I’m reading a strange little book this week. It is called The Fall of Northern Rock and is written by an ex-employee of the now nationalised bank called Brian Walters. I’m not quite sure why Walters was the one commissioned to write the book, for the simple reason that he doesn’t seem to have any more inside knowledge into the affair than the rest of us.
The book is peppered with confessions of ignorance. He picked up not a single warning signal from the beginning of the debacle to the end. In early 2007, he thought nothing could stop the bank’s “fantastic progress”. When the share price started to fall later in the year, he assumed, along with his colleagues, that the media, jealous of the bank’s previous successes, had “it in” for it.
Walters knew little of the bank’s funding methods and was “blissfully unaware” that the sub-prime crisis in America might threaten Northern Rock – as, indeed, were his bosses, who launched a new discount tracker for buy-to-let investors in August 2007. And even in early September, just before all hell broke loose in Newcastle, he was busy flying off for a holiday in San Francisco with, as he says himself, very little idea of “what was really going on behind the scenes”.
It all seems rather extraordinary given that, although he wasn’t exactly a board director, Walters was head of commercial lending for the Leeds office, and given that even the most junior of financial journalists and analysts across the City had a very good idea of exactly what was going on behind the scenes.
Still, compare it with this week’s debacle – the profits warning and bungled rights issue at Bradford & Bingley (B&B) – and it doesn’t seem so odd after all. It looks like a mixture of total lack of awareness and mild stupidity is par for the course across the UK banking sector. Just like Northern Rock, B&B has clearly spent the last few years in total denial – refusing to accept that the housing market was in a bubble and hence fuelling the fire of its own destruction by providing the credit to keep the bubble growing.
And just like Northern Rock, senior management appeared to be blissfully unaware of the all-too-obvious risks to their business. At the start of this year, even as volumes – the canary in the coal mine to the housing market – collapsed across the country, B&B announced that it was relying on growth in its buy-to-let business to keep things going. Whoops.
But just as delusional as the bankers are those who were still holding B&B shares on Monday when their bad news at last appeared. Who didn’t know about the credit crunch? That buy-to-let in Britain is bust? That falling house prices and rising mortgage rates always lead to arrears and defaults? And who had forgotten that bubbles always end in corruption (B&B also announced on Monday that they’d lost £15m to mortgage fraud)? You might want to check one of them isn’t running your pension fund.