February 18, 2008 – 8:28 pm

It was the first British bank of the new century to see runs against it, as fear overwhelmed greed for the most conservative of investors and outrage overtook propriety in the most proper of countries, when everyone wondered whats next?

“I am shocked and appalled,” said Robin Ashby, spokesman for the Northern Rock Small Shareholders’ Group in Newcastle. “It is bad news for the image of Britain as a financial center. The big shareholders may decide to take legal action. Downsizing is inevitable, and we are worried about the jobs.”

But as the credit crisis deepened, the asset and share values plummeted amid failed buy out and rescue attempts until after months of chipping away the U.K. government could take no more and in a surprise move seized full control of the bank.

It was in no way a single bank that failed over the weekend, rather it was the reputation and resolve of the British government that has been broken across Northern Rock:

The Daily Telegraph says taking the bank into state ownership is an admission of failure by the prime minister and his chancellor.

“Fury over Rock nationalisation,” runs the Financial Times headline, warning shareholders can expect virtually no compensation for their holdings.

leaving it tarnished and distrusted.

New Labour’s indecisive, even cowardly response to the Northern Rock crisis has confirmed that UK politics is more bankrupt than the economy. Despite the fact that we are supposed to live in a market economy, the government concluded (after damaging dilly-dallying) that it had to bail out Northern Rock somehow to sustain fragile confidence in the UK economy and especially the all-important finance sector. So, faced with those embarrassing pictures of pensioners queuing to get their cash back, it lent the bank billions and guaranteed its deposits while trying to work out a longer-term solution.

The truth is that Northern Rock was never what it appeared to be in the first place; a successful financial leader of the “new” UK economy.  It was more of the British version of the US’s Countrywide Financial (which, coincidentally, also experienced some scattered bank runs last August). One clue comes from the sudden-death swiftness of the bank’s collapse.

In January of 2007 the bank announced record pre-tax profits of £627m for 2006, 27% higher than the previous year’s. Earnings built on an ailing and all too familiar business model:

The trick Northern Rock pulled off was to rely on wholesale markets rather than on retail deposits to finance most of its lending. More than any other big British lender, it relied on “securitising” its mortgages.

In January 2007 it raised £6.1 billion that way; a second securitisation in May brought the first-half total to £10.7 billion and made Northern Rock the top securitiser among British banks. With money swirling around the world’s capital markets, securitisation worked a treat. By tapping global wholesale markets, Northern Rock was able to raise money more cheaply than its home-bound rivals, price its mortgage offers more keenly and carry on its hectic expansion.

The bank had planned more securitisations for later in the year to fuel Northern Rock’s frantic growth. But as interest rates increased with no capital base of reserves to draw from, the Ponzi rollover-finance scheme tumbled towards it’s “Minsky moment” and ultimate collapse.

Finally there was nothing left to decide except what to do with the corpse.  So with tormented reasoning the government socialized private risk and bought the bank’s liabilities with the taxpayer’s assets:

The Daily Mail’s front page suggests the government has taken a “£100bn gamble with your cash”. It says MPs will be blamed if staff are sacked.

“Fury over Rock nationalisation,” runs the Financial Times headline, warning shareholders can expect virtually no compensation for their holdings

Northern was as much a product as a victim of the credit crisis. It was not responsible for leaving the cookie jar open. It did not print the phony money and pass it to millions of credit unworthy ‘subprime’ borrowers to fuel a housing binge. Those conditions existed in the larger economy and Northern Rock simply led in taking advantage of them.  Unfortunately this analysis reveals that the broader economies of both Britain and the US must therefore be rushing rapidly towards similarly severe reckoning.

Before credit crisis there hadn’t been a failed bank in Brittan in 141 years. In the shock wave of the bubble’s burst, no one knows how many more there will be in Great Britain or elsewhere.  The only certainty is that the queue is forming and on top (or is that bottom?) is Northern Rock.

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