How the spirit of the Rock triumphed over the prudence of the Northern
MARTIN VANDER WEYER Hindsight suggests that the Rock was always likely to get the Northern into trouble one day. The Northern Counties Permanent Building Society, founded in 1850 as the successor to the Newcastle Land Society, was by reputation 'a serious establishment' (one of its first decisions was to ban women from its board, a ruling observed by its successor until 1999) and its early growth was relatively slow. By the turn of the 20th century, it still had only 216 mortgage borrowers, and was one of no less than 29 building societies in a city of 270,000 people. During and after the second world war it expanded by absorbing smaller societies — the Crown, the Workington, the Elswick — but it remained firmly rooted in its home region and the high-minded principles of mutuality.
The Rock Permanent Benefit was 15 years younger than the Northern, and 'seen as a much more light-hearted place', according to a local historian. As home ownership grew in the 1920s, the Rock was a relatively aggressive lender, pushing out £1 million in a single year. It was also one of the first societies to expand nationally, opening branches as far apart as Penzance and Aberdeen.
When these rival institutions started to discuss merger in the late 1950s, their contrasting cultures got in the way. So did the personalities of the men in charge: Fuller Osborn for the Northern, and for the Rock the third Viscount Ridley — father of the cantankerous Tory minister Nicholas Ridley and grandfather of the present Northern Rock chairman (and former Spectator contributor) Matt Ridley. It was only after old Lord Ridley had a leg amputated and died of complications that the merger moved forward in 1965. The combined institution had two thirds of the mortgage business in the north-east and continued to grow, absorbing dozens of smaller societies over the next 20 years. Osborn, a quiet man of fierce integrity, continued to dominate until he retired from the chair in 1987.
A decade after that, Northern Rock floated on the stock exchange, subjecting itself to unfamiliar pressure from analysts and investors for competitive short-term performance. With the help of its friends in the City, it explored new ways of raising wholesale money — including `securitisation' of bundles of mortgages — to support a fast-growing loan book that far outstripped its high-street deposit base. Finally in the last year, combining (as Ross Clark reminds us in this issue) aggressive mortgage pricing with sophisticated funding techniques, it grabbed almost one fifth of all new mortgage business in Britain. The spirit of the Rock, you might say, had triumphed over the prudence of the Northern. Perhaps it was kinder that Fuller Osborn died in June, aged 91, before the first inkling of trouble — a tottering share price — turned into the humiliation of the first run on a British bank in living memory.
Black Friday Quite when the last full-scale run on a bank actually took place, with depositors queuing through the night and round the block, is difficult to pin down. It might have been 2 October 1878, when the City of Glasgow Bank closed its doors with liabilities that exceeded its assets by £6,213,314. The historian David Kynaston tells us the Glasgow crash 'made banks increasingly preoccupied by the question of liquidity and as a direct result increasingly less likely to adopt a liberal approach in their lending policy . . . arguably at the expense of overall British economic development', which may be exactly what's about to happen now.
Before that, we should recall the failure of Overend & Gurney, the 'bankers' bank' whose turnover had risen to double that of all its competitors combined, on 'Black Friday', 10 May 1866. The tumult became a rout,' the Times reported, as `the doors of the most respectable banking houses were besieged.' A modern chronicler of the story, Geoffrey Elliott, concludes: 'Money muddles always start the same way, when judgment is fuddled by greed, ambition and overweening self-confidence; then when problems arise, there follows an obstinate refusal to admit mistakes or the imminence of disaster.' Precisely so with Northern Rock, its City friends and the regulators who have watched this crisis coming for the past six weeks. But financial wisdom is rarely transferred between generations, let alone from one century to the one after next.
History ignored This may be the first run on a British bank since Gladstone's day, but last Friday has at least one competitor for the title of most dramatic moment in modern banking history: 19 December 1973. That was the day the then Governor of the Bank of England, Gordon Richardson, summoned bankers and institutional investors and told them in his autocratic way that he did not expect them to leave until they came up with a rescue for Cedar Holdings, a small bank specialising in second mortgages which needed £72 million to save it from the impact of collapsing property prices. The Governor took the view — similarly taken by Chancellor Alastair Darling in relation to Northern Rock — that Cedar's default could cause 'a contagion of fear' throughout the banking system. But there would be no bail-out with taxpayers' money: Richardson (born in the same month as Fuller Osborn, but still with us) was determined the City would put its own house in order, and so it did. That day and night saw ferocious arguments: my father Deryk Vander Weyer, fighting Barclays' corner, believed Richardson never forgave him for showing insufficient respect. Nevertheless the Governor's eyebrows prevailed. As an Economist headline put it, The City Was Saved'. Within a week the Bank had launched its 'Lifeboat' operation, funded by the clearers to the tune of £1.2 billion, to save other lenders from catastrophe: when it was all over, the reputation of the Bank and the City stood high in the world.
This time, the Governor is a sadly diminished figure: wise economist and nice chap though he undoubtedly is, Mervyn King has been swept aside by the tide of events, by Gordon Brown's muddling of roles between the Bank and the FSA, and by the eagerness of Darling, on Brown's instructions, to minimise political damage Attempts to marshal other banks to rescue Northern Rock seem to have been abandoned before they began; Darling's open-ended bail-out promise has weakened the authority of the Bank even further; and yet another lesson of history has been wilfully ignored.