How much sympathy do Northern Rock savers really deserve?

It's easy to feel sorry for those frantic savers who queued up to rescue their life savings. But how well-informed was their investment? And what about some sympathy for the shareholders?

The more I contemplate the Northern Rock affair, the angrier I become. This is not because I have a deposit with the Northern Rock or a mortgage. I don't own a single share in the company, although I dare say that whoever manages my pension or insurance funds might have plenty. But what really bothers me is this: Why does the Government bend over backwards to ensure that Northern Rock's depositors suffer no loss, while treating shareholders in Northern Rock as if they have brought this whole mess upon themselves and deserve to suffer?

I have got my life-savings in there,' was the cry from most of the distressed customers that queued outside Northern's branches, desperate to get their money out.

Well, before you take pity on these innocents, let us just consider how sensible this was...

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The one rule of investment

Why do depositors put all their money into one building society?

Probably a) because it has an office down the road; b) because names like Northern Rock and Abbey National have a ring of substance about them. And c) because these depositors have worked out that while Mr Barclays or Mr Nat West will pay them only 4% on their savings account, Mr Northern Rock will give them a handsome 5%. Nice!

But rule one of investment is that higher returns and higher risk go together. Why are building society rates higher than bank rates? The answer is because banks do not only engage in the lucrative mortgage business. They diversify their lending far and wide, financing trade and business.

And I wonder just how many Northern Rock depositors knew full well the terms of the Financial Services Compensation Scheme that protects the first £2,000 of cash deposited with a building society, and 90% of the next £33,000 and nothing beyond that. I am certain that they were all given these details when they opened an account details that they either did not read or chose to ignore.

One lady customer of Northern Rock revealed that she had £750,000 with the Northern Rock. She was no doubt earning about £7,500 more interest on this than had her money been in a bank but that did not prevent her outrage at the realisation that this came with some sort of risk attached.

Now compare the treatment of this greedy fool with the treatment of shareholders in Northern Rock...

Excellent results... 30% increase in dividends... so what the heck happened?

They are savers too. They have invested some of the money that they have managed to set aside into Northern Rock shares. Private investors are not by and large, short-term traders. They build a portfolio of shares, stick with them, and favour those that pay a nice stream of dividend income. This is absolutely what the government should be encouraging.

These investors are putting their money to work in the economy, by financing business. If they manage their own portfolios they are doing so in order to secure their own financial security, and because they do not want to line the pockets of City fund managers. They take an active interest in the economy of this country, and in the stock market. They contribute to the efficient allocation of risk capital in our economy through making informed investment decisions. They should be given as much encouragement as possible.

But now shareholders in Northern Rock feel that they have been treated like dirt. They have been kept in the dark, and now that the shares have crashed they hear not one hint of sympathy. Quoted companies have a duty to inform shareholders of anything that might significantly change the outlook for the business. But what did shareholders officially know before September 14th, when the Bank of England announced rescue funding?' Just seven weeks earlier Northern Rock had announced excellent results featuring a 30% increase in the dividend and news that its ratio of non-performing loans was half the industry average.

Three weeks later the Bank of England was, apparently, aware of an impending funding crisis for Northern Rock. And yet nothing was said to shareholders. City insiders were clearly aware of the matter and began to short the shares in earnest. The shares fell 4% in heavy trading the day before the Bank of England acted. With the cat then out of the bag, the share price fell even more steeply. In fact the first time that shareholders could sell in the official knowledge of the problems of Northern Rock, the share price had already lost half of their value at the time of the interim results.

All of this has been pointed out by the UK Shareholders Association, which represents private investors.

It suggests that the heavy selling of the shares that preceded the official announcement of Northern Rock's difficulties could have amounted to market abuse' in other words insider trading. It also questions why, if the Bank of England and Northern Rock knew of an impending crisis, a piece of information of material importance to the share price, it did not inform Northern Rock shareholders.

The answer is obvious...

...because to do so would have made the problem a very great deal worse. And yet the fact remains that some shareholders or City traders clearly knew what was going on, while private investors were kept in the dark. This reveals a particular problem for companies in the financial sector. All companies, whatever their industry, can suffer some real damage to their business, through a diminished reputation or a lack of customer confidence, if their shares are unpopular on the stock market. For finance companies this can be critical, and in the case of Northern Rock it has just about killed off the company altogether.

But since it is undoubtedly the case that financial organisations cannot afford to even hint that they might be facing difficulties, it is impossible for them to keep their shareholders fully informed. So when the worst comes to the worst the authorities cannot turn to shareholders and say it's your own fault. You knew what was going on', because they did not, and could not be told.

Northern Rock shareholders are entitled to feel aggrieved at the sight of their savings being washed away, while the savings of depositors are ensured.

If you are a shareholder in Northern Rock, you can join UK Shareholders' Association's "Shareholder Action Group" via an email to, or via a letter addressed to BM UKSA, London, WC1N 3XX.

This article is taken from Tom Bulford's free daily email Penny Sleuth'.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.

Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

Follow Tom on Google+.