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

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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

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Alistair Darling plays Chess at Northern Rock

Alistair Darling has developed a counter-gambit in the chess game for the future of Northern Rock. The threat is to nationalize the company and to bring in Ron Sandler, former head and rescuer of Lloyd’s of London, to run it

The shareholder meeting is scheduled for Tuesday January 15th 2008. Shareholders have signalled their intentions of opposing plans to find a private owner at a price unfavourable to themselves. They intend to seek motions to prevent the board acting against the interests of shareholders.

These moves are understandable in view of the Treasury’s position, which seems to be committed to recouping as much as possible of the billions ‘invested’ in rescuing the back since the crisis days since September 2007.

The Treasury counter-gambit, if successful, is good for tax-payers, and also protects Darling and chums from accusations of incompetence and worse by that sharp-tongued Mr Osborne.

The Chancellor, while preferring the sale into private ownership to go ahead has to demonstrate that the Treasury is perfectly willing to accept the nationalisation option.

So it came about, that on the Saturday preceding the meeting, the news became public that the Treasury had a well-worked out plan for nationalisation. Why?

Demonstrating that you are serious

Darling has to demonstrate a convincing threat to the shareholders, the group he has identified the biggest threat to his own position, at the battle of Northern Rock. Threats are effective only if they are taking seriously, and not taken as evidence of bluster and weakness. We have written of how the most potent threats are like unsung melodies, shaping events but remaining in the background.

So Mr Darling does not want to nationalize Northern Rock. Neither do the shareholders. But if The Chancellor can convince enough shareholders that he might be forced into a nationalization by their further opposition, it may help avoid the outcome none of the main players really wants.

The threat

The threat involves several elements. A signal of intent. Evidence that it is not a shallow move or an idle threat. The signal deliberately leaked is necessary to convey the seriousness. It can be backed up in chess terms (and in military and political terms) if it can be shown that recent moves by Darling have been played to strengthen the impact of the threat if activated.

Once again, the intrepid financial journalist Robert Peston continues his high profile scoops.

So Mr Peston gets his story for the BBC. Mr Darling gets his signal accurately and prominently reported.

According to bankers close to the Rock, the Treasury has a fully developed plan to own and manage the bank, should a commercial solution be impossible.

The BBC has learned that Mr Sandler would become executive chairman of Northern Rock in the event that the troubled bank is fully nationalised.

The former boss of Lloyd’s of London is well known to Prime Minister Gordon Brown, and worked for the Treasury in developing the so-called stakeholder pension and investment products that were intended to help those on lower incomes save for retirement.

Mr Peston, through a leap of imaginative journalism, or perhaps through the way in which he had been briefed, then links the news with the upcoming shareholder meeting:

The coming week will be a crucial one for Northern Rock. On Tuesday, shareholders will attempt to restrict the ability of the company’s board to sell assets without seeking their permission.

Robin Ashby, of the Northern Rock Small Shareholders’ Group, said he would not welcome nationalization …

The shareholders’ action is regarded by the Treasury as potentially hostile to the interests of taxpayers.

Taxpayers are exposed to the Rock to the tune of £55bn through direct loans made by the Bank of England and guarantees to other lenders made by the Treasury.

A decision will also be taken imminently by the Treasury on whether to pursue a proposal by the investment bank Goldman Sachs to convert up to £15bn of the taxpayer loan into bonds, for sale to international investors.

If that proposal to raise new finance for the Rock flops, it is likely to undermine attempts to organize a commercial rescue of the Rock by either a consortium led by Virgin or by the Olivant Group.

[See how Mr Peston was also struck by the chess analogy in his recent blog where he enlarges on nationalization and partial nationalization options and implications.]

The Chess Game reaches a critical middle-game position

The chess game is reaching a critical position, rich in possibilities. To press too hard risks losing the entire game. Darling has shown he is willing to accept a gambit, and now offers a counter-gambit himself, using the Bank of England to capture Northern Rock for the nation. Making such a move may be risky to the Treasury, but it is even more damaging than other possible outcomes, for the shareholders.

[A counter-gambit: your chess opponent makes an offer as a gambit, which is expected to give you short-term gains for which you risk longer-term losses. You reply with your own gambit, which agagin offers your opponent short-term gains and for which there are the risks of longer-term losses. Playing a gambit often complicates a game. Playing a counter-gambit tends to lead to even more complex positions and greater uncertainties]

That is why I like the efforts made to demonstrate the seriousness of the threat to the shareholder forces. The announcement that Mr Sandler has been lined-up is excellent. Easy to check up on, little lost if nothing further happens. That’s what makes it quite a convincing move.

Acknowledgement

The Chess Players image is of Daumier’s masterpiece. It can be found on an excellent site on Combinatorial Game Theory

The Ballad of Northern Rock

Weap not for me my Darling
my days are not yet numbered
for Good Sir Richard comes for me
while all around him slumbered

Fear not for me my Darling
of any knavish plot.
Soon I shall be his virgin queen,
his court a Camelot

Rejoice with me my Darling
for this I’ll be remembered
I have survived the primal jeers
and shall not be dismembered

Prepare the house my Darling
order the bridal gown
for I shall be his Northern Rock
the jewel in his crown

Northern Rock taken over by Manchester United: Official

Update:

The post was intended as a light-hearted comment on the bizarre worlds of football and high-finance. Later, during the European Championships, [June 2008] the traffic attracted to the post suggested the news may have taken on the authority of a football rumour. The original post follows…

What’s the difference between Manchester United and Newcastle United? Football supporters have their own answers to the question. What about this answer? Newcastle United Football Club are not (yet) financially connected with AIG

Leaders we deserve is not a site at which you might expect to find sensationalist stories. I am in awe of the creativity of headline writers. I could never compete with the genius who produced the all-time classic Freddie Starr ate my hampster.

Recently I have been inspired by the creative headlines and blogs of the BBC’s Robert Peston. He has outscooped, outwritten, and outheadlined all other financial journalists on the Northern Rock affair. Respect. In homage to such great headline makers and writers, here is my modest contribution to the Andy Warhol headline of the hour award:

Northern Rock taken over by Manchester United: Official

It’s such a liberating feeling to write something like that.

Creative headlines have the same relationship to literal accuracy as reality shows have to a Mills and Boon romance. So what am I getting at? Here’s the case as it was reported in more sober terms. And what could be more sober than parts of the BBC not yet inspired by the Peston putzvah?

Last week, Northern Rock said it was continuing to negotiate its position with a number of “potentially interested” suitors. They include the Virgin-led consortium, also featuring US insurance company AIG, which has offered to buy a majority stake in the bank and inject “hundreds of millions of pounds” of money in exchange for taking control and rebranding the business as Virgin Money.

AIG. Remember them? That vast American financial operation whose initials are now on our TV screens every time a Manchester United player runs on to a pitch, or stands in front of an advertizing hoarding in a post-match interview. AIG is as close to Manchester United Football Club as are its American bosses the Glazer family.

In some contrast, Northern Rock is culturally committed to the North East of England, to Newcastle, and Newcastle United sport. It is a key supporter of Newcastle United Football Club.

Or as The Guardian put it recently

The last decade has seen Northern Rock donate £175m to a range of charities and community ventures in the north east of England including youth football teams in Newcastle, opera in Leeds and local homeless projects … Northern Rock is also the main sponsor of Premier League football team Newcastle United in a deal that runs until 2010.

Fantasy Football

In the world of fantasy football I see the following scenario. Cast as the evil empire, Manchester United is bent on global domination. The unsuspecting Americans have been dragged into the plans of super-villain Sir Alec (Darth Vader) Ferguson. Jedi Knight Richard Branson is an innocent pawn in the game. Aided by his puppets AIG, Northern Rock will be captured.
At a crucial time, Michael (Luke Skywalker) Owen will be brought back to Manchester and forced into playing for Manchester United.

So when these events come to pass …Just remember where you heard about them first.

A Bad Week for Weakened Leaders: But how far is Paris from Agincourt?

It’s been a bad week for British leaders. A spate of sackings and resignations has occurred. The battered leaders met their nemesis after humiliating performances in sport, business and politics. But hope persists at the prospects for a great victory in the Rugby World Cup

There are so many stories. Too many for me to cover all of them in detail.

Some were easier to predict than others. Sammy Lee acquired his job at the start of the season, as manager of Bolton Wanderers FC, when the much-admired Sam Allardyce was head-hunted for Newcastle United. He stepped up from Big Sam’s shadow. But from the start he was dubbed little Sam, a painful reminder of his erstwhile stature and status. Bolton has had a dreadful start to the season. In a little league table of Premiership managers facing the sack, I had him placed second (just below Martin Jols of Tottenham). Sorry Martin. Hang in there.

Then there were the casualties from the World Cup of Rugby Football. I didn’t have a list of these. But I certainly would not have placed Graham Henry of the New Zealand All Blacks anywhere near the top. My list of managers most likely to take an early bath would have been headed by England’s Brian Ashton, about whom more later. Henry’s team had been confirming their status as the tournament favourites until the quarter finals. Until then they had outstripped opponents so thoroughly that they had hardly become match tight. They lost a tight game, playing below their potential. Exit New Zealand. Exit Henry.

Wales, Ireland and Scotland failed to make it through the first stage of the tournaments. Out went Gareth Jenkins of Wales, and Eddie O’ Sullivan, of Ireland. Only Scotland’s much-rated Frank Hadden survived.

England’s football coach Steve McClaren also seems to be surviving on borrowed time, after defeat to Russia leaves England’s qualification from the European Cup in doubt. In his case, there is a mathematical probability that England will reach the knockout stage of the European competition. This, as much as somewhat improved performances by the team, is staying the hand of the English Football Association. They had already botched the appointment of McClaren after a hasty effort and failed effort to secure Big Sam (sorry, Big Phil) Scolari during last year’s World Cup.

[Will Big Steve survive in his present coaching job longer than Big Martin Jols of Tottenham?].

In Politics

In Politics the increasingly nasty tussles between Gordon Brown and David Cameron continue in Parliamentary exchanges. Ironically, the more immediate victim of that contest was Ming Campbell of the Liberal Democrats. In a decision that caught the press unawares, Ming has his retirement announced for him by two leading Lib Dem king-makers and king -unmakers. (‘Did you wield the knife’ one reporter shouted audibly during the televised announcement. No, he resigned. Ming spoke the next day, saying he had decided that he would not be able to deflect the media from obsessing about his age, thus hindering all attempts to get across the political messages he wanted to convey.

These petty-paced political moves are arguably no more than the uncomfortable outcroppings of democracy. As I write, I learn of the real carnage within presumably an assassination attempt on Benazir Bhutto as she re-entered Pakistan after a decade of exile.

In Business

In the aftermath of the celebrated Northern Rock affair, the bank’s leaders appeared before the commons select committee that had already interviewed the leaders of the Bank of England, The treasury, and The Financial Services Authority.

Under typically robust questioning, Adam Applegarth and Matt Ridley denied that they had ‘done anything wrong’ but indicated that they would accept the judgement of their shareholders, if they were eventually forced to resign.

In the course of the questioning, it was also revealed that all the bank’s senior directors had offered to resign in the immediate aftermath of the run, but had been asked to stay on to sort out its problems.

I think they are safe for the moment, on the same grounds as Big Steve McClaren has a temporary stay of execution. [Stop press, a few hours after I posted this, Dr Ridley accepted the inevitable and resigned].

In a somewhat different story, ITV faces calls for the dismissal of various culprits in their money-making scheme based on rigged phone-in contests. The enormity of this story can be seen when it emerges that Mr Ant and Mr Dec are under threat. That’s like Santa up for shop-lifting in the Christmas Sales.

England Rugby, The World Cup and Brian Ashton

King-makers popped up to endorse Steve McClaren, and to praise and bury Ming Campbell. They even popped up to endorse coach Brian Ashton, after England’s heart-stopping Rugby Union victory over France. It could be seen as one of those endorsements which increasingly indicate that the coach is in big trouble. The denial serves to signal the presence of trouble, not its absence. This was a slightly different kind of announcement, I think. It was made on the wave of national support for the England team.

Here we have an example of the rapid swings for and against a leader. Less than a month ago, Mr Ashton was seen as credible a leader as Sir Menzies Campbell. The performances of his teams had been bitterly criticized. Now, on the eve of the 2007 final, he now stands one game short of receiving the kind of accolades showered on his predecessor Clive Woodward after his team became World Champions, four years ago. Outside of England, the suspicion is that England are serious underdogs to a South African team that beat them comprehensively in the run up to the finals. This is not a time for logic. How far is from Paris to Agincourt?

Message from Northern Rock: Telling it Like it Is?

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

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?