Fans love King
I was really struck yesterday at the torrent of support for Mervyn King from readers of my blog – and those messages are still coming in. If King is Jose Mourinho, the fans certainly don’t want him to quit.
But I now fear that the briefing by the Bank to me last night – to the effect that the decision to offer three-month loans against the security of mortgage-collateral would not have been enough to help Northern Rock – was disingenuous.
The first Bank auction may only be £10bn but future auctions could be bigger or smaller depending on demand and market conditions. Such a facility could have prevented the Rock hitting the rocks. And Northern Rock itself is absolutely persuaded that if these auctions had been available a few weeks ago, there would never have been the liquidity crisis which prompted it to go cap in hand to the bank for emergency help.
The role of King in the collapse of Lloyds TSB’s attempt to mount a rescue takeover of Northern Rock also needs examining.
Lloyds TSB offered £2 a share, which Rock’s board was minded to accept. And according to a senior, well-placed banker, Lloyds TSB believed initially that the Bank of England had signalled it would be prepared to provide some kind of guarantee of funding for Rock’s £113bn assets. Then the Bank changed its mind and said it could not be seen to be subsidising the deal.
The consequence was that the Rock then had to apply for succour from the Bank as lender of last resort. And the rest is the wrong kind of banking history.
So the criticism of the Bank of England is that it jeopardised confidence in the banking system so as not to face the charge that it was insuring Lloyds TSB’s shareholders against the full risks of a takeover – which could have been seen to be tilting the level playing field for takeovers and giving Lloyds the dangerous freedom to take undue risks with the Rock’s balance sheet.
The credibility of the Bank’s governor, Mervyn King, is in the balance. I have spoken to members of its "court" (the equivalent of its board of directors) and they are split on whether he will or should quit.