Northern Rock: The dog that didn’t bark in the night?

February 23, 2009
“]Sherlock Holmes [Silver Blaise]

Northern Rock was arguably the harbinger of the credit crunch for many people in the United Kingdom. But where’s the evidence of the impact of its new leadership?

Regular subscribers will maybe recall the story as followed in Leaders we deserve (see below for the various posts).

In September 2007 its story was presented as one in which an ambitious regional institution had dynamic but misguided leaders who developed a dodgy business model which had brought the company low. Exit leaders Adam Appleyard and Matt Ridley to much fury and anxiety among small investors and mortgage holders. But in hindsight, the leaders escaped the subsequent humiliation, and accusations of cupidity and worse meted out on those who were directly blamed for the failure of the larger institutions.

Although accused then, and ever since, of dithering, the Government, and particularly Alistair Darling may be feeling a bit more comfortable now of their treatment of the case. Their de facto nationalisation of the bank is no longer regarded as an irreversible swing to left-wing politics.

Hunt the leader

More recently, the unfolding events at Northern Rock have been described with very little mention of its new leadership. A few months ago, the public mood equated bonuses for bank employees as utterly unacceptable. It emerged that Northern Rock was about to pay a 10% bonus to its staff.

A Northern Rock spokesman refused to be drawn on how much money was being paid out, but pointed out that the staff-wide bonus scheme had been announced in October [2008]. He also stressed that no executives or senior management would benefit. The reward comes after staff met targets on repaying the bank’s £26bn loan from the government.

Even Vince Cable, of the Liberal democrats, and one of the most respected and level-headed of financial commentators in the land, felt compelled to describe the scheme as “indefensible …bringing the worst of the City bonus culture into a public body.”

It was left to the Unite union to defend the management decision, pointing out that those involved were not fat cats but the workers whose renewed efforts under tough conditions agreed by The Treasury had helped secure the Government loans pumped into the bank.

Mortgage service resumed

This week [Feb 22nd 2009] the news broke that the bank was to resume mortgage lending

Northern Rock is to revive its mortgage business with up to £14bn in new loans by 2011, the government has announced. The Newcastle-based bank is expected to take on about £5bn in new mortgages this year and up to £9bn from 2010. They will be financed with money from new deposits, repayments on existing loans and more government money.

Investment analyst Justin Urquhart Stewart, of Seven Investment Management, welcomed the move and said Northern Rock could provide inspiration to other banks.
He told the BBC:

“They’ve been quietly off-market, being able to reconstruct themselves… to come back again and be able to provide a model – possibly as the world’s most boring bank – for the other banks to try and imitate. “And [it will] provide more capacity into the system so money starts being lent again and that’s what the British economy needs desperately.”

The story prompted the natural negative reaction from Conservative spokesman Greg Hands, shadow treasury minister

“We’ve been calling on the government for some time to free up credit in the economy and to make sure credit flows. However, for Northern Rock it is a bit of a volte-face because until now Northern Rock had been under orders to wind up its mortgage operation and essentially to close down business. I think there will be a contrast between existing customers who are facing repossession with all these thousands of new customers who are getting very generous terms.”

Invisible leadership

Notice that famous ‘absence’ in the emerging stories? Where’s the leadership coming from? Don’t we have here a puzzle like the mysterious case of the dog that didn’t bark in the night?

Perhaps there is a leadership story, but one in which ‘safe pairs of hands’ deliver a strategy under very difficult circumstances.

The unfolding story of Northern Rock

You can follow the unfolding story at Northern Rock in our earlier posts. From most recent to earliest:
Northern Rock: What’s good about it?
Alistair Darling plays chess at Northern Rock
Telling it like it is
Stone age economics


Northern Rock: What’s Good About It?

February 18, 2008

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The Government announces its intention to take Northern Rock into temporary care. The story has been told as an outcome of poor leadership. Is it really a tale of all-round incompetence? Or has the crisis blocked out any thought of positive thinking about leadership or positive outcomes?

On Sunday February 17th 2008, Alistair Darling announced that Northern Rock was to be taken into public ownership. In many quarters, the decision is deplored as evidence of poor leadership.

The ubiquity of incompetence

As head of the Treasury, AD is taking much of the leadership pain. His political opponents have been quick to continue their attacks on the competence of The Chancellor and of The Prime Minister.

Gordon Brown stands accused of an old weakness, of appearing to be leaving someone else to shoulder the blame, when problems crop up.

Mervyn King, as Governor of the Bank of England has also been widely criticised for his performance. Although he came under serious fire, he has survived press and parliamentary scrutiny and retained his job.

Northern Rock executives CEO Adam Applegarth and Chairman Matt Ridley were also found wanting. Their fates was sealed as the enormity of the problems at Northern Rock became clear. Initial offers to stay on to stabilize things were no more than could be hoped for. Exit Applegarth and Ridley, seriously damaged.

Interim CEO Andy Kuipers who replaced Applegarth is seen very much as a stopgap. He seems to have done all that could be expected, and came up with a rescue plan that won support from institutional shareholders. Yet I have seen no positive commentaries on his leadership.

The Financial Services Authority (FSA) have also been found wanting and criticized for “systematic failure of duty“. Its relationships with The Treasury and Bank of England are now being re-examined.

Leadership reflections

Are these various individuals really such incompetents as they are being portrayed? I offered a different view in an earlier post, which suggested that Alistair Darling, for one, could be seen as having a coherent strategy which he was playing pretty well. He signalled that nationalization was an undesired option, but one that he would not hesitate to use. Furthermore, the position was made to appear more convincing with a timely placing of information about the fall-back plan and the appointment of a very able leader (Ron Sandler) to run any new nationalized outfit.

Unlike many political commentators I argued that Darling has been playing a very solid game under tough circumstances. Among the complications are concerns to avoid breaking EU regulations about State Aid.

The merits of creative thinking

Serious problems can produce a deepening sense of doom and gloom. The difficult becomes assumed to be the impossible. At such times creative thinking is called for.

Creative leaders have their own ways of encouraging the faint-hearted. There are general purpose techniques advocated that help discussions break out of the bleak mindset that is captured by the ‘automatic no men’ and their killer phrases.

Edward de Bono suggests the benefits of putting on a positive thinking hat, and exploring unexpected options, before subjecting ideas to critical evaluation.

There are emerging psychological theories which suggest why personal development can be enhanced through such a positive approach.

When a group has become bogged down, and is unable to find any constructive answer to its problems, I recommend it starts with an attempt to put on a positive face (or De Bono’s sunny yellow thinking hat) and address the question ‘what’s good about it’.

As team leader, or someone brought in to support its creative thinking, I would not imply that I had an immediate answer, and invite a response for others.

Here’s how it might work, from the starting position that Northern Rock is a basket-case, whose troubles have been brought on by ineptitude of leaders in a tough global financial market-place.

What’s good about it?

The company has escaped the worse-case scenario of going bust, and triggering off a wider national (and perhaps international) reaction, in which the mortgages, savings, and jobs of many thousands of people would have been destroyed.

A first class leader has been put in place for the interim nationalised institution. He is likely to be granted more powers from the Government who will try to avoid accusations of interference in its management.

The action offers the best chance that funds sunk into the rescue (some £50 billion) will be recovered. (These are increasingly referred to as tax-payers money, but that’s another story).

Even the shareholders will get more than they would have if the shares were evaluated at their technical value (something close to nothing).

We could apply a similar approach to re-evaluate the leadership performance of those classed as dummies. I leave that exercise for another time.


The date of the general election is fixed beyond doubt

October 4, 2007

The date of the next general election in the United Kingdom will be announced imminently. This is a belief now fixed beyond doubt in the mind of politicians and political commentators, who even believe that the day will be either the first or second Thursday of November 2007

As the Conservative Party Conference drew to a close, uncertainty over the next general election was virtually over. Professional gambling firms placed November as odd-on favourite. Commentators also shifted from ‘likely’ to ‘probable’. In the conference hall it was clear that the party activists had reached a curious and heightened state of excitement.

The story changes

At the start of the Conference season, a few weeks ago, there was little talk of a general election. Interest was mainly on whether poor old Ming Campbell was going to survive, (he did), and whether an heir apparent could be identified (Nick Clegg and Chris Huhne).

Then at the Labour party conference, the story was at first whether wooden Gordon would survive comparison with charismatic David. This notion was weakened as various opinion polls suggested that Gordon was increasingly rated as more capable in a crisis than David. At this point my own perception began to diverge from that of the emerging story, that that the new Prime Minister was preparing for a snap General Election.

What had Gordon Brown said to have left this impression? Not for the first time, I found myself reminded of the phenomena impression management and sense making. A story was developing to help those involved deal with their deeper psychological needs.

Lack of trust helps create a story

Taken out of context, Gordon Brown’s speech could be observed as a politician doing what politicians do, presenting himself and his party as favourably as possible. The reactions of the political observers and activists was quite different. Elsewhere I have written of how fear and suspicion can turn into conviction that something very bad is about to happen. The threat has become psychologically potent.

Coverage of the election by Press and Electronic media become more frenzied. To such an extent, that not saying there was not going to be an election was taken as evidence there would be one (hope you get my drift). The news becomes “Gordon Brown hasn’t ruled an election out” Or, “He hasn’t made up his mind but is thinking had about it”.

Then every statement and action of anyone offering a view is interpreted in these terms. The conference speech is demonstrated to be one designed to kick off an election campaign. For example, Gordon hardly mentioned the conservatives (or the other political parties). That’s blatant electioneering, pretending to be above such knockabout matters. He hardly mentioned Iraq. Later the conservatives quoted the puny number of words devoted to Iraq in the speech. So there, the point is scientifically buttressed.

More straws in the wind
Then, more straws in the wind. The Prime Minister’s diary is being rejigged. That clears the way for a General Election. Even if he doesn’t decide to go to the country in November, all these actions are about outmanoeuvring the conservatives, those bastards to be ground into the dust, in the typically restrained and considered words of Lord Kinnock, at a fringe meeting this week.

Why this all seems a bit hysterical

I just don’t get it. The views of political commentators have converged on the significance of a general election. Gordon Brown could have stopped such speculation if he had wanted to. Perhaps. If he could. If he had to. But not just because he could. Now, the media argue, if he decides not to hold an election, it will demonstrate he has bottled it.

The sort of mood around at present seems to me to be that of ritualized posturing that conceals nervousness. I’m reminded of herd behaviour. The combined galloping herd of media and political hacks are galloping about, instinctively sticking close together in a state of panic, seemingly unaware that ‘it’s not the election, stupid’.

If the Prime Minister now avoids an election he’s timid. Afraid he won’t win. If he does, it’s because he’s afraid that the economy will be in a worse state in a year or two. At least, that’s the analysis of former Chancellor Ken Clarke, remembering Clinton’s motto always that ‘it’s the economy, stupid’.

In the disdainful words of Margaret Thatcher many years ago, he’s frit. Challenged that she might ‘cut and run’ she responded to questions by Michael Foot and some barracking by Dennis Healy.

The right hon. Gentleman is afraid of an election, is he? Afraid? Frightened? Frit? Could not take it? Cannot stand it? If I were going to cut and run, I should have gone after the Falklands [when her political standing was at the highest it would ever be].

A political insight

Listening carefully to insiders interviewing insiders, I arrived at a political insight. The view heard, and the herd view is a genuine belief that Gordon Brown’s actions are all part of carefully prepared plan to gain short-term electoral advantage to reinforce the decision to call an election.

During the conference, we learn that Mr Brown is going to Iraq. More electioneering. On the brief visit he announces a troop reduction. Even more electioneering. Could his words be shown to be a form of stealth electioneering, this time taxing credulity?

The anger expressed by two former Conservative leaders, John Major and Ian Duncan Smith in interviews was intense and utterly convincing.

What David did next

David Cameron made a speech that was billed as significant for the very future of the conservative party. I will reconstruct my notes for a further blog. The test was now whether David’s assured style could prevail against Gordon’s weighty woodenness.

Suffice to say that the speech was reported as impressive in style. I take the BBC view, as that venerated agency still attempts to provide a balanced view of the political scene.

It was also a performance that fired up the party faithful.

He spoke without notes … warning the audience that it might be a bit “messy”. It wasn’t. It was a highly polished performance – and a lot more measured, serious and policy-heavy than we are used to from Mr Cameron. He once again tried to cast himself as the voice of optimism and sincerity – compared with the “cynical” Gordon Brown, who was trapped in the “old politics”.
Mr Cameron ended with a challenge to Gordon Brown to call an election.
Come on Gordon, make my day.
But it was exactly what the party faithful wanted to hear. He told them to “get out and fight” for the changes they want to make and they cheered him to the rafters.

Fear and threat had temporarily been abolished in the hall.


Message from Northern Rock: Telling it Like it Is?

September 21, 2007

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In a message from its CEO Adam Applegarth, Northern Rock communicates with its customers. The one substantive item is an offer to refund all penalties imposed if they re-invest within two weeks. The message is as revealing for what it does not say, as for what it does

Northern Rock for the moment is the safest Bank for investors in the country. The website, much maligned as an indication of the Bank’s inability to respond swiftly, shows signs of recovery. (Although that side-bar graphic of a deep-sea diver gently descending offers a rather unfortunate image of the company’s future …)

Mr Applegarth’s message suggests just how little wriggle-room there is for a leader in these adverse circumstances. Every scrap of information will be scrutinized minutely. A minimum requirement is the avoidance of any factual inaccuracy. I read it carefully, and was left with the impression of a company doing its best under exceptionally difficult circumstances.
One dilemma is how much honesty there should be about the future. Should the message tell the truth, the partial truth, and only the truth that encourages investors to return to the Northern Rock’s offerings?

It is a dilemma, because the marketing and PR impulse is to create the simple brand message. That is the brand imperative. The conventional wisdom is to draft and redraft until the final version has eliminated all traces of ‘off-message’ signals. In this instance, the short-term need is to get some cash back in.

But we know that these are exceptional times, and there has been plenty of evidence in the last week of the difficulty of finding a way of reassuring customers. Thanks to the actions of the Bank of England, in coordination with the Financial Securities Authority and the Government, Northern Rock can say without falsehood that

The Chancellor has made it clear that all existing deposits in Northern Rock are fully backed by The Bank of England and are totally secure during the current instability in the financial markets

But that truth is unvarnished, and yet carefully polished in the posting. Polished to remove any hint that mistakes might have been made, or that changes will have to be made that will be unpleasant for investors. The dilemma is the inclination to be honest about such matters. To treat people frankly. Doesn’t that help build trust? And is it really the case that it will be pretty much business as usual in the future?

A mischievous suggestion

Sometimes it helps to face reality by acknowledging what can’t be said. Suppose the reality is that Northern Rock has been in a near fatal accident? At the moment it is presumed to be wrapped up in a financial security blanket and unlikely to return to full health. No-one will turn the life-support system off until arrangements have been made for donation of the various organs. A first message is received from the bedside of the patient.

There has not been much time to reflect on how I arrived in the Accident and Emergency Room of the Financial General Hospital. I suppose I had been feeling a bit off-colour for quite a while. But I had always been in such good health before. Maybe that had prevented me from seeing those symptoms that something was going wrong.

In hindsight, I suppose my lifestyle was unhealthy in some ways. I’m just thankful to all those who helped keep me alive. The doctors tell me that I will make a full recovery. I’m not sure. I’ll probably have to change my life style quite a lot. Still, must put a brave face on for the sake of the family. There’s a lot more like me. That A&E department is working 24/7. I think I’ll say it’s business as usual. Except I suppose it can’t really be the same business again. Can it?

If you want to sit in judgment …

A lot of effort is going into trying to establish ‘who is to blame’ in the declining fortunes of Northern Rock. I would prefer to see whether there is anything to be learned from what’s going on. Would things have been better, say, if Robert Peston had been in change of Northern Rock? Or Will Hutton in charge of The Bank of England? Or if George Osborne, or Roman Abramovich, or Warren Barton had … Enough of that. Let he who is without sin cast the first stone.


Northern Rock and Stone Age Economics

September 16, 2007

Northern Rock

The Bank of England backs a national bank as lender of last resort. Within a day of the announcement, Northern Rock customers flocked to their local branches. The great panic had begun. Assurances by the Chancellor of the Exchequer, various officials from the Bank of England, and the CEO of Northern Rock had little impact

The queues continue to grow

To be sure, the company has not helped itself, as a drama turned into a crisis. The cardinal rule under these circumstances is to find some way of making specific information available as rapidly as possible. Instead, the Bank was unable to deal with the technical problems following the crash of its website (presumably through sheer weight of attempted traffic).

Timeline of a crisis

Friday September 14th 2007. Radio and TV media throughout the day showed the growing queues outside selected branch offices. Nervous depositors and mortgage holders were interviewed. The beautiful impartiality of the media shone through the reports. Or was it the icy heartlessness which Graham Greene considered was the characteristic of the creative temperament? It’s an old debate.

The emergency lending facility to Northern Rock was agreed by Mr Darling, on advice from Mervyn King, governor of the Bank of England. Northern Rock chief executive Adam Applegarth said that it had not yet borrowed any of the “unlimited” funds available… [The Chancellor, Mr Darling] said that “in order to create a stable banking system, the Bank [of England] steps in and it makes facilities available to the Northern Rock.” .. Angela Knight, chief executive of the British Bankers’ Association, said that anybody who was “either a saver with Northern Rock or has got a mortgage… can be absolutely confident that they have got their money with or they have borrowed from a very sound financial institution.”

All the calming words did not stop some Northern Rock customers [attempting] to move some or all of their money to accounts with other banks.

Saturday 15th September.

Media reports concentrate on the big story. Big queues. Panic. Anxiety No ice in the heart from the customers. I imagined they would be mostly the inadequates and mostly poor and uninformed people. Confused casualties. Instead I heard interviews with articulate pensioners. Young house-holders. A university lecturer. Recently retired business people. (What sort of business?). Many had come with friend or family support. Some had knowledge of the likely downside to their investments. Maximum £900 from over £30,000. One was intending to retrieve £10. Others talked of £100,000. Taken collectively, these groups far from matched my stupidly simplistic expectations. These worried lines of people had more financial resources than you might expect from a queue of people to be found at a post office each week on ‘benefits day’. Was it time, too, for me to revise a long-held image of ‘ordinary people’ flocking to their banks in the financial crash in 1929?

This seems an example of mild hysteria to be witnessed at airports as crowds build up around desks, seeking information during a flight delay. I recognised the ‘nobody seems to know anything. They won’t tell you anything. I don’t believe what I’ve been told, anyway. They [the ‘they’ of possible mightmares] can’t ever be trusted. Politicians. Bankers. Airlines’.

The BBC treatment has been clumsy. Not so much ice in the heart, as unthinking. Northern Rock customers (those who were not queueing) were being advised to go to the BBC website. Where they would find the main report asking what if Northern Rock goes bust.

There was excellent information (as there generally is) to be obtained. That’s why I like the BBC coverage of national stories. But its efforts to become both more commercial and demonstrate its independence are regularly less than impressive. An earlier piece entitled Market Jitters and your pocket was also on offer

The piece on Financial Jitters: Lessons from History was informative about that Mother of Financial Crashes in 1929. Tucked away in that report was the steps taken internationally to avoid such an event happening again. The piece quite rightly pointed out that nothing is certain in life, and any deposits are theoretically vulnerable.

Overall, the Northern Rock customers who failed to get information on the corporate website seem to have remained in a state of high anxiety.

Leadership reflections

What sort of leadership are we observing here? Adam Applegarth was widely regarded as a skilful leader in Northern Rock’s transformation from a little Building Society into an international bank. He pioneered an imaginative business model which was in tune with clever notions of slicing and dicing investments and loan risks. Admiring enthusiasts of the mathematics of derivatives have been particularly impressed.

His experience in working his way up to the top of the organization suggests ability, energy and intelligence. In hindsight it is easy to suggest that the company was still not too far away from the management skills of a much smaller institution. Cynics tends to warn against investment in swanky new headquarters of the kind Northern Rock is building. And what to make of the unusual skills for a chairman, Dr Matt Ridley, better-known as a journalist and popular science writer on socio-biology (unkindly sometimes described as stone-age economics)?

Or a company committing a proportion of profits to charity through its own charitable foundation. Quirky and admirable maybe. Or too clever by half, and undone by market circumstances?


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