Afternoon:
10°c
There is something deeply unsettling about reading of banks in trouble. Other businesses can go under and we don't care - but not banks. It's not just that they've got our money in there - only £1 in every £10 of the banks' cash belongs to the banks, the rest is ours. It's also that they're supposed to be paragons of virtue, well-managed, solid and reliable.
They're one of the pillars of our society, able to dispense advice while never needing it themselves. When Jimmy Perry and David Croft came to devise a leader for their ill-starred Home Guard platoon, they alighted on Captain Mainwaring, the local bank manager. Now, in rapid succession, we've had two of our main players admitting to being in crisis.
First Northern Rock ran up the white flag. Yesterday Bradford & Bingley disclosed that it made an £8 million loss in the four months to the end of April, the result of the mounting cost of the credit squeeze and soaring arrears in the buytolet market.
Both were from regional centres that used to pride themselves on caution and thrift - Northern Rock from Newcastle and the B&B from Yorkshire. Both were former building societies with long histories. Northern Rock was formed from the merger of the Northern Counties Permanent Building Society (founded in
1850) and Rock Building Society (1865), B&B from the coming together of the Bradford Equitable Building Society and the Bingley Permanent Building Society (each was started in 1850).
Northern Rock scrapped its mutual status and floated on the stock market in 1997; B&B followed suit three years later. But in the first economic downturn they faced, they faltered. Northern Rock had to turn to the Bank of England for support and ultimately was nationalised. B&B has had to ask its shareholders for help and has also sold 23 per cent of the company to US private equity firm Texas Pacific Group.
There are those in the City, in banking, even the regulators, who will go to great lengths to insist that B&B is no Northern Rock and the two cases are very different.
They're right. Northern Rock had staked its ability to grow as a business on being able to obtain cash on the world money markets. The issue it faced, back in September, was one of liquidity - international banks, anxious about defaults among lenders in the US and their exposure to them, turned off the tap.
With B&B, the problem was UK buytolets. It might be the country's eighthlargest bank but B&B is the market leader in loans to people wanting to buy and develop properties in order to flip them. As long as prices kept on rising, that was fine - but once they turned and these landlords found themselves in difficulties, B&B hit the emergency button.
What is now clear is that B&B had gone down the buy-to-let path without having the managerial competence or IT system to cope with it. When conditions worsened, they were unable to obtain upto-date figures.
There is something desperately wrong here. What the founding fathers of B&B would make of their firm's cavalier approach to buy-to-let and the seeking of first aid from a US private equity operator doesn't bear thinking about. People like me writing that their great institution "should be" all right would be anathema to them.
What bothers me about the current mess is the complacency I encounter at every turn. No senior banker, with the exception of Steven Crawshaw, the B&B chief executive who quit on health grounds, has left their post. Sorry, I forgot - Adam Applegarth, the chief of Northern Rock went, with a £760,000 pay-off, a £346,000 pension top-up and the bank is continuing to allow him a cutprice staff mortgage.
Talk to those in the City about this and they shrug: it's his contractual entitlement. So that's OK then. If a builder does a bad job, you can reduce his charges or not pay him at all. He can sue if he likes.
But banking boardrooms are funny places - they don't seem to operate to the same standards that prevail elsewhere. Willie Walsh of British Airways doesn't take his bonus because of the T5 fiasco; Sir Fred Goodwin of Royal Bank of Scotland, who paid way too much for ABNAmro and has asked investors to stump up £12 billion to bolster the bank's finances, has taken his.
The banker and his bonus are joined at the hip. It was the prospect of bigger bonuses that drove on Northern Rock's modern generation; it was the thought of fatter pay cheques that caused B&B to take a flyer on buy-to-let.
Yet nothing is done when it goes wrong. Not by the non-executive directors because they like their sinecures. Not by the other banks because they also pay themselves whopping bonuses. Not by the lawyers, accountants and PRs because they all feed off the banks. Not by the clients in other walks of life because they don't dare upset the mighty banks. Not by the Government because it is so dependent on the banks for their tax revenues and for assistance in its private finance initiative. Not by the regulators because they're concerned to maintain "stability" and that is quickly and misleadingly translated into the need to keep London at the top of the world financial tree.
Among the authorities at the moment the prevailing mood is to watch and learn. They're terrified a major bank will collapse and send the whole edifice of UK plc crashing down. Don't worry, said an official to me yesterday, "lessons are being learned and they will be applied". He added: "We need the senior bankers to help us put out the fire."
Excuse me: they started the inferno in the first place! You provide the spark and give it a few gusts, watch it burn, call us, then stay around to show us where the exits are, there's a chap. Oh, and when you decide you want to get out, there'll be a few million to help you on your way.
Suddenly - and I never thought I'd say this - even football begins to look clean and pure by comparison. It wasn't always like this. "When the company was first set up its purpose was clear: to build a better future for the people of northern mill towns. In 1851, we helped our first customer, John Abbey, build a better future for himself and his family by lending him money to buy his own home. We're very proud of our heritage and, in the Bradford & Bingley Group we know today, this heritage continues to shape our business and its purpose."
That's from the B&B website. John Abbey wanted the money for his own home - he didn't want it in order to buytolet. Somewhere along the way banking has forgotten what it once was - and what it ought to be.
Reader views (4)
B&B's buy-to-let portfolio isn't it's problem. Mortgage Express its subsidiary is performing relatively well. Like many others it was the investment in sub prime loaded issues that has hammered this once "untouchable" building society / bank. Buy-to-let could still prove very lucrative for the bank as fewer people buy homes more choose to take up in rented property.
- Ken Dickie, London, UK, 04/06/2008 16:53
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Don't lay all the blame with the banks! Remember that the rise in purchases of buy to let properties was fuelled by Brown's raids on private pension companies which made the provision of a good return poor in comparison with the return that could be achieved from BTL. Unfortunately, the uncontrolled lending of such mortgages partly fuelled the property price rises which have so badly affected buyers for their own homes. When Brown took control, Great Britain PLC had the best funded pension provision in Europe. We now have the worst. I made a decision about five years ago to cancel my own pension scheme, as the projections were falling way below the figures quoted when I first started in 1984, and invested the monies in my own company instead.
- Ron Walters, Croydon England, 04/06/2008 13:58
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The following quote is straight from a former Director of the Bank of England, nuff said?:
"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes such as mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create money and control credit." - Sir Josiah Stamp - former Director of Bank of England
- Goggleman, Newcastle-upon-Tyne, 04/06/2008 12:53
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I still get angry about taxpayers being forced to bail out banks after bankers habitually treating said taxpayers like peasants. It happens all over the world and we don't seem to learn our lessons when the cycle repeats itself. I don't see the big bonuses bankers organise as a part of their 'incentivisation' ceasing either.
- Kiwi Expat, London, UK, 03/06/2008 19:43
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