大象传媒

Tell me Evan, how did that 拢1.3 trillion of debt sneak up on us so unexpectedly? Or have there just been a lot of people (not including Mr King) who have chosen to ignore it and the inevitable consequences and risks as their notional wealth expanded. We have been frollicking on the edge of the cliff for some while, sooner or later someone was going to fall over. The question is whether it was for Mr King or the Government to erect the fence to stop that happening. It seems rather unfair to leave the job to Mr King as he hasn't the toolbox for the job. And in fairness to Mr King he has been offering far more warnings to the likely victims than has the Government

I liked that analogy Evan.

To blame Mervyn King for this crisis is daft. Surely Applegate (the NR chief executive) is to blame for the run on his bank. It was his shoddy business model that has been exposed.

King, quite obviously a man with strong principles, has been a victim of political pressure. Out of this whole debacle it his him that many will have the strongest admiration for.

That is an excellent analogy!

I am with Mervyn King on this one: profligate banks shouldn't be rewarded.

The herd-like behaviour of Northern Rock customers is understandable and self-fulfilling; if the FSA and others (shareholders, auditors) hadn't seen the risk of using short-term funding to lend long, no one should expect customers to be able to do so.

But I don't belive the Government should have guaranteed any losses, and the Treasury's behaviour has damaged the Bank of England's standing.

That is an excellent analogy!

I am with Mervyn King on this one: profligate banks shouldn't be rewarded.

The herd-like behaviour of Northern Rock customers is understandable and self-fulfilling; if the FSA and others (shareholders, auditors) hadn't seen the risk of using short-term funding to lend long, no one should expect customers to be able to do so.

But I don't belive the Government should have guaranteed any losses, and the Treasury's behaviour has damaged the Bank of England's standing.

This is only a delaying tactic, a short term solution; the financial storm is still there. Pumping in all this non-existant money (hot off the printing press?) devalues the real economy and creates inflation, and does nothing to solve the underlying crisis of overvalued assets in USA and Europe.
Shades of 1987?

By not acting quickly I think Mervyn King has done us all a huge favour because he's exposed the real fragility of our financial system.

For that he should be congratulated not villified.

However - if I have a criticism it's that the BoE did not act sufficiently early to kill off the credit boom. Higher interest rates much earlier would have worked wonders.

On the other hand their main role is keeping inflation down and when for political reasons house price inflation is specifically excluded then the BoE is working with one hand tied behind it's back.

This throws the spotlight back on Gordon Brown. He's the real culprit.

A travesty is about to unfold as Mervyn King will/has been made the scapegoat for the fundamental failings (greed) of the banks, the self-serving collusion of the politicians and a failing regulatory authority, the FSA.

Anyone else notice the commonality between the Enron failure, the Northern Rock debacle and the UK Government's Public-Private partnerships (PPI)? ... the extremely dangerous practice of "laying off" debt, or losses, to other "vehicles" and then pretending that the debt/loss has gone away. The trouble with vehicles is that they have a tendency to crash into each other! (sorry).

And, as we know, Mervyn King orginally decided that the banks should pay for their collective and individual greed by not bailing them out with Bank of England cash. Now we have a reversal of that policy because it has become clear, as it always was with the banks, that other banks are in serious trouble. The pack of cards is wobbling.

Question is, which bank, other than Northern Rock, is in trouble? The answer might exist in two slips of the tongue made by the Chancellor over the last few days when, during interviews, he referred to "the Royal..." before correcting himself and saying "Northern Rock". One slip-up is of no note; two may suggest the Chancellor has bigger, smellier, fish on his mind.

Evan, you couldn't have put it better.

Northern Rock created this situation, not Mervyn King. They, and other banks, chose to ignore his advice.

I only wish I could run a company taking great risks, ignoring advice and knowing that Mervyn King was on standby with his helicopter.

King was and is completely right. NR should have been fed to the wolves and it is Applegate who get the sack. Even if he does, he will still be rewarded handsomly for a terrible business model.
The Banks around the world should focus on inflation rahter than bailing out the city or Wall Street (and I work for a large investment bank). The way the equity markets have responded is ridiuclous.
It is time the banks, private equity houses and even the buy-to-let merchants that think they are so clever get taught a serious lesson in risk management and leveraged investing.

I don't think that Applegate can be accused of running a shoddy business.
Overall only 0.47% of NR mortgages are in arrears of three months or more, about half the sector average. Bank overheads account for only 27.3% of NR income, the lowest ratio of any major bank.

The problems only occurred when the rival banks decided to stop lending them money - one of which will now probably snap NR up at a bargain price.

There is a much wider picture to this analysis and the signals are coming from the US. Every lender was competing for business. NR is just one of them, NR is not alone. If the housing market tanks and the loans secured against a notion of ever increasing property value, then there a lot of lenders out ther who will get burnt fingers. The boys at No10 can see this and need to do what ever it can to prevent the 'security' on loans from weakening. Problem is, I don't see how this economical climat can correct its self. But it needs to some how, and how this will come will hurt someone along the way

NR customers have sent the brown/darling duo a message, the financial climate is nearing the bleeding edge.

There is a much wider picture to this analysis and the signals are coming from the US. Every lender was competing for business. NR is just one of them, NR is not alone. If the housing market tanks and the loans secured against a notion of ever increasing property value, then there a lot of lenders out ther who will get burnt fingers. The boys at No10 can see this and need to do what ever it can to prevent the 'security' on loans from weakening. Problem is, I don't see how this economical climat can correct its self. But it needs to some how, and how this will come will hurt someone along the way

NR customers have sent the brown/darling duo a message, the financial climate is nearing the bleeding edge.

Your analogy is a good one, Evan; what the BoE did as events unfolded was reasonable. The BoE provided lots of overnight money, and I do not understand why the banks are so unhappy about simply rolling this over from day to day. I can appreciate why the BoE is reluctant to lend against mortgages; to do so allows the banks to get away with holding less (expensive) liquidity of their own in reserve.

Where I do think the BoE deserve criticism however is that, whatever warnings that Mervyn King may have given, the fact is that the BoE did NOT do all they could to resist the build up of debt. If they had made use of the leeway that the inflation target allows to err on the tight side, it is unlikely that the inflation target would have been breached on the UPSIDE as it was in April.

Evan, as always, thanks for trying to put economics in terms the layperson can understand but unfortunately I'm afraid I'm going to have to suffer from an outbreak of pedantry or nerdom on todays analogy. Apologies in adavance. Kris

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Whilst I understand what you try to do with the climbing analogy Evan, unfortuantely the metaphor doesn't hold up within its own terms; making its application as a metaphor for the Northern Rock crisis problematic.

You describe the climbers initially as 'experienced'. As such, you are implying the assumption of reasonable and safe behavior; as any 'experienced' climber can tell you mountain climbing is, because of its inherently dangerous and unpredictable nature, based on the basic precepts of safety, good information, individual and group responsibility.

And yet, in your analogy, these 'expereinced' climbers commit two basic 'rookie' errors: consuming alcohol at altitude and ignoring impending storm warnings; clear signs of ignorance and inexperience (rather than the suggested arrogance) as no expereinced climber would ever risk either. If there is anything these climbers (bankers) are, therefore, it is certainly not 'expereinced'. You acknowledge as much later when you refer to 'their reckless behaviour'.

Either they are expereinced climbers or they are reckless. They cannot be both as there is no such thing as an 'expereinced reckless climber'. In the climbing community there is another word for such people. The word is Dead.

Similarly, your climbers have nothing to gain from their 'party' in the terms of your analogy that would make them risk everything (including their lives) that years of expereince has taught them not too.

Perhaps a better analogy might have been the sea captain of a container ship (the banks) who, for the sake of a quick extra buck on a single voyage (short term risk), agrees to load his ship up with extra containers (debts) making it sit too low in the water (high debt to savings/liquidity ratio) and then is suprised when it starts to take on water in choppy seas (when extra 'floation' credit is not as readily avaliable).

Leaving aside for one minute the obvious possibilities for 'staying afloat' gags this analogy provides, it would even still allow you to cast the Bank of England as the rescue helicopter sent to 'bail them out': specifically as a Sea(Mervyn)King helicopter.

Sorry. I'll get my coat!

Wasn't Gordon Brown's mate Derek Wanless supposed to be checking that everything was above board at the Northern Rock?

See the attached re their Risk Committee! Perhaps they should apply to be the orchestra on the Titanic?

Who does Gordon and his apprentice Alistair Darling blame? Their mate Derek or the Governor of the Bank of England?

We've lived long enough through the spin and deceit of New Labour to know the answer to that!

As a rock climber who enjoys getting pissed, I would like to point out that for many of us, unlike the banks, it remains a matter of honour to extricate ourselves from dificulties of our own making.
Experienced rock climbers rarely have to be rescued even if they are the worse for drink, but if they did, you might find a helicopter rescue pretty tricky in poor weather conditions.
And what was all that boring stuff about banking?!

I resent the analogy. I've never met climbers that stupid or reckless. Your story could only happen in the unreal world of money and greed. Annie, Climber

Wasn't Gordon Brown's mate Sir Derek Wanless supposed to be looking after risk at the Northern Rock?

What was he and his committee doing? Having drinks with Gordon or watching the football at St James's Park?

The position is clear to anyone with an independent mind. New Labour are blaming Mervyn King to cover up their and their mates mistakes.

Plus ca change.

It's the politics, stupid.

Your analogy is a good one, Evan; what the BoE did as events unfolded was reasonable. The BoE provided lots of overnight money, and I do not understand why the banks are so unhappy about simply rolling this over from day to day. I can appreciate why the BoE is reluctant to lend against mortgages; to do so allows the banks to get away with holding less (expensive) liquidity of their own in reserve.

Where I do think the BoE deserve criticism however is that, whatever warnings that Mervyn King may have given, the fact is that the BoE did NOT do all they could to resist the build up of debt. If they had made use of the leeway that the inflation target allows to err on the tight side, it is unlikely that the inflation target would have been breached on the UPSIDE as it was in April.

Keeping with the analogy. For King to intervene before the crisis would have been akin to taking a rifle and shooting the climber in trouble to ensure he isn't hurt on the way down.

As you say Even, by injecting more liquidity, there is no guarentee it would get to NR. If the bank had taken the even more extrodanary action of going to NR directly it would have been even more damaging and rather than give NR a fighting chance to find a buyer would have turned it into a periah.

King has acted superbly and questions need to be asked of the Treasury and NR management.

Evan

Your characterisation is CRAP. If you've ever been up a mountain and got into trouble you'd know that your LIFE was at risk. So would the rescue chief - he would come and get you immediately he knew. The situation with the bank is entirely DIFFERENT.

Here's the problem with banks:

There is a disease in the banking world .... It's called "I don't understand the risks of loaning cash, and (even worse) I don't care!"

BANKS - WAKE UP!! IT'S TIME FOR YOU TO ENTER THE 21ST CENTURY - UNDERSTAND YOUR RISKS.

Otherwise, suffer the consequences of your incompetent actions!!

Evan, I hope that you now understand the difference between risky banking and mountaineering. If not just give me a call and I'll explain it. Even better, I'll take you up a small hill called Ben Nevis and see how you get on navigating off in the mist.

Wasn't Gordon Brown's mate Derek Wanless supposed to be checking that everything was above board at the Northern Rock?

See the attached re their Risk Committee! Perhaps they should apply to be the orchestra on the Titanic?

Who does Gordon and his apprentice Alistair Darling blame? Their mate Derek or the Governor of the Bank of England?

We've lived long enough through the spin and deceit of New Labour to know the answer to that!

"1. Brian wrote:

Tell me Evan, how did that 拢1.3 trillion of debt sneak up on us so unexpectedly?"

Um... Brian... ALL of our money is based on debt. Money is only created when people take out loans and it is destroyed when the loans are paid off.

Huge rolling debts are inevitable if the economy expands (and it must expand) ... Reducing the debt by definition removes money from circulation and thereby causes a recession ... The Tories don't seem to understand this either. God help us if they get into government.

The run on Northern Rock is irrelevant. They deserve to lose all their customers to competitors, they are clearly not well enough run to survive in the case of a downturn and the depositors were doing the sensible thing.

Protecting such a bank from market forces is ... stupid.

Rather than focusing so much attention on the Bank of England, it seems to me that searching questions have to be asked of the Financial Services Authority.

If the BoE plays the role of the Mountain Rescue Service in Evan's analogy, then the FSA is akin the authorities in the Himalayas who hand out licences to would-be climbing groups. It is their job to see that the climbers are fit for the what lies ahead. But if Northern Rock were getting drunk with storm clouds looming, what on earth were the FSA doing?

Shouldn't the FSA have foreseen many months ago that Northern Rock's business model (i.e. relying heavily on the credit markets to fund lending) was vulnerable in just the sort of credit crunch banks are now experiencing? And foreseeing this, shouldn't they have told NR to either kit themselves out with a new set of crampons or come down the mountain sharpish?

The bank and business in general are always going on and on about less regulation; leave it to us we have the expertise, we know best etc. Let鈥檚 be straight, the banks have acted like a bunch of sheep let alone rock climbers. As soon as they got into difficulties, they start bleating 鈥渨here鈥檚 the sheep dog鈥� and 鈥渨here is the shepherd鈥�.

I find it amusing that the Banks are "furious" over Mr King's handling of the situation. It was their reckless actions, over an extended period (not just one rock climb 鈥� they could have climbed a whole mountain range over this time) that has led them to this situation. I think the extract from your news link that says "鈥iggest banks in the UK was "furious" with Mr King over his handling of recent events" should be re-written to say "the big banks were "furious" that they had been caught with their knitted wool rock-hopper climbing pants around their ankles!鈥� There should be a lot more honesty from the Banks and just a tad more gratitude for the BoE.

I have lost, and consider I am still losing cash..from the debacle at Equitable Life.If Northern Rock had crashed and become insolvent while I was unable to access my On-Line account, I would have lost again.

It is about time that the regulatory system was adjusted so that the protection was real.I consider it almost impossible for the average saver to assess the level of risk that his funds have. Even Government assurances have turned out to be misleading. Perhaps we should buy gold and bury it in a safe place.Prudence for Gordon meant hiding unwelcome news deep in the detail of a budget, and reducing any advantage modest savings and real prudence might give to an average person.

Perhaps a better analogy for explaining why he didn't send the helicopter would be that there were others affected that had been less reckless or something. Going in to rescue one group might have jeopardised someone else on the mountain who hadn't gone so high.

I have lost, and consider I am still losing cash..from the debacle at Equitable Life.If Northern Rock had crashed and become insolvent while I was unable to access my On-Line account, I would have lost again.

It is about time that the regulatory system was adjusted so that the protection was real.I consider it almost impossible for the average saver to assess the level of risk that his funds have. Even Government assurances have turned out to be misleading. Perhaps we should buy gold and bury it in a safe place.Prudence for Gordon meant hiding unwelcome news deep in the detail of a budget, and reducing any advantage modest savings and real prudence might give to an average person.

Nice analogy!

I do think you could add an additional piece to it though. To the effect that, "There was another rescue helicopter which could also have come to the rescue of the climbers, it even had enough fuel to get there and back (just) but the owners chose not to, because they were afraid they may not have enough fuel for later in the week, and decided to hord it for themselves. The owners of this helicopter, also urged the M King helicopter to pick the climbers up.

As good a metaphor for Moral Hazard as any.

It would have been extremely irresponsible for the Bank of England to demonstrate that when a bank overstretches itself, it doesn't have to take responsibility for the consequences.

Northern's problems were a consequence of their borrowing far too much (or putting themselves in a position where they would need to) on the assuption that such cheap money would continue to be available indefinitely. Too close to the problem, they didn't see the wood for the trees and when liquidity took a step in the wrong direction, they found themselves unable to meet their obligations. A bank's exposure to such risks is their own decision, not the Bank of England's, and the blame lies with those who decided the risk was worth taking.

To rely on the BoE to bail you out when you fail to maintain sufficient safety margins in your liquidity is deserving of the pummelling Northern is getting. Blaming the Head of the Central Bank is merely a knee-jerk reaction to the press reports by people who don't understand the concept of Moral Hazard.

To take your analogy further, the reason the bank didn't send a helicopter was because they knew that if they did, every other Rock Climber would know that it was OK to take risks when climbing because when something goes wrong, the mountain rescue will always be there to bail you out with their big helicopter.

By not intervening, the Bank wasn't just teaching Northern Rock a lesson, they were trying to send a signal to all the other banks : exposing yourselves and your customers to such risks is not Ok, and the Central Bank will not bail you out if you do. Northern Rock didn't deserve the help they got, and their customers deserved to have their savings treated with greater caution.

A better analogy would be that only a few of the climbers got into trouble but the rest - who were perfectly able to get down themselves - said 'send helicopters for us too please - we'd like a free ride'. Bank managers are ever eager to hold their customers responsible for their own fecklessness - but seem unwilling to face the consequences of their own. This hounding of the BoE when the FSA has responsibility for Bank regulation (and is run by former bankers) smacks of buck passing....or not, as they want to hoard their bucks or pounds for themselves as they don't know what their exposure is to the sub-prime problem. But I guess that is the BoE's fault too.

To extend the analogy, the climber who fell could well have dragged down all his climbing partners and in the fall they may have created a rockfall that damaged a far wider group of innocent bystanders. Faced with such a scenario, the helicopter had to be used, but then how would you discourage irresponsible behaviour in future?

Somehow, the irresponsible party has to bear the cost of their profligacy or bad luck or be restricted from getting themselves into the dangerous situation in the first place - we used stairgates for our children.

I think the telling bit is not whether the current crisis was handled correctly - just enough slap on the wrists to make people think about not doing it again, not so much punishment that the whole system fell over - but what the BoEs role in allowing this state of affairs to occur was.

There was never any possiblility that the BoE would not do all in its power to prevent a proper bank run as the cost to the economy would have been too great so in fact all the players knew that it was a game of chicken and the bank would have to blink; so whilst some moral hazard has been avoided it has also confirmed to the banks that there will eventually be a bail out as the consequences of not doing so would be too severe.

Which brings us to the area where the bank still had leeway to manouvre, the build up to the problems. It is for the Bank to ensure that the banks it licences and regulates do suitably stress test their business models. Either the bank had failed to do this or it had seen what NR had done and felt that this was adequete - either a failure of oversight or a failure of modelling; but either way a failure.

I think it would be harsh to fault the BoE for this failure however, obviously analysts in the banks all made the same mistake - and many would still not see it as a mistake if it had not blown up in this way.

We all consciously or sub-consciously make decsions based on looking at historical patterns of events. For example should I prepare my house for a major huricane next week? Well historic data says 'No, it is so incredibly unlikely it is not worth worrying about' I think this is a good analogy with what happened in this case. Events were way outside the statistical likelihood of what would have been predicted to happen in a very long period based on historical data - what was not understood was that historical patterns would not prove to be a predictor of future behaviour.

Some mathematical models of chaotic behaviour might have been useful in identifying that a complex system may suddenly move to a different state but these models would probably be of little value in modelling normal day to day fluctuations within each state.

Hindsight says may be the BoE is the ideal player to try to take this more holistic overview but like the rest of us it is much easier to see the knitting of our daily activities than the paradigm shifting external shock.

I assume you`ve never been climbing before? Your analogy about climbers taking drinks with them is laughable..

Great analogy, Evan.

Mervyn King could too easily be the government's fall guy for the events of the past few weeks, but I truly hope he isn't. Is it not FSA's job to keep risky lending practices in check? The BoE is last resort.

And what sort of message does it send out when the BoE bails out a greedy and reckless banking system whose staff's excessive bonuses have helped to inflate house prices, while NHS nurses on pitiful salaries may never be able to afford their own homes.

If you want to get ahead in this country you've got to be total banker.

Mervyn King did warn the banks and more importantly their regulator the FSA that the business model had a major flaw.
When the BoE saves the day - why is the spotlight not turned on the FSA who ignored the warning?
As an institution the FSA has proved incompetent at regulating anything - instead busying itself with imposing layer after layer of bureaucracy on the consumer and letting the markets run amuck - I wonder in any one at the FSA knew what a CLO was last week - I suspect not.
Who at the FSA will get their head out of the sand and speak on this subject

There is a much wider picture to this analysis and the signals are coming from the US. Every lender was competing for business. NR is just one of them, NR is not alone. If the housing market tanks and the loans secured against a notion of ever increasing property value, then there a lot of lenders out ther who will get burnt fingers. The boys at No10 can see this and need to do what ever it can to prevent the 'security' on loans from weakening. Problem is, I don't see how this economical climat can correct its self. But it needs to some how, and how this will come will hurt someone along the way

NR customers have sent the brown/darling duo a message, the financial climate is nearing the bleeding edge.

Using your analogy one might argue that had "the rescue chief" sent the helicopter to pick up the climber and their picnics a different set of events would follow.

In the following weeks and months, dozens of climbers (perhaps some not as experienced) decided to climb the mountain. They held the assumption that if they got into difficulties that the helicopter could be sent up to rescue them.

However, the mountain rescue team only has a finite amount of helicopters and once this option was exhausted dozens of climbers met their end.

At the end of the chaos on the mountain everyone was looking for someone to blame. In this situation the mountain boss would also be to blame as he didn't set an example when he had the chance. So as the saying goes. You're damned if you do and damned if you don't.

Surely at some point though the climbers must be held to account as it was their recklessness that was the root cause of all of this.

That analogy is rubbish! Any mountain climber with experience would not hang around and disregard weather warnings, would not get trolleyed at the top of a mountain. With healthy uninjured walkers, the advice would be to get yourself to safety, not use mountain resuce who may not fly a helicopter in bad weather anyway... I cant comment on the banking situation as I'm no expert, but the anaology is nonsense.

Not a bad analysis, though 'hillwalkers' would have been better than 'rockclimbers': I was particularly struck by some of the weasel words mouthed by the HoC select committe today, including that a lot of ordinary people had been hurt : such as whom? If the MP means that several thousand savers queued for several hours to shift their several tens of thousands to another bank (which has probably been just as reckless in buying in dodgy loans) then they have suffered no real damage. The real damage is likely to be that the downsides to the massive extension of personal debt have temporarily been avoided, but will come back in another form sometime soon. By the way, my analogy is that of the banks jumping out of a plane without a parachute and then complaining after MK freefalls past them & hands them said parachutes (and all at the public's expense!).

So our Bank Govenor is right and the European and US Govenors are wrong, am I missing something, did we see queues outside banks in Paris and New York.Mr King and Mr Darling made a complete pigs ear of the situation and as such they should both go...By the way from now on I am going to insert the word bank into my Company`s logo and no matter how stupid I am I know I can call on Mr Darling and Mr King to help out....

Great article, Evan. I applaud the comment made yesterday that we would like to see more frequent postings - if not at the Peston/Mardell level, a few times a week would be great.

I don't think it is fair to characterise Mervyn's 'Swerve' as a U-Turn. That is a 'digital' term in an analogue world. He has made a change - but he has not fully baled out the less prudent banks, but offered a bit of an olive branch. His action are being dismissed as giving a green light to the 'moral hazard' he wanted to avoid - but the scale of what he is offering is limited, and he as shown clearly to other banks what the danger is of not being prudent - the graphs of the NR share price on News 24, and global coverage of queues outside bank branches.

That has sent a timely shot across the bows of the banking sector, and not before time.

大象传媒 Real Story uncovered the truth about 'Responsible Lending', or not, as the case may be, last year. This problem has been in the pipeline for years. I still think it was a mistake that banking regulation was divorced from the Bank Of England - Steady Eddie George was right to have kicked up a fuss about that decision.

The point to be borne in mind is that Mervyn King did not have a choice between avoiding a bank run or letting one happen. It was a choice between a small one today, versus a huge bank going under tomorrow.

If he gets fired before his term of office is up, then he has been a scapegoat of 'Mourinho' proportions !

George Sinclair [23] Oh dear, oh dear, oh dear ! Got out of bed the wrong side did we, Mr Sinclair ? Lost the ability to understand things like 'metaphor' and 'analogy' ? If you don't like Mr Davis's analogy about climbing, maybe you would like to come up with a better one ?

Your 'sense of humour' failure is tragic..

Interesting analogy.

Any chance you can get 大象传媒 production to actually strand a few senior bankers on top of a large mountain and film them trying to get down?

Not usually a fan of reality television shows, but wouldn't mind watching that one :-)

"This is not a very unfair characterisation of the situation between the Bank and the banks."

Except it is, unless you add that the mountain is an active volcano which much more experienced climbers have never dared to go more than half-way up.

And that the party went up without proper (but costly) safety gear and having been rescued other climbers are now wondering why they bothered with the expense.

And that we learn that the rescue service was sent out because the climbers' day jobs involve putting "Vote Labour" posters on billboards.

Only then is it a fair characterisation.

If the Northern Rock was such a bad business model why did the regulators allow it to continue for so many years??

Your analogy is flawed in one major way: although you say that "no-one dies", the mountain climber scenario strongly implies a life or death situation.

As compassionate human beings, when life is in danger of course we overlook recklessness for the higher principle of saving a life (as shown by the amazing work of our emergency services, mountain rescue, the RNLI etc.).

It taints your analogy with emotion and sentiment that shouldn't apply: in the case of Northern Rock livelihoods may well be at risk, but lives aren't.

Thomas said: "I don't think that Applegate can be accused of running a shoddy business. Overall only 0.47% of NR mortgages are in arrears of three months or more"
When your core business is Mortgage lending and your business model involves raising money from the Market assuming interest rates are always going to stay low, it is fundamentally flawed. The problem here is we're only where America was 9 months ago. The bigger issue is at what rate will NR sell mortgages if they are going to borrow at 7% and where is the growth going to come from once house inflation goes into reverse.
If that isn't shoddy business, what is?

You and your colleagues should be investigating how the government let this happen first as they are the people who are in control of the civil servants.

By taking part in the scapegoating of Mr King, you are letting Brown and the inept Darling off the hook - again.

We have no effective opposition in this country and no effective media.

Northern Rock is dead, long live the King!

Well before the current meltdown, NR has, in my view, often sailed very close to the wind. It has been one of the main banks to offer savers high initial rates, only to slash them once customers are locked in.

In my case, it also tried levying a much higher mortgage exit fee than the one advertised when I first took out the loan. Of course, it's not alone in this and I fought and got the difference refunded.

But overall, I think NR has (or should that be had!) less respect for its customers than many of its rivals.

It might therfore come as a surprise that I'm still a customer of theirs (and no I didn't queue up last week!). But the only reason I bank with them is for their business account - which is linked to BOE base rate. So they can't start messing me about on interest rates. Without this guarantee, I'd never have touched Northern Rock.

In my book, it deserves everything coming to it and should NOT be bailed out at taxpayers' expense.

Perhaps a more generous savings compensation scheme is merited. But ultimately, if banks have to contribute to this 'insurance policy', we - the customers - will pay more. In effect, we'd be penalised for risks taken by the more reckless banks.

In short, it's Northern Rock's days that should be numbered as an independent company, not Mr King's.

Should not someone have prevented them getting on the mountain with the storm coming in the first place - ie the FSA? I agree with Philip's comments.

All of the major economic slumps of the last 200 years have been preceded by low inflation and huge speculative asset price over-valuations. (1837, 1857, 1866, 1873 and 1929) In the end asset prices (i.e. Houses and Property) will fall to the level at which the average Joe can afford the mortgage at about 3.5 times income. If 'financial institutions' hold these 'assets' as security valued at greater than these levels then they have a big problem. If they have lent them our money on these 'securities' then we have a problem. The 1929 slump took 25 years to recover from and no amount of tinkering with low or even negative interest rates (c.f Japan recently) helps, in fact as history shows these actions delay the necessary re-balancing. I would like to see some statement on asset values included in the accounts of all financial institutions that evaluated their security / mortgage on the basis I suggest so everyone knows where each institution stands. That is after all all that the Banks are doing between themselves and refusing to lend money to one another!

To expand upon my earlier point, I believe the introduction of life-or-death implications makes the characterisation unfair from a "what would you do?" perspective.

If I were the mountain rescue leader and there were people in danger, would I be petty and delay to prove a point? No, I'd send the helicopter up straight away, despite any recklessness of the climbers.

If there were no people on the mountain, just some - very expensive - equipment, would I send the helicopter? Perhaps not - I might wait for the weather to clear and send the (now sober) mountaineers up to collect it themselves.

The guarantees that the BoE gave to NR depositors set a very dangerous precedent. Now if a poorly managed bank gets into trouble again depositors will be expecting the BoE to rescue them. The taxpayer is asked to foot the bill for these financial losses.
Guaranteeing these depositors was a dangerous move as what would have happened if other banks also came under pressure? On this occasion the BoE was lucky(or judged the situation well, if you are more sympathetic) and its action stopped the rot.
The major problem is that we are a society awash with debt. Flooding the economy with more money to cure this problem only stores up more problems for the future. The decision of the American Federal Reserve to cut interest rates is also a similarly short term solution that encourages us to take on more debt as a means to averting economic slowdown.

I strongly beleive that Prof King should not be held responsible for the recklessness of irresponsible bankers whose loyalty lies with their bonus. I am of opinion that FSA and Chancellor should have remained as far away as possible for the bankers to sort out the mess they created.

I'd be greatful if someone can explain a little more about the detail...why couldn't NR simply stop issuing new mortgages until the credit markets opened up again - i.e. pass the problem on? or is it that the mortgages it has already issued have to be constantly re-funded..if it is the latter then it is a crazy business model built on assumptions.

Dear Evans,

There only few choppers but too many drunkards at the top.

Northern Rock was a Building Society that never learnt how to be a Bank. No wonder it one to suffer when things got rough.

Evan - really well put.

A friend recently said to me that investment bankers operate in only two states of mind - greed and panic.

It makes me really cross to see bankers who have exercised their greed and, in so doing, made bad decision, blaming the Bank of England for making them live with the consequences of those decisions.

The irony is, of course, that ordinary mortgage lenders who have, for the most part, borrowed sensibly, will pay for the banks failure to control their lending and the highyl paid investment bankers will for the msot part lose nothing more than a part of their enormous bonuses.

Such is life!

I'd like to know exactly what warnings you think the "climbers" were given. I'm fairly confident that Northern Rock had a good idea of their risks and how the market should react (based on past behaviour), and would have been more than able to cope with that. However I don't know anyone that ever predicted that the Libor - Base Rate spread would get to 100bps.

The role of the internet鈥� and Mary Poppins

I think the internet had a big role to play on the run on the bank. It's much easier to access your internet account, than go and talk to your bank, but the Northern Rock servers couldn't cope with the surge. This gave the (wrong) impression that the greedy bank was actively preventing people getting their money out, and that's when the panic started.

It reminded me of the scene in Mary Poppins when the children were "encouraged" to invest their tuppence in the bank, but they just wanted to feed the birds. The little scuffle, gave the impression that the children were being prevented from getting their money back, and the end result was a mob of investors withdrawing all their money.

(my tuppence-worth)

The CE of Northern Rock is Adam Applegarth and not Applegate as some of your bloggers write.

What the Northern Rock depositors fail to realise is that in Gordon Brown's means-tested-benefits Britain you're better off with no money for your retirement. Oh yes and preferable across the border in Scotland...funny that...!

Maybe the analogy can go further. Presumably the rescue helicopter (and the whole rescue service) is supported by public funds (i.e. our money). Should our money be used to bail out reckless people? Maybe the reckless mountaineers should be forced to contribute something to their rescue? In the same way it seems that Northern Rock has been given potential access to our money at a mere 1% above base lending rate. I don't know what Northern Rock's standard variable rate on its mortgages is, but I only wish I could get a quick loan on such terms. I wonder if any of our European partners will complain about us subsidizing banks in this manner. Anti - competitive?

Not a good analogy, stick to facts. For NR the mortgage book is an excellent asset, the savings accounts are a relatively minor liability. "Back in the day" savings groups would biblically reward savers (only friendly societies can call them investors) with interest and punish borrowers with a higher rate of interest, the basic rule that some cash should remain available (reserve assets ratio) was the only governance beyond the philanthropist who usually funded the startup financial services company. Now, in the debt fuelled international markets funding at significant multipliers is allowed and that will occasionally result in losses.

The NR board, driven by the non-execs, should have seen this coming and reduced their exposure by selling good assets to guarantee the liabilities - the BoE role is superficial and late(as this government is in so many ways), it has only provided a loan facility against these assets to guarantee liabilities (or some of them).

I did not withdraw my savings, which are in excess of the normal guaranteed amount - the governement was always going to prefer the positive spin of the rescue!

The problem with this analogy is that there is no rescue helicopter. All that the Governor could do --- against his better instincts --- was to send another case of booze up the mountain to dull the pain and delay the hanogover.

Its nice to see an ecomonic piece put in lamens terms.

I think that political pressure is the sole factor that Mr King's position may be in jeopardy. Its time that these over paid idiots in the city take responsibility for their actions and Brown is brought to account for his vote wining economic policy.

Lets hope that these iresponsible playboys are not awarded large bonuses in the new year...that would be ironic.

Northern Rock were very happy to deal in the USA sub prime mortgage market, but, it is a very well known fact that they would not lend a penny to a similar borrower(status) in the UK!
How very conveinet for them now, to obtain taxpayers cash to get them out of a hole!
The whole thing stinks, Northern Rock should have gone to the wall along with its money grabbing executives!

So where were the FSA in all of this?
Is it not Callum McCarthy's job to make sure banks and mortgages are properly regulated!
The FSA is just to busy justifying its own bureaucratic existence rather than doing any actual good for the consumer - is it staffed by three wise monkeys.

Mervyn King seems to one player to be free of blame in this mess. It's most unfair that Gordon Brown's spin machine (yes, he still has one, don't believe the spin that he hasn't) meant all the newspapers put Mervyn in the frame.

Northern Rock's executives are the most directly responsible. Followed closely by Gordon Brown who turned a deaf ear to the warnings of the past years when massive consumer borrowing and spending fuelled his profligacy. And the FSA coming in a close third.

Andrew Neil's _This Week_ on the 大象传媒 covered the issue quite well.

In this scenario, why are shareholders being treated as culprits? They provide the wearwithal for the whole banking edifice to function efficiently. Going forward, disclosure requirements should be increased for all banks operating in the UK.The banks' Investor websites should contain monthly risk reports, cash flows, p/l, detailed balance sheets, and budgets. This is particularly true for Northern Rock at present. Its options seem to be a) Takeover
b) Long term liquidation (similar to BCCI), or c) Nationalisation, and eventual sale.

this is not the good metaphor everyone seems to make it out to be.

You don't send rescue helicopters to the summit in a storm. Helicopters are hard enough to maneuver with updrafts in mountainous terrain anyway. If your stuck on top of a mountain in a storm you have to find cover and wait it out.

If you want a rock climbing metaphor use lead climbing. When you lead climb, the first climber goes up and places protection, usually in the cracks. The belayer (gov't) can thus catch the climber if he falls. The problem in this case is Northern Rock Climber hasn't been placing enough protection as he climbed up. And the protection he did bother placing was set very lose, so when he fell, he fella long way before a piece of protection held and the belayer could stop his fall.

Every now and then, someone needs to die on the mountain, for the good of others.
The problem for the man with only one helicopter is that the lower slopes are swarming with other climbers desperate to follow the example of those above. By rescuing the Idiot at the top, expect 100 to be there when the next blizzard strikes.

Northern Rock has worked hard for the obituary they should now be receiving.

As for the depositors in northern Rock (Rubble?), their savings have been guaranteed at the expense of Sterling, which is all of our "savings" + assets combined.

Faced with the real problem (wide scale under pricing of risk due to lax monetary policy), the current blame throwing by the establishment is truly pitiful to behold. Mervyn king appears a lone voice of reason in my opinion, but none wants 鈥渞eason鈥�, just a new case of Bolly and trendier climbing boots.

To use a completely different analogy:
Yet another sticking plaster and puff of au du cologne, is applied to the rotting gangrenous sore that is the end of the money for nothing(votes) epoch. By the time someone finally faces up to the need for surgery, amputation at the neck will be the only option left.
Prepare to be poorer....

ridiculous analogy. the only people who make sense in these blogs are the real world climbers ?
King allowed interbank rates to go balistic.
So if you depend on borrowing, your balance sheet suddenly goes toxic.
The ECB and the US saw the problem and acted immmediately.
What is the UK playing at ?
The real question is what is the situation at the other banks ? though the lending rate has now fallen with a tiny injection of BoE funny money.
There's still 110,000 mortages / month being approved. anyone understand that ?

I really liked the format. The font type and size was good. Best was the double line spacing. I wish all the stories and comments could be like this one.

Thanks 大象传媒 for a super news web site. I read it most every day.