大象传媒

Hang on Robert. The international competitiveness of the City is its problem not that of the BoE or -ergo- that of the taxpayer.

This goes back to previous comments on previous blogs.

What is so special about the City that it deserves tax payers support but real industrial concerns don't?

I thought all this was supposed to be sorted out when the Bank was made independent in 1997?

Mr King added: 鈥淭he British banking system has not collapsed, it has come through.

鈥淎nd we will come out of this with new legislation which will give the regulators an opportunity to intervene pre-emptively 鈥� earlier than we were able to on this occasion, with better deposit insurance arrangements and with a better focus in the future on the regulation and management of liquidity.鈥�
Does this mean MK or the Holy Trinity deliberately allowed a bank to suffer a run so that they could get legislation through for the greater good?

What about confidence in the competence of the politicans?

Does the competitiveness of the London depend on the perceived liquidity support of the central bank? I very much hope it doesn't because the BOE is poorly placed to support a general run on any of the largeer banks. I would say that most people would regard light regulation as key to London's success. The Fed and the ECB added liquidity to the market when required, but in the US the biggest benefit was when they accepted a wider range of securities as collateral at the discount window. America used to be proud of its non-intervention in private business but Bernanke and Paulson are desperate to avoid a crisis of confidence in the banking system and seem willing to do whatevedr it takes, in the future this may be regarded as one of the worst decisions ever. I think the FSA is a joke, drip feeding aid to NR would not have worked, the markets can tell when a company is in trouble and would have slaughtered NR in the depo markets. I have heard a number of rumours that at least one US investment bank repurchased $2 billion of loans they originated and sold to NR at a massive discount, causing a loss of at least $1 billion to the bank, while I cannot be 100% sure this is genuine, it wouldn't surprise me. The FSA can argue that it is not responsible for actions taken by off-shore SIV's, which is fair enough, Andersons also said they were not responsible for auditing Enron special funding vehicles.
London overtook New York as financial centre because of the innovations that were taking place here and the international nature of the business, I remember not so long ago when US banks would simply pass all their non-dollar business to their London branch. The FSA should concern itself with identifying possible weaknesses in financial institutions and warning the public that these companies have unsure risk profiles, a common misconception is that NR was a solid institution with a conservative business plan when in fact it was utilising cutting edge financial techniques. Perhaps the FSA should have warned customers that this was happening, the other alternative is the NR was some dowdy, backward regional bank that was wined and dined by the flash investment banks. I doubt that was the case but anyone old enough to remember the local authority interest rate swaps scandal will recall that defence worked well enough back then. Do you really think it is the BOE's duty to be a lender of last resort? if so, should they be required to maintain a contingent liability fund to match the funding requirements of the banking sector and is the same institution that sold off gold reserves at the bottom of the market the best one to manage the funding of the banking sector at times of stress. Many people have commented on the attractive deposit rates and mortgage rates offered by NR, didn't they stop to wonder why? I remember trading Argentinian debt when the yield to maturity for local currency denominated debt was 90% it was clear that a default was inevitable, the same thing happened in 98 for anyone trading MinFins, the YTM then reached 150% - if a deal looks too good to be true...

The Rock's situation did not create the global liquity crunch but was a result of it. I take it no one at the FSA would disagree with that?

That being the case, how can the FSA possibly hold the view the that passing the Rock a few quid here and there, with a wink and a nod would have avoided The Rock's own particular crisis?

Such a course of action would have been against Stock Exchange rules would it not?

And the Rock's business plan had never envisaged the (small?) risk of a global credit crunch. The money markets where aware no doubt of how the Rock financed itself, afterall they had been financing it (in the good times!) for years. The diparity between its loan book and retail savings income would also be known. At this level the Rock was, is and will remain sub-prime.

It's really very simple.

If people remove their money from banks which can't fund themselves through the normal mechanisms. Those institutions will fail and leave only those which are competent.

If the government or Bank of England prop up banks which are failing then it isn't going to be long before they are propping them all up.

Let them fail. If you live by the market you should die by the market. I don't see the government propping up our steel, coal, car industries any more with tens of billions of loans.

Interesting that "The City" gets special treatment. Might have something to do with the banks ability to literally create money, causing the economy to boom, just when the politicians need.

I don't agree the BOE should have intervened earlier to prop up the failed NR.
The current financial crises is a result of unprecedented relaxation of lending practices, when it all predictably goes pear-shaped, the City starts bleating for taxpayer support...NR is basically insolvent, and it's shares should be suspended.

Robert - well done - you have got there at last. The well being of a crucial industry to the UK economy has been put at much greater risk by the Governor's failure to act early and decisively. Instead he courted the words 'moral jeopardy' as though his first concern was to ensure the comeupance of outfits taking on too much risk. It was not. His overwhelming and first responsibility was to the ensure the well being of the industry as a whole and the effective operation of systems that underpin it. He did not do that.

Other illiquidity periods have been short lived because bankers acted decisively in putting adequate funds into the system.

Potential inflationary effects are important but second order. Besides, consumer prices in UK were low and falling: +1.8% in Sept compared with 2.8% in US and 2.1% in the Euro area. The Fed and the ECB saw the wood from the trees, understood the dangers and acted. The BoE sat on its hands and we got a devasting run on a solvent bank not exposed to the American sub prime.

It has become clear that the current situation cannot continue.

It seems however entirely par for the course under new labour that no one seems to be in charge and as such no one can be blamed.

We need to have a single body that can not only regulate companies with the power to investigate and punish them but also to have the ability to intervene directly financially if required.

What seems to have happened, when everyone hasd managed to get their individual stories straight is that Hector feels that a little intervention early on would have stopped all this.

Mervyn however says he couldn't do that. If Hector had issues why didn't he act on them earlier? Why didn't he call in the board of Northern Rock and get it sorted or stop them making new loans?

We need a truly independent enquiry on this whole fiasco to ensure it doesn't happen again. Perhaps Gordon's mate Sir Derek Wanless is free after he had sorted out the NHS?

Oh sorry he was supposed to be ensuring Northern Rock didn't get in this state in the first place as the chair of their Risk board.

I'm curious about the "post hoc" nature of this discussion. There is no suggestion in this that the problem was that the NR got into this mess in the first place, only about how to get them out of the sh*t.

Why is this issue out of bounds? Why is adequate regulation of the City a non-topic in this discussion?

King was (and still is) right. One thing is bailing out morronic behaviour of institutions who got flawed business models who didn't even bother to stress test the possibility of the main source of funding drying up. The other is as you rightly say, providing that liquidity in the right circunstances.
The benefit of hindsight always works wonders, but i think in the long run the BOE will be proven right.
By adopting a tight stance banks will get clear signalls that: Anything DOES NOT go.

You know that Mervyn is right... and so does Darling (which clearly infuriates him, since he is shown up).

I don't think Hector Sants' argument stands up. He can't really be telling us that in the midst of a global credit crunch that the market would have been prepared to roll over 拢30bn in loans to NR if the BOE had bunged it a few quid early on. I think Mervyn King's analysis looks much more robust. It'll be interesting to see whether he gets to keep his job though.

Robert,

Another excellent article - I'd love to hear your thoughts on the future for Northern Rock and the implications for shareholders. The share price has been suprisingly robust despite the drip drip of bad news.

Like many, i have criticised Mr P's sensationalist style in his reporting on the NR isue in the past.

This by contrast appears to me to be the sort of balanced, factual reporting which provides useful information with helpful comment.

Nice one Mr P

How can Sants suggest pumping a small amount of money into the banking system in general have required less funds in the long run? If he thinks a couple of billion would have calmed fears enough that Northern Rock could have raised the 30 billion they needed then he is more wrong than I thought him.

If there is any lesson here it is that trying to subtly manipulate the markets would only postpone the inevitable. If the BoE quietly lent the Rock a billion or two of term loan then the eventual inevitable leak would have lead to a far worse crisis.

The BoE's intervention is entirely correct, the intervention is to save investors funds. Shareholder, senior management and directors be damned, the BoE is right to let them burn. That the great and the good in the city and docklands get such a timely reminder will hopefully focus their minds.

Why is the head of the FSA commenting on how the Gov' of the Bank Of England manages the UK economy through this international financial rumble?

The FSA is a preventative organisation. By the time they were sitting around the table with Darling Sant's organisation had already become irrelevant and its view on the current predicament inconsequential.

The only item that Sants should have a view on is whether his regulation of the UK financial market was prudent enough to ensure that the organisations protected themselves well enough for an occurrence of an event like this.

It wasn't and therefore he should be turning his entire attention to ensuring it is in the future.

The juries out on the benefit of the FSA. In other words Sants should leave Merv to get on with his job and concentrate on doing his own much better.

Robert, You and others have stated many times since this debacle began that the Rock was founded on a rotten business model. Given that, why are we here? Should not the FSA have stepped in before any of this hit the fan? It seems that having been slow on the diagnosis, the GP is now shifting the blame for a poor outcome onto the surgeon.

The key question is:

WHY did the FSA rules allow a bank to operate with such an inherently risky business model?

Unless the rules change it could well happen again

Hector Sants said "we would have set out those arguments .....for the Bank of England to consider" he did not say "we set out" or "we did set out". My conclusion is that Sants either does not know what the FSA told the BoE or it - he or his staff - did nothing. Either way it is woeful and does nothing to enhance the reputaion of either Sants or the FSA. It does not necessarily contradict what Mevyn King said in the interview.

People can argue endlessly, but some facts remain.

The Fed and the ECB have, so far, appeared to have manged this crisis nuch better than the BoE.

That is, the ECB has been prepared to let banks go bust and the Fed seems to have, so far, provided enough liquidity for the American markets to continue to function relatively 'normally'.

Whatever, you must make personal decisions about all this, and I for one, would not be currently holding significant amounts of cash deposits in ANY bank that reports to the BoE at present.

You have to be rational in these matters and trusting bankers and politicians is not even on my list.

Robert

Apologies for my ignorance and probably a question for another day, but looking at things from a practical perspective, why do the banks need to foreclose on the 'bad' home loans.

Surely debt repayments could be restructured, eg paid back over a longer time period, or switched to a fixed rate, etc.

In the US foreclosures only seem to be excerbating problems. Houses are left empty, they fall into disrepair, eventually they get broken into and vandalised...then they need to be refurbished or demolished and rebuilt...

The house holder loses a home and the bank gets a building plot (eventually)...No one wins.

Is it that the people literally don't have jobs...or they pay so little the amount they borrowed literally can never be paid back?
If that is the case watchout! The US will go into a depression/recession. Or at the very least lots of people will really suffer. The only way out would be to reduce interest rates again and accept a higher rate of price inflation..that seems to be happening anyway in the US adding to the problems..

As a successful business man I know said 'Don't shot a willing horse!'

Well, the FSA has a statutory objective (i.e. is required by an act of parliament) to maintain confidence in the UK's financial markets. Did it do this? No. However, is the FSA required to intervene when a company does something risky? That is much more of grey area.

The FSA can not act to stifle innovation, but surely anyone should have seen that a more risky business model needed better and more robust controls to reduce the "net" risk.

Clearly this didn't happen. The controls were not adequate and this is the outcome. But I don't believe the system "failed" so catastrophically.

If the people in charge of supervising NR had done their jobs properly and challenged the NR Board and the Head of their Asset and Liability Committee (ALCO - which all banks have and is arguable as or more important than the credit risk function) when they last assessed the firm then this may never have occurred, or would have been a much blip on the radar.

While the FSA and NR may have believed the BoE would intervene with liquidity in such instances as over the summer, a prudent approach to regulation would have seen somehting similar still tested - i.e. a drop in fudning of 10%, 25% and 40%.

This should not be seen as an end to the current system but a lesson to ensure that businesses willing to push the envelope need to be monitored more closely than those with more traditional models - i.e. common sense should prevail, especially in regulation (New Labour take heed!!!).

The City, or any other financial centre, is not a special case. It relies on liquidity to do business, much in the same way that some industries rely on commodities. If liquidity dries up, there is a big economic problem. Like it or not, the City and it's global counterparts enable the continual economic expansion demanded by all of us, the tireless consumer.

No, it is not a blameless, philanthropic collection of individuals and companies. However, there are too many people who comment on this blog who don't understand the importance of financial markets in driving economic growth across all industries. Instead, they prefer to imagine that it's sole purpose is to print money for bankers and idiots; sometimes both. Whilst being partly correct, it is generally misguided and most definitely not the whole picture.

#9, Ray Philips.

Are you suggesting that it is for the greater good of society that banks which take ridiculous risks should be rewarded by being propped up in the most obscene of circumstances?

If so, may I therefore extend your argument to other persons suffering either full blown liquidity problems, or cash flow problems. I quite fancy a holiday on my loan repayments. Do you think if I stopped paying them, I could get Mervyn to help me out?

The problem is that as an institution, NR relied on borrowings that lenders were not prepared to advance on an ongoing basis. In most other situations, everyone would already be crying foul. How many other situations do you get Government intervention in a bankruptcy case? To suggest that the bank should have intervened sooner is ludicrous, and would not be suggested in any other arena. The banks are just getting their just deserts after some very irresponsible bororowing and investing. The fact that we all lose out as well is our comeuppance, for buying into this debt fuelled hurricane, which appears ready to die down and spit us out. We have created money out of nothing, and we are now learning that this money is similarly worth nothing. I for one shed no tears for the victims of this episode of reality coming back to bite.

#4 Toni

Light regulation may have been key to the success of the City but it's been darn all use to the rest of us.

Here's an alternative hypothesis: Northern Rock's business model relied on the same money suppliers as many finance companies: the wholesale arms of the major banks. Nothing wrong with that then. Unfortunately for Northern Rock, its directors, rather naively, didn't anticipate that those same major banks would be very upset by NR taking vast amounts of market share from their own retail mortgage operations. Consequently NR was unprepared for the coincidental cut-off of its money supplies by all those agrieved wholesale banks! The fact that an "excuse" for cutting-off money supplies arrived in the form of an unrelated crisis in NY, was helpful cover for those suppliers. Now it's back to business as usual for the major banks' mortgage operations. Their irritating NR competitor has been eliminated. Hegemony has been restored.

Mr Sants talks nonsense. The markets had dried up. No investor wanted residential mortgage backed bonds. These supplied the vast majority of NR's funding. A small facility from the B of E would have been like a short rope and a drowning man. The current problem is that nobody has an incentive to bid for the buisenss at a price which pays off the B of E loan. That suggests that the NR has become a giant work out for the B of E and the Treasury

Here's an alternative hypothesis: Northern Rock's business model relied on the same money suppliers as many finance companies: the wholesale arms of the major banks. Nothing wrong with that then. Unfortunately for Northern Rock, its directors, rather naively, didn't anticipate that those same major banks would be very upset by NR taking vast amounts of market share from their own retail mortgage operations. Consequently NR was unprepared for the coincidental cut-off of its money supplies by all those agrieved wholesale banks! The fact that an "excuse" for cutting-off money supplies arrived in the form of an unrelated crisis in NY, was helpful cover for those suppliers. Now it's back to business as usual for the major banks' mortgage operations. Their irritating NR competitor has been eliminated. Hegemony has been restored.

It seems to me the FSA are being disengenuous.

If the liquidity crisis at NR could have been solved by pumping a few 拢billion sinto the markets - as Sants suggested... then why has the problem continued worldwide?

After all, the ECB and the FED have pumped 拢billions of liquidity into the marlkets - and we KNOW UK banks have borrowed from the ECB - and YET the problems remain.

So the FSA solution - a few Billion (presumably less than the 拢30Billion Lloyds wanted to take over NR) - for the General market .. Would NOT have worked.

The problem is still there.

So to me it's obvious the FSA have miserably failed. Again.

Since the FSA are currently trying to keep other information secret from the FOI Act ... then I suggest when that comes out, it will show the FSA are basically toothless.

As anyone who trades shares knows, insider dealing has been rife in the UK for years.. and the FSA has achieved nothing there either..

Imo a track record of failure. Better to abolish them than to spend 拢millions on another failed organisation.

I wonder if the NR's reliance on wholesale funding really was more risky than the business model of other banks and building societies. At least NR's wholesale funding was committed for a few weeks. As the File on Four programme made clear, depositors are even more flighty. Of course a large emergency line would have helped, but how many institutions which rely on deposit funding have such a line?

Scamp, you are absolutely right, but I fear investors will have to start to deal with the consequences of whichever decision they make, because it seems the FSA, the regulator that is in charge of protecting investors interest was sugesting that the BOE covertley support a (possibly) failing institution in order to dupe investors into maintaining their accounts. it seems they think that this would have gone on until market conditions normalised. So the BOE would be drip-feeding money into NR while the market would have already identified the bank as lame. You simply cannot hide this kind of information in the market as the complicated funding structures that NR used were broadcasting loud and clear that they were desperate to shift assets at vastly reduced prices. If they tried to hit deposit desks in the interbank market, they would find credit lines reduced or dealers tacking on high margins to lend money, (I remember seeing a trader quote BCCI LIBOR + 350bp for tom/next money just prior to their collapse). It seems that the FSA has the public image of the city as a priority and the protection of individuals some way down its list.

3 points:
Everyone is dismissing Sants arguement - however they seem to ignore the psychological effect - if other partys saw that if they were to lend to NR and NR was unable to rollover their loan in the market it had access to the BoE for funds then they might indeed have been more willing to lend as at that point NR debt would be as good as Govt bonds

As stated above it does also appear to be an attempt to deflect attention from what seems to be an obvious failing in oversight by the FSA to the BoE's actions to resolve the problem

Everyone criticises NR for its business model - however does everyone doing the criticism have a plan in place for the situatio nwhere thier own income is suddenly cut off - I know if my salary was suddenly cut off without compensation I would have to scratch around for money and of course all the normal routes of securing money (loan, remortgage) would also unexpectedly be closed to me. As stated before NR did not run in to solvency problems and so it would be very hard to anticpate that an investment grade rated institution would be unable to find liquidity, those who say NR should have antcipated this, please could they give example sof where this has happened before ever?

The liquidity crisis that arose from the so-called credit crunch meant that the big banks found that they needed to retain cash for their own purposes (ie mainly to cover their own sub-prime losses) as well as to ensure that they didn't accidentally lend it to some other bank with big sub-prime write-downs hiding on their balance sheets, so they stopped lending it to the inter-bank market on anything other than a very short term basis, if at all.

Surely it was the central banks' role to shift this log jam in the short term by providing liquidity and the FSA's role to "out" the losses so that things could get back to normal more quickly? If they had both done this at the appropriate time, we wouldn't be having this discussion.

King is not perfect (which of us are?) but he strikes me as having integrity. Savers must be put first, second and third and their savings must be protected. Northern Rock was and is a one-trick pony - fodder for any squeeze any time.

King is SURE to go now. Maybe Sands will get his job? I hope not!!!

The FSA has shown itself to be unworkable, toothless and incompetent.

We need an inquiry - we need adequate safeguards for savers - we need to restore faith in UK financing.

I suggest Mervyn King to conduct it.

The FSA is trying to divert attention. A regulated banking system should not allow any bank to extend itself so far as to require any emergency govt funding. The fault is the FSA for allowing NR to act as it did, not the BoE's for failing to cover up their mistake.

I don't have a problem with the way this subject has been reported generally but i am concerned at the rather sensationalist approach taken by the 大象传媒 and Mr Peston in particular.

The spinning of Mervyn King's comments to produce a nice headline is cheap and unworthy of the 大象传媒 in my view.
Why can you not aim to bring us carefully considered commentary together with intelligent response to unfolding business stories. If you concentrated on that you may find a more loyal audience.

To be unkind, your stumbling performance on "Today" the other morning just makes me think you should contemplate a return to Print Media.

In his article Sants V King Robert gives some insight into the differnt ways in which Sants and King thought the crisis at Northern Rock should have been handled.

On the one hand Sants believed the problem could have been lessened if the BoE had pumped more liquidity (our money) into the system earlier on. That presumably is what the markets were hoping for and suggests his prime concern was to maintain the city's reputaion, regardless of what the final cost might be. Because at the time Sants had no idea as to the extent of the problem or how many other financial institutions were in similar difficulties and waiting in the wings to be baled out by the BoE. More worrying is the fact that a person in his position should have had a lot more inside knowledge of the problem and how to better control it, much earlier on.

Mervyn King's approach on the other hand might not have best suited what the city and finacial markets wanted but, faced with the impending magnitude of the ticking time bomb and with only very limited information to go on he was right to opt for a more sensible, albeit cautious approach. In agreeing to act as a lender of last resort to support a bank or financial institution that was still basically financially sound. Providing they could show they had not been wilfully negligent in lending money to people that were never likely to repay those debts. Also he was right to charge a so called punitive rate to deter other more delinquent banks who are now unable to raise money on the open markets because of their past misdeeds.

Only time will tell which of them was the better judge of the situation.

Robert says that the competitiveness of the City of London depends on there being confidence that the central bank will provide the right level of liquidity at the right time.

Perhaps he should have said that the the international competitiveness of the City of London depends upon having confidence in the ability and integrity of the people in charge there. Right now confidence in their abilty and integrity is not what it should be.

Why does everyone seem to think that the run on Northern Rock was such a bad thing?

Surely now and again we need to be reminded of the risks that we are taking. There isnt anything in life that is risk free. We can mitigate and accept risk, but we cannot eliminate it. If we did manage to eliminate a risk, we would only find another bigger risk to take, and nowhere is that more true than in high finance.

What the run has shown us is that the Northern Rock business model was dangerous, reminded us that not all of our bank deposits are insured unless you have a small amount, that the taxpayer wont bail you out if you gamble and lose, and that bad things happen.

These all seem to me extremely valuable lessons, and if they could have market value, I suspect that they would be worth far more than the value of that lost in the collapsed Rock.

It taught us to rely more on ourselves, to be aware of the risks we are taking. We should be thanking Mr King for reminding us of the harsh financial realities of life.

26 Andrew.
No I am not suggesting anyone should be rewarded. So the rest of your post falls.

What I am suggesting is that an irrisistable urge to punish caused the BoE to take its eye off its first and over riding responsibility to help the systems underpinning the market to work effectively.

So the FSA is showing great wisdom after the event. I think the narrative goes it wasn't us guv. How very New Labour to pass the buck. Is the FSA responsible for supervising the financial system or not? No wonder Mother Brown refuses to go under the table because this knees up has the potential to expose yet another failure to deliver; the Blair/Brown trademark for the last ten years. It is now clear that we need an independent public inquiry to show who did what and at what stage. At the moment we have reached an impasse with the FSA apparently contradicting the Old Lady's version of events. This is not the way to run a whelk stall let alone a global financial centre. Ideally the Commons should extract the truth from all concerned but I think there is fat chance of that happening. Northern Rock is a political hot potato for Mother B and there is no obvious way of emerging from under the table without a very tarnished reputation. I have said all along that this one has legs and may yet undo Mother B. Keep this story in the public domain Robert you are doing a valuable job,

There's a consensus that King was rights and Sants was wrong.

And yes, there should be a public policy assessment (by Government) that preferably confirms that but if not at least makes the opposite (that taxpayers will spend what it takes to cover up problems) clear.

Is this critical? Well, perhaps not. The only people who have suffered are NR shareholders - which is a good result. In the medium term NR just isn't that important.

Why did the money market stop lending to NR having done so profitably for many years? NR did not change its business model recently, it was solvent and not exposed to the sub prime market?

Do I hear a chorus of market illiquidity? And whose responsibility is it to ensure the markets operate efficiently? None more so than the central banks.

DeAnne Julius got it right. The BoE should have acted much earlier and decisively.

So, have I got this right, the international competitiveness of the City of London depends on the ability of the British taxpayer, via the Bank of England, to prop it up? Oops,what a give-away...

I think post 10 has hit the nail on the head.
Could I suggest everybody sticks their head out the window and takes a deep breath. Obviously, the country and most of the organisations within it eg banks, the NHS etc are being run by idiots whose only real concern is their fat cat pension and severence pay after messing up. There are of course a few exceptions. We'd offer Mr King a cup of tea if he was in the neighbourhood.

Its a bit rich for the FSA to fingerpoint at the BoE for this NR mess when for many years the FSA stood idly by cheerleading the dodgy financial alchemy being hatched by its City cohorts that precipitated this meltdown. Where was the FSA as the derivative bubble ballooned to its enormous unmanageable proportions?Where was the FSA when these instruments of ultimate financial destruction were being touted about and hailed as such risk spreading wonders? Where was the FSA in protecting the investment public when it knew that there existed no mark to market mechanism for these "AAA rated" toxic hazmat bombs?
Give over!!
In all this fiasco I would NOT be placing my trust in a bunch of self serving Johny come lately politicians nor a bunch of slick spivs and shysters playing defense for dodgy lenders such as the FSA. Mervyn King has been forthright in his appointed role as guardian of the WHOLE financial system in the UK. He knew that depositors would be safe even if he did not say so. He let the banking fraternity take it in the neck and thus exposed their smoke and mirrors dealings. Brits should be thanking him, not villifying him. He has allowed the system to hold dodgy bankers to account and more power to him.

I'm afraid the FSA are rapidly being shown up for the standing joke that they are.

They've stood by whilst the biggest credit bubble in history was inflated and now that it is going pop it was all someone else's fault that a sticky plaster wasn't applied quicker.

It is only a matter of weeks since the chairman of the FSA stated that depositors withdrawing their funds from Northern Rock were irrational. Whereas clearly they were acting very rationally a point Mervyn King conceeded after the event.

Isn't it time the FSA were junked and replaced with a regulator who actually regulates. Light touch regulation has proven to be a disaster particularly in the areas of consumer secured/unsecured debt, credit securitisation and credit based financial derivatives.

I see where this whole thing is heading it is toward the scapegoating of Mervyn King. No doubt to be replaced by some government yes man who will cut interest rates to save the hide of the city but at the same time robbing pensioners and savers with increasingly rampant inflation obfuscated by the CPI (Comedy Price Index).

The sight of the regulators engaging in a blame game is embarrassing but predictable. They have all got themselves in a frightful mess by bailing out a badly-run bank, and are now rightly petrified at the likelihood of repeating the exercise as the rest of the banking sector follows like ninepines, destroyed by the years of reckless lending.

What will happen next?

Sterling will start to plummet.

Gold will continue its ascent as the only safe haven.

Gilts will start to come under pressure as the creditworthiness of the government itself starts to come into question (and rightly so).

Sants is no fool but his appraisal is base on perpetuating a system of regulation that is weak at best and incompetant at worst.
It now transpires that Darling stoppped LloydsTSB form taking over NR and no one else.
King is obliged to maintain monetary order where it has been shown politicians haven't got a clue. But that doesn't mean condoning incompetance by clearing bank management should covered up by pumping more money into the system because they got it wrong big time.
The FSA should get its own house in order first and foremost and then look where it can help the system and its CEO should stop suppporting the banks above all elsem that is not his job, they have Angela Knight to fight their corner, unfortunately for them.
It looks like we have 2 nmore years of a lame duck labur party who will rely on ever more spin and duplicity to cover up their disasterous handling of the economy and hopefully less if Brown does the right thing and calls an election sooner.
Brown was right in highlighting change at his unopposed coronation, however the key and most important changed has conveniently been missed - his resignation.
This self infilcted mess by labour is manner from heaven for the tories and it will be great TV to see the public cruxifiction of labour and all their cronies.

Robert,

I believe that Sant's view has some merit, but i still question whether pumping money in earlier would have saved NR when it is clear that its business model was so fatally flawed. The BofE and effectively every taxpayer in the country is now proping it up. King is definately correct in saying that the BofE could not (and should not) have tried to cover up the financial difficulties at NR or any other bank. If the BofE had tried to rig the market in such a way as to favour NR then it could have created an even bigger banking crisis then we have now as the integrity of the central bank would have been questioned and by implication every other UK bank would have been tarnished.

The delineation of jobs between the FSA, BofE and the Treasury must be made much clearer, as some of the comments appear to be part of a blame game betwen the three.

The story so far.
American mortgage providers lent to people who are bad risks. Some of them mis-sold and are suffering high default rates.
Big American Banks funded the sub prime market. They hid their jeopardy by mixing high risk loans with good securities in opaque packages. These packages were well regarded by the rating agencies and sold on across the world's financial markets. The buyers of the packages had little idea of the poison hidden within. They did not understand what they were buying.
The default rate in the American sub prime market escalated; the exposure of banks around the world to the toxic mixture in the packages became less opaque.
The market took fright and liquidity drained away as banks held on to their funds for their own well being.
The ECB and the Fed took measures to try to ease the situation. The Bank of England sat on its hands muttering ' moral jeopardy'.
Meantime, a relatively small solvent English Bank with a low default rate and a good mortgage book that had been funded largely by the wholesale market for many years found itself stranded. It went to the BoE for help but the BoE sought all ways and arguments for doing nothing muttering ' moral jeopardy, moral jeopardy'.
NR takes a lashing for its flawed business model. A run on NR followed to the deep embarrassment of the BoE, the Treasury and the Government. This kind of thing was not suposed to happen - the FSA looked after individual banks and the BoE ensured the effective working of the systems underpinning the markets.
The BoE throws away its guns and does a U turn. NR survives on a BoE life support system.
The big banks who poisoned the financial system declare large hits to their current year profitability. Other big banks who bought the opaque packages without knowing what they were buying are still getting round to their final assessment of the damage.
According to many posters and commentators the transgressor in the story is the NR and it should be punished.

#41 Ray.

I never suggested in my post that anyone was being rewarded, although given the high profile resignations in major city institutions and their even higher profile bonuses, I think that maybe people have been rewarded for the risks that they have taken.

That said, whether we are dealing with risk takers being rewarded, or with risk takers merely not being punished, I believe the result is the same. In effect, we have individuals who have pushed the system to breaking point, a regulator that has allowed it, and bank being asked to pick up the pieces. In any other arena, this wouldn't be allowed. Would it?

Lloyds were only interested in taking over NR if the BOE guaranteed the funding to allow them to check out how much of the balance sheet was legitimate, They knew that NR was playing some dicey games with both its assets, (loans and investments) and its liabilities, (funding). As far as anybody claiming the Fed has done a better job, the should keep watching. Bernanke is a firm believer in printing money and as a true follower of Milton Friedman would prefer a bit of inflation to deflation, he is also terrefied about the prospect of a banking crisis, so he is altered monetary policy to avoid what he sees as the bigger risk. Unfortunately the US has as many avaricious lawyers as bankers and a whole raft of class-action filings are no doubt about to hit the US securities and finance industry. The obvious solution to the US companies is to pre-emptively file for chapter 11. I hope this doesn't happen because a credit event like this will be hugely upsetting for the banks and insurance companies and hedge funds that have written credit protection - the beauty of derivatives and financial modelling is about to be tested and we have all seen from Bear Stearns, Citi and Merrill Lynch that some financial models do not respond well to extreme stress testing.

Ray,

1) You have no idea how solid the loan book at NR is. No-one does. I suspect not even NR does. On the basis of their advertising model, I wouldn't bet on their loan book.

2) The 'market' is seriously overinflated. Period. EVERYONe (well maybe everyone except you) has noticed. Which is why most markets are in huge flux at the minute. This overinflation has been caused by the huge borrowings that people have taken on to buy.

3) What the ECB and the Fed have done by making money available cheaply is to try to fund the continuation of this bull market to avoid the inevitable comedown. What the BOE have done is taken a step back, and pointed out that the market is over-inflated. Pushing cheap funds into the market simply delays the inevitable, and amplifies it. By penalising the overly irresponsible by charging a penalty interest rate for the funds made available, they are ensuring that instead of the crash tha the ECB and Fed are provoking, we get a smooth slowdown with a transition.

Which do you want, Ray? Crash and burn a bit later on, with the taxpayer picking up the bill, or smooth transition to slower/negative growth?

In reply to TONI.
Friedman was a moneterist.

# 53 Andrew
It is true that you did not mention rewarding anyone - a person. But I think you should look again at your original post first paragraph where you refer to rewarding institutions. It astonishes me that so many want to inflict punishment on NR and regard help as a reward.

Banks do not want to lend money to Northern Rock even now that it has massive financial support from the BoE and the government - that is why the BoE's line of credit is being used up as the Rock's wholesale deposits come due. It therefore seems absurd to argue that banks would have been willing to lend to the Rock when it had no support at all from the BoE or the government.

If the BoE had followed the advice of the FSA and large commercial bankers in early September, it would merely have provided cheap money to the big banks to build up their liquidity without doing anything for Northern Rock.

Exposure Exposure Exposure!
Is a product of
Greed Greed Greed!

Robert
I have been reading your blogs with interest over past few months and wish to ask you 2 questions (I dont expect you to publish these questions - guess they may touch on a nerve maybe?)

Q1 Are you sponsored by / on the payroll at Barclays?

Q2 Was Mervyn King your source of information (some may say mole) with respect to NR'gate..

Kindest Regards
Jeff

Frank, well spotted, Friedman was a moneterist, and so is Bernanke. He, like Friedman, belives that the helicopter drop of liquidity can solve a credit crisis. I think Bernanke said something along the lines of we have the keys to the printing press and we know how to use them. The difference is that back in the day of Friedman, the US was the pre-eminant industrial power, now it is a country with a tragic fiscal imbalance. Friedman believed that central planning economics was the wrong way to go, maybe he was right, we will never know because the war delivered the end of the recession for the US and co-incidentally bankrupted the UK, in fact they just paid of the last lend-lease commitment to the US last year. The Americans do nothing without being paid for it, just ask the Saudis.
Situations change. A US economic crisis will not be a deflationary or stagfaltionary one this time, it will be inflationary and that is bad news for all of us. Inflation is all around us, we may choose to believe the government figures in the UK and in the US but those are only created to reduce real wages. Go to a shop, buy some groceries, fill up your car with petrol and tell me that you don't feel inflation.

Robert, this is more drivel. You're setting up a silly "was the FSA or BOE right on this" debate.

It was the FSA's job to monitor financial institutions and prevent a situation like this developing. If they had been doing their job properly in the first place, the Rock wouldn't have been allowed to become overextended and Mervyn King wouldn't have had to make the difficult decisions he had to make.

Your continuing attempts to find a way to pin the blame on Mervyn King and to defend the FSA and your city chums are robbing you of all credibility.

Reply to Jeff #61.

You are way off the mark here. Robert Peston is a mafioso. All the major banks and financiers pay him protection money. The Rock sadly missed a payment.

Robert is also a clairvoyant and has no need of MOLES.

Mervyn King is a hologram programmed/controlled by Mr Peston.

The truth is ALWAYS stranger than fiction.

Kindest Regards

Robbie (Peston's love child)

Ray (58)

Your mistake is to assume that "not rewarding" a company is the same as punishing them. Northern Rock were the authors of their own downfall. The BoE were quite right to be extremely cautious of the moral hazard of propping up a bankrupt financier.

As others have pointed out, Robert P is talking rubbish here. The primary fault lies with the FSA for not doing their job by regulating Northern Rock effectively over the previous years that led up to this crisis. King was left to pick up the pieces of the FSA's failure and NR's risky behaviour. Ignoring this in favour of setting up a false choice between whether Sants or King was right when push came to shove is yet another example of Robert's awful journalism on this topic.

Serena (65)
Andrew mentioned that NR should not be rewarded. I said that not being punished was different from being rewarded. There is a neutral state between a punishment and a reward. I agree the BoE should always be cautious if that is the opposite of reckless. However I do not think that caution means timidity, inaction or indecisiveness as he has now found with the BoE underpinning NR.