
  • At 09:07 AM on 18 Sep 2007,
  • Scamp wrote:

Robert it's not just a matter of banks taking stupid risks to inflate profits it's also a matter of whether their priorities are the right priorities for the economy.

For example.... Which is best?

A) Continuing to lend Private Equity companies billions of pounds to buy existing companies even though it has no real impact on economic growth and creates nothing new or;

B) Putting up a few hundred million pounds between them to create new companies which will help improve real economic growth and our competitiveness.

The answer of course is B but you can guarantee that once this present problem has worked through then as sure as eggs is eggs the banks will carry on doing A.

In short, they don't really care.

They'll soon be back to their bad old ways offering excessive salary multiples keen as mustard to continue inflating house prices so they can lend more and more.

Maybe they should all be taken into public ownership now because frankly I just don't trust their management to do the right thing for the country.

Despite, I became victim of GMAC-RFC mortgage hike due to bust in the USA market and to avoid NR like public humiliation- I still believe a short term remedy from government would make things worse in foreseeable future -- what we want - banks to sit down and shed some of their asset to come out from the crisis NOT taxpayers money for survival.

  • 9.
  • At 09:15 AM on 18 Sep 2007,
  • Albert Hall wrote:

MORAL HAZARD.
It's ok for sharp suited vultures to mortgage the next two generations to pay for the lifestyle of the over 50s, and that's official. Government guarantee.

It's an election winner, and nobody will mind. Or more accurately if they do, there is not much they can do about it.

Why don't they pave the streets with cash?

  • 10.
  • At 09:19 AM on 18 Sep 2007,
  • Richard Battams wrote:

Another bit of recent history that this brought to mind for me was the collapse of Farepak. Admittedly a different situation, although in many ways Farepak acted like a bank or building society. In that case people learned the lesson that the Government won't always jump in to help (poor) people.

Is the Northern Rock situation a Farepak for the middle class?

  • 11.
  • At 09:22 AM on 18 Sep 2007,
  • M. Fleming wrote:

Banks borrow short and lend long. They represent to depositors that they can always have their deposits back on demand (or whatever period of notice). This is untrue. It is a state licensed misrepesentation.

The state purports to regulate banks and other deposit taking institutions. Since it does, it should stand by its regulators and guarantee deposits in all regulated institutions. UK regulation is very much a joke - regulators relying largely on auditors paid by the regulated. If the state had to pay out whenever regulation failed, the Treasury might force the regulators to be more pro-active.

The Bank of England (and its present Governor) has a pretty sorry track record. Remember Johnson Mathey - BCCI etc.

The so-called "moral hazard" is also a joke. If the regulator started proactively debarring directors and officers of depoist takers from working in the regulated sector whenever there had been imprudences, there might not be so many questionable new financial instruments which turn out not to be worth the the raw cost of the paper - let alone the "value-added" at great expense by banking lawyers.

If order is to be restored, banking for the mass consumer should be separated from investment banking. The former with full protection and the latter with none.

  • 12.
  • At 09:24 AM on 18 Sep 2007,
  • ryglobal wrote:

Brace for the BIG recession....

The Chancellor has taken an unpredented step and will be remembered in the history books as having taken 'that' decision which led us all to the brink

This step (to bail out all irrational banking models) will now cause the sterling to fall from grace.Why?

- because these banks will have to be bailed out by taxpayers money (Rob Paul to pay Peter) meaning higher taxes, lesser public spending and bigger budget deficits

What would this lead to?
Look no further than across the Atlantic for answers (Job losses, inflation, housing woes, unemployment...)

We've been hit by the tsunami and the only way left to gracefully save our economy is to let financial markets sort the mess thay created for themselves. Its not the Govt's job to bail out Northern Rock just as it did not bail out the Rovers'

Any attempt at tinkering with the market forces will only help to shift the blame, not the end result.

  • 13.
  • At 09:29 AM on 18 Sep 2007,
  • Philip Smith wrote:

Sounds to me Jim like you'll only be completely reassured once you've withdrawn all your savings and stuffed them under your mattress - after all that's safer than any bank isn't it ?

  • 14.
  • At 09:31 AM on 18 Sep 2007,
  • Jacques Cartier wrote:

A far simpler method would be to make the shareholders liable for the losses, rather like a Lloyds Name. They have broken thier promise (of their business ) to pay their customers back, so they must pay themselves, by selling up what they have and giving it to those owed money. There, that’s sorted out the banking industry ... next please!

  • 15.
  • At 09:34 AM on 18 Sep 2007,
  • john wrote:

Is it not that Northern Rock's problems do in fact benefit other banks as the cash withdrawn has to go somewhere? An interesting parallel with votes. One wonders whether the government would have taken such action had it been Southern Rock?

  • 16.
  • At 09:42 AM on 18 Sep 2007,
  • Albert wrote:

Robert Peston, you could not be more wrong in what you have just said. All Banks belong to the Public whether they are Nationalised or Privately owned.
The reason being that the liquid funds in the Banks are all the property of the public (investors) at large and not the share holders'.
To make it simpler, if Tom Dick and Harry started withdrawing their savings from ALL the Banks then ALL the Banks will go Bankrupt.
This is what ALL Banks around the world forgot, and since the mid eithies, financial wizards took risks to maximise profits and to out do their rivals, (except that they were not as prudent as they should have been). The STUPID public fell for a free for all Banking Culture.
The INVESTOR has the keys to a Bank's success, as the public can make it or break it!
This is what we were taught when we joined the Banking business in the sixties and seventies, until legislation was changed in mid eighties by Lawson, whereby the new legislation gave more freedoms to financial institutions to deal, manipulate and create funds by dealing with other Banks which started the creation of Funds that were sold on the stock market, and therefore make even more money along the way! Robert, these risks are all over the world of Banking in the Capitalist west. If one does not like the modern Capitalist system, then one should say so in the first place.
So Robert, who own the Banks? Yes that's right, Tom, Dick and Harry in the street own the Banks.

  • 17.
  • At 09:44 AM on 18 Sep 2007,
  • Dave C wrote:

The Chancellor's announcement came a couple of days too late for me. I had all my pension lump sum tied up in a NR Online Silver Saver account and I simply could not afford to run the risk, no matter how slight, of losing all that money I'd worked 42 years for. So when I finally got lucky and gained access to the website, I withdrew all but £30k of it by CHAPS.
I would have gladly have left it all in there if the Chancellors announcement had come earlier. I would also gladly put it back in the NR right now if the Chancellor's guarantee extended to returned deposits removed in the last few days, but alas his statement only seems to apply to 'existing' deposits. This is surely short-sighted as a return of funds under guarantee would assist NR to get back on their feet quicker.

  • 18.
  • At 09:50 AM on 18 Sep 2007,
  • David C wrote:

The thing that was interesting about the Darling statement was the exact wording.

If I heard him correctly, he said that all "existing" deposits would be guaranteed. I interpret that to mean that if you put more money into Northern Rock today, it won't be specially protected.

I think he also said that it would be protected "during the current instability", which further reduces the open-endedness of the commitment.

  • 19.
  • At 09:53 AM on 18 Sep 2007,
  • Peter Bench wrote:

A banker writes:
1. The simplest thing here is to set a limit of, say, £100k and then say loud and clear that anything over this is not protected.
2. the BoE could have taken action to put cash into the money markets - as did the Fed and ECB - which would have enabled NR to continue funding
3. alternatively the NR could have been pressured into offering some form of convertible bond issue (as Countrywide did in the US) to bring in immediate cash - and that way existing investors (nor savers) take the hit
4. It would also be helpful if the BBC economics editor would not use terms such as 'excessive' in relation to 'risk', without defining either. There is of course no such thing, only unrewarded risk
5. ps lower government borrowing and taxes would also help but no-one seems to to be brave enough to make that argument.

  • 20.
  • At 09:55 AM on 18 Sep 2007,
  • Chris wrote:

All Darling has done here is socialised all of the banks' risks while allowing them to continue to privatise the profits.

In other words it's business as usual as the fat cats continue to enjoy the profits while allowing the taxpayer to pick up the bill.

  • 21.
  • At 10:00 AM on 18 Sep 2007,
  • Paul Amery wrote:

Darling and Brown have effectively just nationalised the banking sector. The open-ended government guarantee will encourage even riskier behaviour in the future and gives banks no incentive whatsoever to exercise prudence in their lending. This is a desperate attempt to prevent the credit bubble and housing market from deflating. Whether it will work is another matter - sterling may well collapse, and interest rates may rise as the government struggles to finance its borrowing requirements.

All in all, this is a decision of quite astonishing incompetence.

I have a feeling that the shareholders of said banks would have something to say about 'huge' risks being taken by banks since they would lose the lot if they did.

The 'moral hazard' suggestion is completely overplayed.

  • 23.
  • At 10:07 AM on 18 Sep 2007,
  • Daniel J Farnan wrote:

Lets look at this as installing fear into other banks as 'onlookers'. The Government smiles at the oppurtunity to fish Northern Rock out of the swamp of uneasy minds, as it can revive the message it holds all the cards.

Just look at how the public had to wait untill the last minute to hear this news.

Dan J Farnan.

  • 24.
  • At 10:14 AM on 18 Sep 2007,
  • Ian wrote:

In the short term it appears to have worked. However many of the buyers today may well be people who feel the falls over Friday and Monday took the share price too low.

If this offer steadies the ship then all well and good. One thing seems to have been overlooked in all of this when, and I'm sure it will be when rather than if, will shareholders look to sue the Directors of the Bank?

I can imagine Mr Wanless who headed up the Northern Rock risk committee and coincidentally is one of our new Prime Minister's favourite financial gurus must be looking a bit of a fool at the moment.

I can see the bank being sold off after a discrete time has passed. The mortgages arm must be worth a reasonable amount, if someone can get tthe capital in place.

I can see the shareholders and staff being the big losers in all of this.

  • 25.
  • At 10:22 AM on 18 Sep 2007,
  • Andrew C wrote:

This is a bizarre policy which smacks of policy-making on the run. No substantive details have been published by HM Treasury - so we are relying on a statement by the Chancellor - no wonder rational depositors are still queuing at some branches of Northern Rock.

The implications of this "policy on the run" is that whenever there is a whiff of possible difficulties arising at another bank / building society, we should queue first - in the absence of another explicit statement of support from the Chancellor (which people may or may not really believe).

How is this going to affect the Financial Services Compensation Scheme and the very rational basis of providing guarantees up to a reasonably generous limit? (Remember that the limit applies per institution, not per depositor across different institutions).

The lesson for me prior to this episode was that that I should diversify my savings & deposits across the banking system, as well as to maintain access to a number of banking establishments in case there were accessibility issues.

The lesson from this recent episode is that internet only accounts will most probably let you down when the need arises.

  • 26.
  • At 10:22 AM on 18 Sep 2007,
  • Martin P wrote:

You pointed out earlier that Northern Rock has enough assets to cover all deposits. So isn't the Bank of England underwriting a situation that carries no risk anyway?

  • 27.
  • At 10:23 AM on 18 Sep 2007,
  • Mike wrote:

Strikes me that the only safe place is UK index linked gilts after the Chancellor's actions yesterday. Just look at the prices leap this morning. If ever you needed a signal for a safe haven for funds, in an otherwise strong and large global economy, then the UK Government has guided us to pile in, unless the savvy ones amongst you have already done so, well before the summer madness.

  • 28.
  • At 10:24 AM on 18 Sep 2007,
  • Andrew Dundas wrote:

When all other banks had refused normal loans to Northern Rock, it became rational in that bizarre situation for depositors to refuse to lend too. That's why they have queued to withdraw: the other banks destroyed Northern Rock's reputation.

Why should they do that? One explanation is that most of those banks also have retail mortgages businesses that have lost market share to Northern Rock. What better way to get back at this upstart competitor that to refuse to lend NR normal inter-bank loans?

Of course NR shouldn't have relied on its competitors for vital loans. It is more expensive and slower to gather deposits through branches as other mortgage banks do. It's competitors may have been annoyed about that innovation.

Nor is there any point in queuing for hours to retrieve money that those banks' own Banker has guaranteed. After all, the notes we have in our wallets are only paper guarantees from the BoE.

When all this has calmed down, we need to find out why the clearing banks decided not to make normal wholesale loans to NR. Was it mass panic? Or was it deliberate?

  • 29.
  • At 10:25 AM on 18 Sep 2007,
  • David wrote:

I think this whole thing has been hyped up far too much, but let’s face it, it was a great story!

As I see it, yes some banks have been caught out by irresponsible lending in the US and the subsequent sale of collateralised debt obligations (CDO’s). It’s the far reaching and complex nature of these instruments which are causing the problems. Banks and financial institutions are waiting to see their full exposure to them as well as the exposure of others e.g. Northern Rock, and are holding on to their cash for that reason.

As NR rely heavily on the money markets they’ve had to turn to the Bank of England who of course have to protect savers money. This is fine as long as the CDO losses turn out to be not as severe as first thought. At present this seems to be very difficult to ascertain and has created so much unpredictability in the markets. However, considering they are secured (I assume) against US Real Estate I can’t imagine the losses will be huge unless of course the US housing market plunges! Could these CDO’s not be chopped up further into rental opportunities etc............??? Are they completely worthless? Those smart enough to create CDO’s should be smart enough to value them and rescue them to some extent and in doing so they will free up the money markets again.

The British economy, we are told by the government, is as solid as a rock (excuse the pun). The debt mountain is a major concern, but most of it is secured against property which has proven extremely resilient in recent years.

I may be naive, but I think the Bank of England made the right decision. The economy should be strong enough to ride out this storm and wait for money markets to work properly again. The sooner the losses are ascertained, however, the better.

  • 30.
  • At 10:28 AM on 18 Sep 2007,
  • Simon wrote:

Darling's statement sets a dangerous precedent. Where does this leave other bank deposits? What are the hard and fast facts?

Where does this leave National Savings and Investments which traditionally have been the only fully Government backed place for large deposits over £35,000, but at the cost of lower interest rates than the high street banks. Will NS&I raise it rates to keep deposits - why should people worry now?

Savers can just chase the highest rates in the market knowing now that the government will be behind them. Banks will feel free to take greater risks - not tomorrow maybe or next week, but when this has died down - they will be pushing the boundaries again to increase profit margins.

This is dangerous territory and we have not seen the end of the problem yet by any means. Darling may have stopped a short term panic but I believe that he is sowing a long term and larger problem.

  • 31.
  • At 10:29 AM on 18 Sep 2007,
  • Matthew wrote:

The Government are going to guaruntee all savings in all British banks? For such a big policy change, there's been precious little announcement...

  • 32.
  • At 10:33 AM on 18 Sep 2007,
  • alex wrote:

So the government is now coming to the rescue of a bank that has manifestly failed to act in it shareholder's interests. This must make the old style labour elements wonder whether there is still an ounce of "labour" left in the Labour party that still carries the name. Perhaps we should rename it the "capital" party.

If I am a farmer who has a business ruined by the government leaking foot and mouth, there is nothing by way of compensation. But if I am a chief executive of a bank on a pay package of £ 1.35 million a year and have gambled £ 24 billion of deposits down the drain via a flawed business model, that's alright - the Labour government will help you out.

Proof that all the corporate governance, regulation and auditing in the world seems like a chocolate tea-pot when up against personal gain.

  • 33.
  • At 10:36 AM on 18 Sep 2007,
  • Ed wrote:

Alistair Darling 'speaks with forked tongue' - I don't believe a word of what he said, and I'm sure I'm not the only one. The queue outside Northern Rock in Mayfair this morning said it all! NR is fatally wounded now.

The Chancellors statement was vaguely worded, politician speak. Nothing definite, a desperate sounding effort to try and restore confidence. September 2007 will be remembered as the month when the public finally realised that they cannot trust the Government and the financial regulators. They've grown tired of the lies and false promises - they've seen it all before with Equitable Life etc and decided to take matters into their own hands. I think this is a real turning point.

Where's Gordon by the way? He's always out and about when something good happens, but seems to disappear at the slightiest whiff of trouble. It's particularly galling as most, if not all of these financial problems had their beginnings on his watch as financial controller.

  • 34.
  • At 10:37 AM on 18 Sep 2007,
  • John Smith wrote:

I own shares in Northern Rock and I have lost a small fortune. Nevertheless, I think the government has made a terrible blunder with this move. The correct thing would have been for pressure to have been place on a consortium of UK banks to purchase Northern Rock. If it is not too late for the government to back out now, it ought. Our banking system needs to be run by people with a memory of what corporate catastrophe looks like, 'pour encourager les autres'. A real bad move.

  • 35.
  • At 10:39 AM on 18 Sep 2007,
  • KP wrote:

Comment 26 is the most sensible thing said on here ! There never was any risk to savers deposit accounts. The chancellor's guarantee is a risk free measure to restore confidence. Remember, the same protection would only be offered to businesses that have sufficient assets to cover their liabilities, there is no question of the tax-payer having to bail out businesss that have been mis-managed to insolvency.

I understand why the BoE has done this; the domino effect could have collapsed the whole system. And I agree with Robert Peston about the moral hasard argument.
I just wish both of these scenarios had been properly considered before so that:
1/The BoE had implemented proper regulation of the banking system BEFORE this happened - it wasn't as if this is out of the blue, its been discussed for months!
2/ The BoE had a proper support and rescue package in place before the sh*t hit the fan!
Why do the words, 'duty' and 'dereliction' spring to mind?

  • 37.
  • At 10:47 AM on 18 Sep 2007,
  • Scamp wrote:

Just to add to current woes the oil price has hit a record high of over $81 on supply concerns and is now forecast to hit at least $85 by the end of the winter with at least two analysts suggesting between $90 and $105.

  • 38.
  • At 10:49 AM on 18 Sep 2007,
  • Keith Phair wrote:

Hello Robert,

To what extent do you think you bear a responsibility for encouraging the run on Northern Rock in the first place?

I watched your broadcast on Thursday night's news and carefully observed what you said and, more particularly, the way that you said it. Obviously you said "all the right things" - but the way in which you said them left no doubt whatsoever for the viewer that you didn't wholly believe the assurances of the Government and you appeared to be strongly hinting that if they really wanted to secure their money then they'd better get down there and pull it out.

Don't you think that was an extremely irresponsible way to present the story in the circumstances?

regards

  • 39.
  • At 10:49 AM on 18 Sep 2007,
  • Andrew Wilson wrote:

Is there really much point in having private insurance on savings?

Surely the insurance company will be open to all the same pressures of the economy that cause the bank to close.

Also, everyone will be claiming on the insurance at the same time. This, in turn, could cause the insurance company to close.

  • 40.
  • At 10:50 AM on 18 Sep 2007,
  • symo wrote:

A good point has been made. If the Northern Rock "supposedly" has money to cover all the deposits why do they need emergency loans?
Darling's appearance saying don't panic is too little too late. It has passed the point of those with informed opinion panicing and now reached the general population whilst the crisis is in full swing. The BofE can cut interest rates and increase liquidity in the system, but the reality is that it will encourage Mr Buy-to-Let to think he can hopefully go out and buy more houses.
Merv King needs to feed the markets and the economy strong medicine in the form of interest rate rises instead of pandering to the City. If the economy is in such rude health then the interest rate can rise to 7% without any hassle. Or are we not being given all the facts?

  • 41.
  • At 10:50 AM on 18 Sep 2007,
  • David wrote:

The bit that really gets me is that the chancellor´s statement is silent on whether it covers the £2bn of deposits in Northern Rock Guernsey. These deposits were never covered by the FSCS and why should the UK taxpayer even consider bailing out people using the tax haven?

  • 42.
  • At 10:55 AM on 18 Sep 2007,
  • David Hughes wrote:

The issue isn't so much with bank and building society accounts, but with nominee trading accounts. Stock market trading relies on these and the assets held by individuals in such trading accounts are often far greater than the guaranteed amount. Private investors would be at significant risk should a company providing such accounts fail.

  • 43.
  • At 11:02 AM on 18 Sep 2007,
  • Galloping inflation wrote:


Some questions.

If we had passed Mr Browns 5 economic tests and had joined the Euro what would the position be for bailing out UK banks?

Do I have more guarantees banking in Euroland?

If a Spanish or French bank fails who bails them out? The European bank or the individual country (state)?

I understand that this question is at present being discussed at a rather quiet meeting of finance ministers in Portugal at this very moment, the outcome could be interesting but might not be public. Perhaps the BBC will be kind enough to give us some information regarding this meeting.

So far the rescue operation in Euroland has gone nice and smoothly, except for IKB and Saxon LB in Germany.

No nasty queues outside banks as in the UK. Billions of Euros (also US dollars and Japanese yen) have been created out of thin air and pumped generously into the system so that the banks have been kept afloat. Today billions of pounds have joined the party.
This has bought a little time and a lot more inflation and the pound has lost some value.
How many rotten apples are there in how many baskets?

  • 44.
  • At 11:04 AM on 18 Sep 2007,
  • finnbarr wrote:

Dear Robert

Can you explain please - am I as a humble taxpayer guaranteeing the unfeasably attractive rates of interest that Northerm Rock pays its depositors, Adam Applegarth's inflated salary and share option package and Michael Owen's Newcastle United shirt? Have the government imposed any conditions on Northern Rock- like get rid of the Board without compensation, for instance?

Thanks

  • 45.
  • At 11:26 AM on 18 Sep 2007,
  • KP wrote:

No No No, this is not like Farepak. Farepak was in debt, it spent the money its savers deposited. Northern Rock is a viable business. It has more assets than liabilities. It CAN pay its way. The government should not prop up badly run insolvent businesses. The government's guarantee puts zero taxpayer pounds at risk, it simply put our money where its mouth is. It reminds me of Les Dennis's catchphrase from family fortunes; "if its up there I'll give you the money myself", a seemingly generous but ultimately risk free promise.

  • 46.
  • At 11:36 AM on 18 Sep 2007,
  • Gary E wrote:

So there we have it. If the banks want to loan millions to Lord Lucan so he can bet on Shergar winning the next National, they need not worry about any losses - the tax payer picks up the tab. Like other posts on this forum, I believe this intervention will give banks the green light to continue their previous reckless lending - but as our economy is built on spending/debt, more and easier debt is most likely what the Government wants.

  • 47.
  • At 11:38 AM on 18 Sep 2007,
  • FR wrote:

This collapse of a single UK bank is just the tip of the iceberg. For years, the world economy has been teetering on meltdown - the US has been maintaining its luxurious lifestyle at the expense of the rest of the world, by selling its debts on to us. Finally things are coming to a head, and it's all starting to unravel. Greenspan has distanced himself from Bush in the last week (whom he advised all through his presidency), trying to cover his own ass. Gordon Brown has been a great advocate of Greenspans 'teachings' and has consequently dragged our country in the quagmire.

Figures of $620 trillion dollars of world debt are surfacing on the internet (something you will never see in the mainstream media). ALL of our UK banks are exposed to this danger. What happens if (let's say) Barclays goes under? What if Barclays handle the payrolls of over 3 million people? Suddenly society is faced with a lot of penniless people. What if Tesco's or Sainsbury's shuts because there is no money to pay it's staff? What if the haulage company that supplies supermarkets stops deliveries? No food in the shops. No money to buy food.

Our current banking practises have bought us to the edge of oblivion - perhaps it IS time for a collapse and then a long, hard re-evaluation focusing on how to run things in the future. Banking should be State controlled - it's THE pivotal process towards greater freedom in a supposed democratic country.

  • 48.
  • At 11:42 AM on 18 Sep 2007,
  • Craig wrote:

When the BBC late news was rading out the list of those responsible for the current situation regarding Northern Rock; I was very disappointed that they did not own up to being largely responsible for the hysteria (along with Sky News). This should never have been the main news item... and certainly not for 5 days..

  • 49.
  • At 11:54 AM on 18 Sep 2007,
  • dr.james smith wrote:

I think the problem is much worse than we are being led to believe and may be endemic.
When Callum McCarthy of the FSA states that the guarantee extends to all British Banks this leads me to believe they all have a similar problem and over the next few months as details come out they will all need the guarantee.
The injections of liqudity have started today and I suspect will continue.
It is a huge mess.

  • 50.
  • At 11:55 AM on 18 Sep 2007,
  • Jonathan wrote:

I'm sorry Robert, but your pious preaching about Northern Rock is hard to stomach. There was no crisis until the BBC unnecessarily gave the impression that Northern Rock's recourse to the Bank of England for funds was in some way indicative of it being in terminal financial peril. It was not and never had been.

Strategically, it was foolish for Northern Rock to rely so heavily on the inter-bank lending market to be able to settle its own lending commitments, and the directors should have been fired for this and the effect on the share price. So it was a "crisis" for shareholders and the bank's management- but for them and them only.

Depositors' money was never at risk, which, incidentally, is why Darling's committment to back those deposits won't ever cost taxpayers any money. The outrageous way in which the media, and the BBC in particular, have blown this out of all proportion (in some desperate attempt to make the subprime issue "relevant" to UK consumers and in turn whip up hatred of investment banks) seems to be the prime cause of the current situation. There is and was no genuine crisis.

  • 51.
  • At 11:56 AM on 18 Sep 2007,
  • ian wrote:

kp post 35.

True, there is no risk at the moment. As long as the housing market holds up, agaist which all the NR loans are secured the chance of BoE bail out is slim. But how long will it extend and for how many other banks. Say in 6-months this offer is withdrawn and we see no formal policy change, and a month later the housing market tanks....then what of NR and other lenders with large customer base of 100% loans secured only against inflated house prices.

I own my own house have no intention of moving, but the property prices are way too high and when it all comes to a crunch, then the BoE may not be around to help recover/guarantee amounts above 32K....

  • 52.
  • At 11:57 AM on 18 Sep 2007,
  • Bedd Gelert wrote:

Another excellent post - isn't it about time you started working for what I think of as the 'Sleeping Dog, the Fundamentally Supine Authority', and gave them a bit of a rocket ??

My best analogy for the 'moral hazard' era we are entering is when car safety became a big issue in the seventies.

Volvos started to bulk up and safety belts were fitted to all cars. Rather than reducing deaths, people just drove a lot faster, which rather defeated the best endeavours of the manufacturer's.

It took compulsory speed limits after an oil price shock, and safety belt legislation to make a real difference.

What Darling has done is the equivalent of giving the banks carte blanche to put their lead feet on the go pedal, and throttle up for more dicey lending and 'securitisation' of their assets.

Maybe what the economy needs is an oil price shock, and 'safety belt' legislation for the banks in the form of 'Basle 2' and EU 'Sarbanes Oxley' to rein in the worst excesses, plus a 'speed camera' of real, government run external legislation, rather than the feeble 'self-regulation' of FSA.

  • 53.
  • At 11:58 AM on 18 Sep 2007,
  • david mishon wrote:

What was Sir Derek Wanless (a non-exec. director doing all this time and how did he get his reputation???
I thought (stupid me) that that was what non exec's did Use their 'expertise' My perception of the man is that he has made a mess of everything he has touched - so I ask again where did he get his reputation ??
Jobs for the Boys ?
(see his report on the NHS)

  • 54.
  • At 12:03 PM on 18 Sep 2007,
  • ian wrote:

kp post 35.

True, there is no risk at the moment. As long as the housing market holds up, agaist which all the NR loans are secured the chance of BoE bail out is slim. But how long will it extend and for how many other banks. Say in 6-months this offer is withdrawn and we see no formal policy change, and a month later the housing market tanks....then what of NR and other lenders with large customer base of 100% loans secured only against inflated house prices.

I own my own house have no intention of moving, but the property prices are way too high and when it all comes to a crunch, then the BoE may not be around to help recover/guarantee amounts above 32K....

  • 55.
  • At 12:16 PM on 18 Sep 2007,
  • Robin wrote:

what is incresingly obvious is that the legacy of Gordon Brown as Prime Minister will be identical to his legacy as Chancellor...if there is a problem; pour money into it.

why did he entertain the Iron Lady whose catchphrase 'you can't buck the market' if only to ignore her?

supreme hubris which will end badly for us all.

  • 56.
  • At 12:19 PM on 18 Sep 2007,
  • Thomas D wrote:


NR share prices this year fell from a steady 1200 in March to about 700 *before* the crash. Shareholders may well have lost small fortunes - but if you noticed the clear warning signs earlier this year, you would have got out sharpish.

http://news.bbc.co.uk/2/hi/business/6915007.stm

Check the graph of NR shares over the last year - anyone who was awake sold before the end of July.

As for the deposit question, unlimited protection is clearly unworkable but 32,000 is much too little. The average of 32,000 and infinity is still infinity, but there must be a reasonable compromise...

  • 57.
  • At 12:20 PM on 18 Sep 2007,
  • LostOutAgain wrote:

I'm delighted to see that the government will now guarantee retail savings in failing financial institutions. I'm sure they'll announce schemes for BCCI and Equitable Life investors very soon. Or are asians and pensioners (the main losers from these failures)less important somehow?

I don't buy the argument that "we can't prop up failing institutions". After all, they all held the appropriate licence to operate from their regulators; how is an investor supposed to know more than them?

If the Board of NR have to walk the plank soon, then I hope a panoply of officials will be following them.

BcR

  • 58.
  • At 12:27 PM on 18 Sep 2007,
  • colin downes wrote:

Can someone explain to me teh difference in treatment of Northern Rock savers and Equitable Life savers.
The governmnet had a duty of care to Equitable Life members in its role as regulators. They raised concerns over the way in which the company was being run but took no effective action. The company then savaged policy holdings and members lost tens of thousands of pounds.We are still fighting for compensation.
The government acknowledge that Northern Rock is not mismanged but suffering from market forces yet it guarantees savers full cover. I hope teh Ombudsman Ms Abrahams is taking note and when the report is finally published we will get full compensation for our lost savings.

  • 59.
  • At 12:37 PM on 18 Sep 2007,
  • rogero wrote:

I believe that northern rock has raised capital by selling permanent interest bearing shares (pibs). These provide higher interest than savings accounts in return for increased risks associated with just the sort of troubles that we are seeing. Am I wrong in thinking that it is these pibs holders that the government has bailed out and, if so, why is this a special case compare to the risks other investors take ? Does this effectively mean that all such pibs are now guarenteed by the government, and if so, why should these investors receive superior returns ?

  • 60.
  • At 12:40 PM on 18 Sep 2007,
  • Dave wrote:

Probably best not to be too naive here. If taxpayers money is being put up to guarantee the deposits held by NR customers, I'd assume that this isn't just being done for show. It seems like too great a political risk to take just to persuade the general public that NR are solvent and have no money worries which could spread through the whole system...

  • 61.
  • At 12:42 PM on 18 Sep 2007,
  • JPF wrote:

I agree with KP that it is risk free in this case, but this certainly is a bad beginning.

This credit crunch has been taken care of by the central banks world-wide by pumping money into the market, but is this absolutely necessary? A mature market can absorb such risks, and taking care of the market in this way would not help it mature.

And now we are not only getting low intrest inter-bank loans, we get unlimited promises. Nice job.

  • 62.
  • At 12:43 PM on 18 Sep 2007,
  • Philip Smith wrote:

I agree with you Craig, the media have been a driving force behind the Northern Rock problems. I remember watching the initial BBC report and thinking they were deliberately sensationalising it (while just leaving enough wriggle room so they could claim to have done nothing of the sort).

  • 63.
  • At 12:44 PM on 18 Sep 2007,
  • Matt Swift wrote:

A bizarre response from the Govt. indicating that the only thing they care about is popularity.

You can save in a pension and it can all be wipped away by a private company goig bankrupt, but you can save in a bank account and it's guarenteed. nonsensical.

As to blaming it all on international markets this is absurd, is the same thing happening in Germany or France ?, no.
This is down to the simple flawed strategy of NR, if it were not the liquidity issue it would be something else in a few years time.

Madness, btw why should I pay taxes to prop up a company that had such poor management ?.

  • 64.
  • At 12:45 PM on 18 Sep 2007,
  • mad max wrote:

Historical!

Debt is the new currency and governments have now guaranteed or protected the risk takers.

It has been a concern for some while that banks might flex their muscles and exert a power over the political process by virtue of 1.4 trillion of personal debt.

Only an amoral government could or would allow this to happen. However, what has been promised politically is worthless until the words are backed up by common law.

New Labour voters not the government are to blame for their personal indebtedness.

Cause and effect!

  • 65.
  • At 12:47 PM on 18 Sep 2007,
  • andy williams wrote:

"At 11:26 AM on 18 Sep 2007, KP wrote: Northern Rock is a viable business. It has more assets than liabilities."

That is not strictly true though is it. If house prices crash signifiantly and in a short period, the opposit becomes true.

ie: Customer borrows 125% on a £100k house (thus giving it a notional 'value' of £125k). Market crashes and house deflates to a 'value' of £70k even though it is underwriting a debt of £125k plus interest. At the same time, interest rates are rising so the repayment on the £125k is also rising. General inflation is rising faster than wages so liquid cash is also in short supply.

Customer defaults, mortgage company forecloses and makes virtually a 50% loss. Mortgage company investors and savers pick up the tab. Circle continues and accelerates.

Personally, as someone on a low income unable to afford to buy a house, why should I have to pick up the tab through increased taxes and why indeed should I care.

  • 66.
  • At 12:47 PM on 18 Sep 2007,
  • Michael wrote:

Jaqques Cartier, post 14, sorry but the whole point of the limited liability system is the maximum a shareholder can lose is the money they paid for the shares. This is why limited companies must put "plc" in their names - it is a warning that in the event of bankruptcy the owners (the shareholders) have limited their liability. ["but the liquidators say 'never mind you needn't pay', and you start another company tomorrow" - from Utopia Limited by W.S. Gilbert]

Martin P. in post 26 has a valid point - except the problem is that the depositors do not believe Northern Rock has those assets. While the FSA has stated it does have assets, are they liquid enough to satisfy all the depositors at once? I suspect not. Hence the need of the BoE to underwrite an unlimited bridging loan. If NR should be found not to have those assets then its directors need to be brought up on fraud charges and the FSA inspectors replaced.

  • 67.
  • At 12:53 PM on 18 Sep 2007,
  • andy williams wrote:

"At 11:26 AM on 18 Sep 2007, KP wrote: Northern Rock is a viable business. It has more assets than liabilities."

That is not strictly true though is it. If house prices crash signifiantly and in a short period, the opposit becomes true.

ie: Customer borrows 125% on a £100k house (thus giving it a notional 'value' of £125k). Market crashes and house deflates to a 'value' of £70k even though it is underwriting a debt of £125k plus interest. At the same time, interest rates are rising so the repayment on the £125k is also rising. General inflation is rising faster than wages so liquid cash is also in short supply.

Customer defaults, mortgage company forecloses and makes virtually a 50% loss. Mortgage company investors and savers pick up the tab. Circle continues and accelerates.

Personally, as someone on a low income unable to afford to buy a house, why should I have to pick up the tab through increased taxes and why indeed should I care.

  • 68.
  • At 01:15 PM on 18 Sep 2007,
  • Mark S wrote:

The Chancellor has said the government will guarantee all deposits in Northern Rock, but surely they won't guarantee that shareholders don't lose their money.

This is how it should be. Savers should be able to invest their money in bank account without fear that they will lose it. Shareholders, on the other hand, accept some risk when they invest in a company. It should be the Bank's shareholders who demand that the Bank doesn't engage in risky practices that could cause it to go bust.

  • 69.
  • At 01:15 PM on 18 Sep 2007,
  • Frank Columbo wrote:

If I rob a bank and get caught its 20 years but if a bank robs me I bail them out with taxes. Something wrong there?

  • 70.
  • At 01:19 PM on 18 Sep 2007,
  • Stephen T wrote:

So operation Infinite Bailout has now swung into action, with UK Plc offering to guarantee every last penny in Northern Crock and thus, every other British Bank (no matter how enormous the hole in their balance sheets comes to be, with an unwinding of credit derivatives and the bursting of the housing bubble).

Now that the depositors are 'safe', with the promise of money yet to be printed, we can expect to see a serious test of sterling on the forex markets.

Obviously, Broon has lost his patience with all this threatening his plan to cut and run for an early election.

This whole charade is typical of Fantasy Island: the place where everyone is getting poorer when they think they're getting richer.

The worrying issue is that people no longer trust government. They don't trust them over reports that take us to war, they don't trust the given cause of Foot and Mouth disease and they don't trust words of comfort to investors.

Even inflation has suddenly dropped to below 2.00%.

Alan Greenspan who spent his last years in office writing a book now says that he didn't know about the US housing market - Gosh!

  • 72.
  • At 01:27 PM on 18 Sep 2007,
  • Frank Columbo wrote:

If I rob a bank I will get 20 years in jail but if a Bank loses my deposit they get bailed out with my taxes, whats wrong with that?

  • 73.
  • At 01:31 PM on 18 Sep 2007,
  • Mountford wrote:

Isn't this whole affair simply mass hysteria? In my opinion, the people who were panicking to withdraw their money are simply uninformed.

NR has assets to cover all its deposits. If my memory serves me well, it has £150 billion worth. The panic resulted in something like a £3 billion withdrawal by investors. That leaves NR still having £147 billion. What's the problem?

Money is simply figures. As long as it is backed up by corresponding assets then it is worth that amount. The only time NR may be in trouble is when property prices collapse dramatically, like over a 50% fall, but that is hardly about to happen.

NR may have had a cash-flow problem from the inter-bank lending freeze so they went to the Bank Of England for cash. Businesses do that all they time but I don't see shareholders dumping their shares.

  • 74.
  • At 02:02 PM on 18 Sep 2007,
  • Scamp wrote:

#52 Bedd Gelert wrote that what the economy needs is an oil price shock.

It's on its way Bedd.. Analysts are talking about $85/bbl by the end of winter and some are suggesting it could even reach $100.

I forecast $110 by end of 08 rising to $120 by latest 2010 subject to there being no major slump in demand.

  • 75.
  • At 02:08 PM on 18 Sep 2007,
  • Paul wrote:

I cannot agree more with the comments posted by the contributors at 38 & 50. This whole saga was blown out of all proportion by your good self Robert.
The story should never have been headline news in the first place, as there was never any risk to the money invested by savers with Northern Rock. Despite this fact, having first highlighted the story on Thursday evening the BBC then went on to feature the story on every news bulletin, morning, noon and night for the next three days. Each and every time, there would be a statement confirming that Northern Rock was in no danger of collapse, but then a so called financial expert would be interviewed who would, when pressed fan the flames, by cheefully admitting that they would move their money from Northern Rock immediately. Is it any wonder that people were panicked into withdrawing their savings? Which of course then became the headlines for the week-end BBC bulletins!

  • 76.
  • At 02:15 PM on 18 Sep 2007,
  • Finnbarr wrote:

Dear Robert

Can you explain exactly what the Bank of England's guarantee will cost us taxpayers? Even though the chance of paying out is remote this is the case with most bank guarantees but the bank will still charge a fee based on a percentage of the amount guaranteed because it cannot use that money to do other things with. Presumably the BOE is the same. If has guaranteed all bank deposits it can't also use that money to do something else with, like invest in something else. Or can it?

Also to those who say NR is not like Farepak because its assets exceed its liabilities, tired point I know, but the depositors can demand their money at any time; NR cannot call in all its mortgages at any time. Presumably the directors of Farepak also hoped that something would turn up before Christmas.

Final point- does the FSA understand banking at all? Depositors are lending their money to the bank for a fee i.e. interest. The "markets" won't lend money to NR so how is it less rational for small depositors to do so?

  • 77.
  • At 02:18 PM on 18 Sep 2007,
  • Cary J wrote:

so, the government will back individuals bank accounts and "make them whole"?

is there not a limit per account? we have federally insured accounts in the u.s. but only for $100k usd.

  • 78.
  • At 02:52 PM on 18 Sep 2007,
  • Howard Hunt wrote:

Re post 54

"There is no risk".
So I guess you have substantially more than £35K in NR accounts?
Of course there is a risk - and it is excessive, despite a know-it-all banker in a previous post saying there is no such thing. Every bank in the world recognised this risk and that's why they wouldn't lend any more to Northern Rock. So if all these financial institutions are not prepared to take this risk, why should individual investors? That's why sensible people are still withdrawing funds from Northern Rock.
The Chancellor's "guarantee" is so vague that I wouldn't risk a fiver on it, let alone my life savings. In the event of a total collapse of NR, how and when will deposits be refunded? From what point in time will these deposits be guaranteed? Just some of the obvious questions that NR investors should be asking as they queue to sensibly reduce the risk to their savings by removing them from Northern Rock.

Remember Equitable Life - as if anyone could forget them BCCI ? The Bank of England cannot bail everyone out, and as the public has little liking for or loyalty to any financial institution could it be the time for anyopne with any bread to 'Go to tyhe mattresses ?

  • 80.
  • At 02:58 PM on 18 Sep 2007,
  • Gregor wrote:

The strange thing is I haven't seen a single journalist comment on the real reason why this run has occurred. Namely, the fact that the Bank of England made public its support on Thursday. Why ever was THAT allowed to occur? As you point out Rob, the behaviour of the man on the street was entirely logical and predictable. Everyone in the banking industry knew that as soon as that was made public the consequence was inevitable. Anyone who thinks otherwise understandz neither human nature nor banking.

  • 81.
  • At 03:27 PM on 18 Sep 2007,
  • Joe Chapman wrote:

Surely customer deposits are shown as liabilities rather than assets on a balance sheet?

The key issue here seems to be the lack of liquidity caused by financial alchemy, rather than liabilities exceeding assets.

  • 82.
  • At 03:37 PM on 18 Sep 2007,
  • Anonymous wrote:

I do not agree with 68 Mark S.

A bank is a bank, a company, not a govt. Its credit should be protected and regulated by the banking industry as a whole. While no other bank want to help NR, it seems to me that every 'smart' player in the market has figured that it is too risky to do that, even riskier than losing the confidence people have in banks, then why the govt want to jump in and bail them out.

when people take their savings to the bank, wishing to get a higher return than leaving it underneath their matress, they should know there is a risk out there. When they choose NR because it offers better interest rate, they should know there is a risk out there.

  • 83.
  • At 03:39 PM on 18 Sep 2007,
  • Charles wrote:

Word on the street (Main Street not Wall Street) says that at any time we are always only 72 hours from rioting on the streets or at least civil strife. Maybe those NR queues and the thought of what could come next switched the panic from ordinary savers to Darling & Brown in Downing Street, a bit like Lamont & Major 15 years ago.

  • 84.
  • At 03:56 PM on 18 Sep 2007,
  • Bobesque wrote:

More worryingly going forward is that under the Basle II Capital Adequacy rules some banks will be allowed determine their own level of risk and the amount of capital to hold against them. Surely this is the banking equivalent of those dodgy self-certified sub-prime mortgages that started all this brouhaha in the first place. It is not the absence of moral hazard that makes bankers behave prudently but strong external controls through the BoE and F.S.A..

  • 85.
  • At 03:59 PM on 18 Sep 2007,
  • Susan Pyne wrote:

Comments 38 and 50 have said everything I wanted to say. You and the BBC are responsible for creating a great deal of unnecessary anxiety amongst the less well-informed of Northern Rock's customers. There was no immediate risk to their money - Northern Rock was and is solvent - but as non-experts they believed what people like you told them. I hope it made you feel good to see pensioners queuing in the streets at 3 in the morning.

  • 86.
  • At 04:04 PM on 18 Sep 2007,
  • ian wrote:

poster 78, I agree, but right now with equity in house prices supporting the loans, there should be no risk. The fact that the banks would not lend to the NR could be an indication that they are scared of a housing market crash just like in the US, then it would really kick off big time, lets see how the BoE stand if and when that happens... are they going to help the home owner keep his/her house by paying the mortgage. Lets see what happens when the borrowers also get hit.

And I have £0 in NR account never trusted their rates and deals.

  • 87.
  • At 04:06 PM on 18 Sep 2007,
  • Anonymous wrote:

Mark S in post 68 wrote
"Savers should be able to invest their money in bank account without fear that they will lose it. Shareholders, on the other hand, accept some risk when they invest in a company. It should be the Bank's shareholders who demand that the Bank doesn't engage in risky practices that could cause it to go bust."

Please note the duplicated word invest. When you put your money in a bank account that is exactly what you do - invest. It carries a lower risk than buying the shares - why, because when you place cash on deposit with a bank, a portion of your investment is guaranteed and you are at the top of the list of creditors (i.e. you get paid first out of the sale of assets). When you buy stock, you get what's left of the company after everyone else has been compensated.
If any one wants to put their money in a bank which guarantees that you will be 100% refunded, I will start it up. The business model is simple. You give me your cash. I will put it in a safe place and obtain insurance against its theft. There will be no interest and for the service I will charge you 3% of the total you have on deposit or £100per annum, payable in advance. Applications for withdrawal can be made at any time and will be settled within 20 working days - any takers?

  • 88.
  • At 04:13 PM on 18 Sep 2007,
  • Jacques Cartier wrote:

> Jaqques Cartier, post 14, sorry but
> the whole point of the limited
> liability system is the maximum
> a shareholder can lose is the money
> they paid for the shares.

Of course, Michael, and the whole point of
_not_ having the limited liability system is to increase the amount a shareholder can
loose to an unlimited sum, to prevent said
shareholder from engaging in dubious scams
and whatnot, like this.

It would be back to the days of "debtor's
prison". The risk of a spell inside
would give the fat cats something to think
about.

No need to be sorry.

  • 89.
  • At 04:16 PM on 18 Sep 2007,
  • Anonymous wrote:

Re Post 80.
It was made public because the company is a public limited liability company and like any other company that raises financing through the public markets, the public have a right to know about the way in which it is being financed so as to make informed decision about their investments. What is more important to ask in terms of the reporting is why no effort has been made by the journalists to explain why the application to borrow money from the bank of England by Northern Rock was normal banking practice - or to explain that several other banks have sought the same recourse over the last few months, and to explain that the BoE was in fact already making extended borrowing facilities available for all banks because of a world wide shortage of liquidity due to an industry wide concern over the valuation of assets, particularly in the US, and possibly in the mid and long term in the UK. Instead, in modern journalistic style, it was sensationalised for entertainment rather than educational value. It was a hell of a lot cheaper for Darling to guarantee the deposits of savers with Northern Rock than to Guarantee against anyone losing out because they beleived media hyperbole.

  • 90.
  • At 04:16 PM on 18 Sep 2007,
  • John Bull wrote:

Why is no action ever taken against the perpetrators of these major upsets, namely the directors of the organisations concerned? The City pays out very high salaries, and even greater bonuses (I believe £14 billion in bonuses last Christmas). It seems to me that banking these days is almost as risky as gambling. No savers expect that their money will be used to finance hedge funds or sub-prime mortgages in the USA. Directors of companies like Northern Rock and Equitable Life should be FAR more liable for stupid and basic decisions that put the business at unnacceptable risk.

  • 91.
  • At 04:20 PM on 18 Sep 2007,
  • roy wrote:

@ alex comment 32

the govt is not coming to the rescue of shareholders.
the chancellor is compelled to speak out when this ridiculous media fuelled run on NR threatened to unecessarily spill over into other banks. So far we've had some vague talk of savers with existing accounts being guaranteed their money. certainly in the case of the regular saver, thats only fair. its upto shareholders to hold BR management to account now and to re-establish the business on a more even footing now that the lesson of not relying on credit markets to underpin their dealings has hopefully been learnt.
as for gordon brown? give the guy a break! he already had the attempted terrorist attacks in glasgow and london to deal with, cut short his holiday to a single day to oversee the response to the foot and mouth outbreak and then handle the worst flooding in england for over a generation. now weve got a remarkable collapse in a high street bank with scenes from the 30s. he might have waited 10 years for the job but i bet he didnt think the first 6 months would be anything like this

  • 92.
  • At 04:22 PM on 18 Sep 2007,
  • Robson Danton Green wrote:

No 83. What a Cracker.Precious,
Robson.

  • 93.
  • At 04:27 PM on 18 Sep 2007,
  • Chris Davies wrote:

On reflection I believe that that the media have stoked this whole mess-publicising the old people panicking outside the bank did indeed cause a run on Northern Rock.Of course the city spivs shorting the share since the end of June initiated the whole saga.The LSE has to bring an end to the activity of the spivs, whereever in the financial system they are, in shorting the stock of perfectly viable companies and devalueing them and bilking small shareholders while they line their own pockets by this entirely negative activity."Shorting stock" must be outlawed.

  • 94.
  • At 04:32 PM on 18 Sep 2007,
  • Goodenough wrote:

I agree with the fact the the behaviour of the general public and customers of NR was inevitable, but i think that if major banks and building societies went bust that would be the least of our worries. Isnt the banking industry what makes this country financially ticking, with the amount of debt in which we inncur each year.
So insuring the financial stability of NR savings was just a good pr exercise to combat NR poor example of one. The rumours of legislations in order to safeguard financial institutions will be swept under the carpet and forgotten about.

  • 95.
  • At 05:16 PM on 18 Sep 2007,
  • gerry fletcher wrote:

This is a media driven frenzy driven by the ratings and circulation greed of the TV and press barons.

If Sainsbury's (or better still, Waitrose) had changed their chicken suppliers during a short term shortage, noboby would have cared less.

But of course, here we see sensational media coverage of "devastaded" savers which only fuels the run on banks. The winners of course are the media ratings junkies. There's a fine line between "public interest" and "what's interesting to the public" and unfortunatley, we are cursed with a media that only cares about sensational headlines.

Northern Rock? Blame the media.

  • 96.
  • At 05:55 PM on 18 Sep 2007,
  • andrew robinson wrote:


As many UK banks, via their branches on the Continent, have been using the very large scale funding made available over the past week by the European Central Bank, may there not be a case for reviewing the pros and cons (again) of the UK entering the final stages of EMU. If Uk citizens want above all security, which will be a vote-winner, this might be the time to re-assess the euro option.

  • 97.
  • At 06:00 PM on 18 Sep 2007,
  • andrew robinson wrote:


As many UK banks, via their branches on the Continent, have been using the very large scale funding made available over the past week by the European Central Bank, may there not be a case for reviewing the pros and cons (again) of the UK entering the final stages of EMU. If Uk citizens want above all security, which will be a vote-winner, this might be the time to re-assess the euro option.

  • 98.
  • At 06:18 PM on 18 Sep 2007,
  • Martin Holland wrote:

There news that the government will fully back Northern Rock seems to be the correct decision. After all ANY bank can be made to fail if all the depositors withdraw their money at the same time. Remember the plot of "It's a Wonderful Life".
Two points I would like to make:-
1) Bank surveillance was taken from the BoE when it was given control of Interest rates. This emasculated the BoE and nearly led to the resignation of Eddie George. Therefore any hostile comments about this debacle should be directed at the Treasury.
2) The banks should do something about the "borrowing short, lending long" policy. It always surprises me that I can usually get better rates with an instant access account than any long term account. If I am going to lock up money for months or years I want a copper bottomed unbeatable interest rate.

  • 99.
  • At 06:43 PM on 18 Sep 2007,
  • Lenin wrote:

I think the post at entry 67 is spot-on. As someone in the industry it is as obvious as the nose on your face that 'The Crash' in property then in the economy a couple of years later is coming and it is going to be big. Everyone in the system knows it is going to be big and knows it is inevitable. They don't say so because if they did it would erode public confidence and bring it on more quickly.

One more thing. Watch the price of sweet light crude oil and read as much as you can on 'Peak Oil'. It is a far far bigger threat than global warming, will have major ramifications over the next 20 years and is being virtually ignored in public by politicians (but not in private I can assure you). They haven't a clue what to do and are very very very worried about it because it is something that they cannot control - it will just happen (in fact it's already started).

  • 100.
  • At 08:01 PM on 18 Sep 2007,
  • Will R wrote:

If the government does underwrite all savers that will have a cost, like any insurance policy, which must be paid either by the taxpayer or by the banks.

It's fairer that the banks pay this (i say the banks, it would really be the savers who get lower interest rates) but it would be interesting if the scheme was voluntary. How many people would take a higher rate of interest for the slight increase in risk?

Could be a good way for banks to differentiate themselves from each other - some higher risk + higher reward, some safer with lower reward...

  • 101.
  • At 08:41 PM on 18 Sep 2007,
  • jk wrote:

The Fed's decision to cut interest rate is disappointing. Clearly , the Fed has succumbed to the demands of those who created this subprime crisis (by selling toxic waste)and put millions of investors around the world into misery.Instead of conducting a full scale investigation into this crisis, the Fed has decided to bail them out. It is obvious now that the cheap money will flow again, which means inflation will rear its head.

  • 102.
  • At 08:52 PM on 18 Sep 2007,
  • Bluebird Over wrote:

Why all the criticism of the media in general and the BBC in particular? People have a right to know what is happening even if it frightens them. When I was told I had cancer it came as a terrible shock, but I would now rather know what my prognosis is than be left to wither on the vine.It was not a "media generated panic". Savers with large deposits were acting rationally in that before the Chancellor made his most welcome announcement - not just for the sake of NR but for all of us - they stood to lose their hard earned cash above £31K. Well done to all at the BBC and thank you Robert Peston for the inside track on what was going on.
Furthermore, tis not a "short-term fix" but a prudent policy decision which wil prevent further degradation of our banking system on which all of us ultimately depend.

  • 103.
  • At 09:44 PM on 18 Sep 2007,
  • citizenBNW wrote:

How can so many be so incredulous?

The banks don't operate for the common good. They operate for profit. That would be private profit. As do your politicians.

#16, Albert : The banks aren't owned by the people. Have you been receiving your salary and massive bonus checks while you've had your deposits destroyed by inflation?

The bank profits go to the owners. The people just absorb the risk. Either through direct loss of their deposits, direct taxation to cover lost deposits or inflation through the creation of new money.

In the end, you are all back to being serfs and the bankers / politicians are the lords of the manor.

How many months of the year do you work to pay the lord of the manor?

Sir Josiah Stamp said it best. He should know.

Cheers,
Chad

  • 104.
  • At 10:54 PM on 18 Sep 2007,
  • Glitterbabe wrote:

I would like to point out that I understand customer withdrawing funds as it is their life savings.

However I would like to see the media sued, they have created mass hysteria from thin air. They will soon move on to something or someone else their like vultures. (They could be the wannabe buyers of NRock)

I would also like to point out that half of these people saying they don't trust the government actually voted and put them their "hypocritical" if you ask me.

I really feel sorry for the people who work there, a vast majority have families to feed and support, the media could well of lost them their jobs. "Well Done Media"

  • 105.
  • At 11:14 PM on 18 Sep 2007,
  • John W wrote:

Sadly, my faith in the BBC to report in a fair and balanced way has been severely dented by their coverage of the Northern Rock story. There has been a strong tendency to report only the negative aspects, and, even now (Tuesday evening) the slant is still negative when the reality of the situation has changed. Where is the coverage of the enormous benefits that flow from the Northern Rock Foundation, for instance?

  • 106.
  • At 06:51 AM on 19 Sep 2007,
  • Mark wrote:

The performance of the Government has been so hypocritical, why have they protected the entire deposits of Northern Rock customers when they couldn't do the same for Farepak customers for a much smaller amount and for a section of society who felt the biggest impact.

And they protect the banks, but tell the Rover workers and other manufacturers that going out of business is the modern corporate world we live in.

And is the Bank of England safe ? The Government hasn't been keeping it's budgets balanced, and in large amounts. Who's going to bail Britain plc when the speculators start a run on us.

  • 107.
  • At 08:09 AM on 19 Sep 2007,
  • KV wrote:

What a great business model. Setup a financial institution, leverage it to the hilt, and when you have a losing trade or adverse conditions in the money markets, the governments and central banks will ride to the rescue and bail you out!

Market panic? Turmoil? At most we dropped 10%, at the moment we are within a couple percent of all-time highs in stocks. Yet again, a healthy correction of a bubble has been halted by greed and a belief that stock investing is a one-way bet!

  • 108.
  • At 09:35 AM on 19 Sep 2007,
  • Galloping inflation wrote:

Yesterday I asked on this site whether Euroland banks had more guarantees for savers than UK ones.
The question is; If a Spanish or French bank should collapse who bails them out? The individual country (state) or the European bank. Of course some think it unfair advantage when the UK government subsidizes, nationalizes, UK banking.

There has been a meeting in Portugal this week to discuss this problem as German taxpayers would be reluctant to pay bills for French or Spanish bank failures.

The European Central Bank by injecting billions of Euros into the central system avoided several unsightly NR type queues outside European banks. Questions are now being asked, rather quietly and diplomatically, and reporting of the decisions and meetings has been poor. Out of sight out of mind.

So who is the lender of last resort in Euro banking land? How safe are my bits of paper?

This is a huge question in a system where there is no stability pact. Like it or not we are all EU citizens now and need to be well informed as this affects us all whether we are part of the Euro banking system or not.

Just how many rotten apples are there in how many rotten baskets?

  • 109.
  • At 08:42 AM on 12 Apr 2008,
  • Michael Feeley wrote:

Does not the Northern rock affair, together with the 11 billion dollars Bush has ploughed into the US economy show that 'market forces'fail in the long run?. At the end of the day it has to be the exchequers of each country the carries the risk - truly the'lenders of the last resort'?
Meanwhile the banks(uncontrolled and badly scrutinised by governments) go on with the merry-go-round of lending and borrowing - a pyramid selling mentality that greedy investors, their advisers seize upon.
I wish that some financial wizard could demonstrate the outcomes in model terms - say as in the game of monopoly where the unhappy member of the family has to get Dad (lender of the last resort!)to 'discover' some new money he had in the box lid. It spoils the game! They all cry "unfair" and the game stops in dispute.

This post is closed to new comments.

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.