Northern Rock: when are those responsible to be held to account?
It’s not only civil servants that get off scot-free (as I blogged here) when they screw up. The Northern Rock fiasco shows it applies also in spades to bankers and so-called finance regulators in today’s finance capitalism.
Matt Ridley, the Old Etonian zoologist chairing Northern Rock, owed his position almost entirely to being heir to Viscount Ridley, and had no knowledge of financial services and no capacity for independence to control a headstrong chief executive taking fearful risks. A month into the crisis he is still there.
Adam Applegarth, the chief executive, borrowed recklessly on unreliable wholesale markets, even up to 75%, for his mortgage lending. Like the US sub-prime lenders, he packaged up the mortgages of borrowers and through securitisation sold on the debt for cash, and used an aggressive sales drive to drum up yet further business. When a lending freeze seized up international money markets in the aftermath of the unfolding US sub-prime disaster, his plan collapsed. He too is still there.
Callum McCarthy, chair of the Financial Services Authority which is in charge of banking supervision, blithely believed that the dangers of excessive bank borrowing for mortgage lending were minimal and failed to recognise early on that Northern Rock’s methods made it unduly vulnerable to wholesale money market volatility. The FSA issued no warnings until too late and manifestly failed in its regulatory duties. He is still there.
Mervyn King, Governor of the Bank of England, refused when the credit crunch bit to inject liquidity into the markets to bail out the banks so as not to condone irresponsible lending, thus sealing Northern Rock’s fate, but then did an about-turn by pumping £10bn into the markets to stop the rot spreading, thus achieving the worst of both worlds. The regulatory system could hardly have made more of a mess. But despite presiding over the first run on a British bank for 140 years, he still survives.
Sir John Gieve, his deputy, was the link between the Bank and the FSA., and as such has been accused of being asleep on the job. By failing to read the reports from Northern Rock and then going on holiday in the first two weeks as the crisis gathered, he failed to note and take action on the warning signs. He too remains in post.
Over the last 5 years while Northern Rock pursued such obviously dubious business methods, the chief executive took home £10m, his deputy £7m, the finance director £6m, the zoologist chairman £1m, and the non-exec directors another £1m. None has resigned or paid back any of their enormous gains to ordinary depositors who found their savings disintegrating.
It is a sorry story of mammoth ineptitude, yet nobody is held to account. Indeed one of the main lessons of Northern Rock is to expose just how far the accountability of Britain’s financial leaders has now utterly vanished.
There is one more casualty too. The 1997 reforms which brought independence to the Bank of England also removed banking supervision to the new FSA. This has been the first real test of the new regime, and it has clearly worked badly, with inept handling by almost all the lead players and the regulatory authorities forced belatedly into hasty and contradictory decisions. Split regulation was obviously not such a good idea, and is certainly not how the US Fed and the European Central Bank head off trouble brewing in the financial markets. Time to think again, Gordon.