At last, the UK financial press has its very own mortgage-related rescue crisis. But the fact the news about Northern Rock’s request for emergency funding from the Bank of England leaked out in the first place “says everything about the bank’s senior management, under the guidance of chief executive Adam Applegarth”, writes The Daily Telegraph’s city editor, Damian Reece, on Friday.
That Applegarth chose not to announce the shock move during trading hours — and instead opted for the sit-and-wait tactic — “will cost him, and the bank, dear,” notes Reece. Applegarth’s supporters might argue that both the Bank and the FSA told him not to say anything until the funding was arranged.
But those supporters are aware that Applegarth has been having this conversation for the best part of the last week — a conversation that should, arguably, have been conducted with the knowledge of customers and investors.
For Applegarth, who has run the UK’s fifth largest mortgage lender for the last six years, the expected confirmation on Friday of what has been arranged could be one of his last.
The Guardian’s Nils Pratley, meanwhile, argues that it’s not just Applegarth’s days that are numbered.
Even though it’s clear the Bank of England would not allow such a significant institution to sink, Northern Rock’s days as an independent institution are probably over, he says. “Its business model, lauded in the golden years, has been exposed as too feeble to withstand the crisis in the credit markets.”
It needs better protection for the future, which means sheltering within a bigger, more diversified bank with a wider deposit base. In other words, a takeover.
As for the wider mortgage market:
Rock’s management is not without blame, as the Bank of England in effect implied by saying the emergency cash will be provided at a penal rate. Rock has lent freely. It has been the first port of call for buy-to-let mortgages, for mortgages at five times a borrower’s income, and for mortgages representing 125% of a home’s market value.
Such deals will now disappear. In the long-term, that may be no bad thing, but many people will find it harder to get a foot on to the property ladder.
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In Friday’s FT, the FT’s banking editor, Peter Thal Larsen, and economics editor, Chris Giles, say the Bank of England’s decision to provide emergency funding to Northern Rock is a “stark illustration of the severity of the liquidity crisis facing the UK banking sector”.
The Bank’s decision to rescue Northern Rock illustrates how a sound, well-run financial institution with no history of poor lending decisions has fallen victim to a crisis of confidence it played no role in creating. But it also underlines the Bank’s concern that, if unchecked, the liquidity crisis at Northern Rock could spread to other financial institutions.
On Wednesday Mervyn King said that the Bank always had the option of acting as the lender of last resort where it would “lend ‘against good collateral at a penalty rate’ to an individual bank facing temporary liquidity problems, but that is otherwise regarded as solvent”.
But his position will be uncomfortable as it will be difficult for him to be seen as both a crusader against bailing out banks and one of the important players in the rescue of Northern Rock.
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The BBC’s Robert Peston, meanwhile, says on his blog that “the good news is that the Chancellor, the FSA and the Bank of England don’t believe Northern Rock is an unviable business”.
If they thought the Rock — or Northern Crock as it’s been dubbed in the markets — was an intrinsically bad bank, they would not have agreed to rescue it by providing emergency funding.
Such, says Peston, was the unambiguous implication of the Bank Governor’s statement to the Treasury Select Committee on Wednesday on the circumstances in which the Bank is prepared to act as lender of last resort to a troubled institution.
But that’s the end of the good news.
What Mervyn King also said is that the Bank will only provide funds to a troubled institution in this way if the risk of a collapse could lead to “serious economic damage”.
Certainly Northern Rock — with £24bn of retail depositors’ funds and £113bn of loans and other assets on its books — is big enough to wreak a fair amount of havoc, were it to fall over.
But does that mean that Northern’s customers and shareholders have no reason to feel aggrieved at Northern’s management?, asks Peston.
Well, Northern is the victim of exceptional market conditions. But that doesn’t let Northern’s management off the hook.
Banks have to expect the unexpected in the way they manage their balance sheets.
But perhaps the biggest criticism to be made of this bank is it massively increased its mortgage lending at the beginning of this year, when most economists were forecasting a slowdown in the housing market and when interest rates were already rising in a way that squeezed its profit margins.
So Northern Rock may not be going bust. But its reputation has been badly damaged. Which normally means that there will be a clear out of top management and also that the business may well be sold.