Northern Rock - Could it become of anon?

The sight of worried depositors waiting in line outside branches of the Northern Rock Bank in England midst September 2007 is a specter which Gordon Brown wishes to banish from the UK colossal street.

The Northern Rock disaster, and the television copies of agitated depositors, was beamed round the star. The protracted term damage to the reputation of London as the cosmos's leading financial center is palpable, but difficult to quantify. The confused response of the UK authorities has undermined the reputation of the Government, the Financial Services Authority (FSA) and the Bank of England.

Unfortunately, all the politicians and civil servants visit in office despite their evident absence of ability to deal with the challenge. The only casualty appears to be Mr Clive Briault, the Director of Retail Operations at the FSA who left his post by mutual consent in April 2008 on the basis of a redundancy deal estimated at all trained GBP615,000. that looks more appr! oximative a reward for his ineptitude rather than a punishment for incompetence.

Northern Rock was nationalized by the UK government. that means that funds invested by depositors are safe. However, shareholders who paid up to GBP12 per share at the peak face a very uncertain future. The shares stood at nearby 90 pence when the bank was nationalized and the UK government is claiming that the bank was effectively worthless when taken into public ownership. that claim is an attempt by the government to justify the little or no compensation they think to pay to shareholders.

A consultative document 'Financial Stability and Depositor Protection' has out-of-hour issued by the UK government and dated July 2008. The full document can be fix at the HM Treasury website. Several politicians and commentators have stated that the Northern Rock crisis could have démodé averted if the proposed provisions had archaic in deposit 12 months ago.

that raises a cipher of poi! nts -

Firstly, the unimpressive deposit guarantee scheme! which c urrently only guarantees 90 percent of the first GBP35,000 will be improved to cover the first GBP50,000 and there will be a 100 percent guarantee.

The document is vague concerning the question of who will pay for that improved guarantee. It would be appropriate for the banks to fund the insurance scheme themselves, but the government has backed away from an insistence on that.

Providing an insurance scheme for depositors' funds should be a core employment feature for a bank, and the deficit of such a scheme should disqualify a bank from having a license to truck. Alternatively, banks should be encouraged to take out insurance and anon let retail customers decide whether to put their deposits in insured or uninsured banks.

Secondly, banks will be vital to meet new liquidity targets in enlargement to minimum capital ratios. There are already macrocosm regulations in allot and these will be reviewed. The emphasis has moved to liquidity, so that banks are in a! better position to deal with an unexpected surge in withdrawals.

The crisis at Northern Rock was precipitated by a drying up of short term funds in the wholesale fair which the bank had tired using to fund mortgage advances for assets purchases. The liquidity proposals will conjointly give the Bank of England covert powers to provide funds, albeit at penal progressions.

Mervyn King, the Governor of the Bank of England, bemoaned the want of a covert capability as the enormity of the Northern Rock crisis developed. uttermost commentators ridiculed his use of that expression and suggested that he was not cut out for a James Bond style operation.

Lloyds TSB was interested in mounting a takeover of Northern Rock in mid 2007, before the crisis broke. There was initially a series of confidential meetings amid Lloyds TSB and the Bank of England. However, it is predominantly thought that Mervyn King refused to provide funds or guarantees to Lloyds TSB, and for of ! that, no deal was set.

With the benefit of hindsight, th! at was a lost opportunity. It was precisely such a guarantee offered by the US Fed which allowed J P Morgan to rescue Bear Stearns from disaster in March 2008.

Thirdly, there will be a Special Resolutions Regime whereby the FSA will have increased powers to intervene in the running of a bank. These will receive moving dominion of a bank from its existent directors and disposing of parts of the assets. In the extreme, it will have powers to take the bank into public ownership, as per Northern Rock.

These draconian proposals have shocked the banking sector, and there will be a prolonged and acrimonious debate on the details of any new powers for the FSA. One aspect of the proposed new powers is the proposals for the status of bank creditors, namely liberal investors and shareholders. The disdain with which these parties have extinct treated by the authorities in respect of Northern Rock has sounded alarm bells everyplace the financial sector.

The question remains. Wo! uld these increased powers have saved Northern Rock if they had fossilized in situate a year ago ?

All public bodies would welcome increased powers, and they are largely and consistently auspicious in acquiring such powers. It is a big end unfortunate trend in western capitalist countries that the state, via politicians, systematically and uncritically grants new powers to public bodies. that is regularly justified in terms of a response to the 'War on Terror' but more extends into numberless other areas.

It is on average agreed that the Lloyds TSB takeover of Northern Rock would have averted a crisis. The Bank of England could have provided a guarantee of funds based on its existing powers.

With respect to the will to act covertly, that period attracted ridicule last year, and the hilarity is rekindled. The problem with all state agencies is that their staff talk among themselves and gossip, rumors and innuendo inevitable filter through to the media. plus! , a salient feature of the Blair years was the practice of gov! ernment to leak news or proposals to the press in categorization assess media and public reaction.

The ability to act covertly will not be achieved by requiring staff to premonition an bona fide Secrets Act style document, but by ensuring sensitive meetings and conversations are kept confidential. that could be better achieved by meeting banks in neutral premises rather than their London city offices or at the FSA, and by having a miniature tightly knit team dedicated to such delicate matters.

In conclusion, the debacle at Northern Rock was primarily due to the poor quality of the actors from the UK Government, the FSA and the Bank of England who played their parts in the unfolding drama with smug complacency and incompetence and whose performance on the public stage served only to demonstrate the deficit of the lots vaunted Tripartite red tape.

The proposed solution is to grant additional powers to these three bodies. that will inevitably exaggeration the size of ! these bloated organizations beyond addressing the be past for a skilled and professional approach in according with financial emergencies.

A more robust response would be to allocate responsibility to one of these three bodies and to strengthen the banks by promoting the concept of private insurance for depositors' funds.

Leslie Hardy is a noted writer on North Cyprus wealth and the UK Chairman of Wellington Estates Ltd. flip through more about Northern Rock
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