The run on Northern Rock may have begun a decade ago tomorrow but, in our dealing room at the money brokers BGC, it had been clear for months that all was not well with the Newcastle mortgage lender.
Since Big Bang in 1986, the money markets — where the banks went to fund their requirements — had expanded like wild mushrooms.
There was no shortage of “liquidity” out there. It was sloshing about aplenty.
But by early 2007, that was not the case as far as Northern Rock was concerned. The supply of money from its retail and wholesale depositors had dried up despite the “Rock” offering premium rates for money.
BGC and other moneybrokers collate information from the banks that want to borrow, and match them with those that want to lend.
We set a price — the interest rate — that both agree to, and execute the deal.
Northern Rock relied more than most on the money markets, and was a really valuable client of ours.
Where more conservative banks would prefer to rely on their retail depositors to fund the mortgages they were lending out, Northern Rock largely used the money markets — far more readily available than persuading the public to lend you the money.
BGC had a large whiteboard on the dealing-room wall. This was where banks’ requests for loans and deposits were chalked up so the brokers on the floor could try to accommodate both borrowers and lenders at mutually agreeable prices.
You might get 20 lenders up there with offers for every bank seeking funds.
When the client agreed a price and the deal was done, young Oscar, the trainee board boy, would rub them out and the action would move on.
But for months before the cataclysm arrived, the names of Northern Rock and later Bradford & Bingley were always up there but rarely getting rubbed off.
Why? Because nobody wanted to lend to them. Nobody would offer them any money, for any time, at any rate.
Every morning the Northern Rock broker would shriek: “Show me the offer!”
Answer came there none. Poor little Oscar always tried to exude enthusiasm and intelligence.
While hurriedly writing offers and bids from the likes of Deutsche Bank, Barclays, Credit Suisse, UBS and Mitsubishi UFJ across the board like a scalded cat, he would try to get the traders to chat about the rates Northern Rock was prepared to pay.
Along with a tsunami of Anglo-Saxon abuse, he was told not to be a “numpty” and just write on the board “Northern Rock — SHOW ME!”
Potential lenders stayed silent — a big “no thanks” from the market.
Usually, our broker for Northern Rock would be speaking to his guy there a dozen times a day as the bank repeatedly asked what terms the market was offering to lend to it.
Those calls petered out to one a day as the client eventually tired of being told there was no one willing to lend.
In our dealing room, and others like ours around the City, this had been happening for months.
The brokers round the desk knew, just as their clients did, that Northern Rock had overstretched itself.
Its balance sheet was too big; it had lent money for mortgages many years long but only borrowed for a few months — classic bad practice for a bank.
We knew the Bank of England was aware of the problem — partly because it was told regularly. But I suspect Gordon Brown’s rudderless tripartite of regulators — the Treasury, Financial Conduct Authority and Bank of England — did not have clearly defined responsibility to act upon it.
The situation was exacerbated by the Government and Opposition being comfortable with soft regulation.
The run begins
Northern Rock hit its zenith in 2006, with a profit of £460 million. Its bumptious, arrogant and youthful chief executive Adam Applegarth would update the market quarterly on its achievements from Merrill Lynch’s offices, regularly accompanied by its mild-mannered chairman Lord Ridley.
The Rock was on its way to the moon. Its mortgage lending was rampant, occasionally offering to lend customers 110%-125% of the value of their homes.
By July 2007, net lending had reached £19.3 billion — 18.9% of all UK net mortgage lending.
The profits it and its supercharged peers were making were huge. Banks were responsible for 21% of FTSE 100 dividends (by 2009, this had fallen to 9%).
Applegarth always appeared as the super-confident Jack the Lad. He thought he was invincible. He walked on water.
In fact, although no one was prepared to say it, Applegarth and his team had been behaving totally irresponsibly, riding on the coat-tails of soft, inadequate regulation.
On September 14, 2007, I was watching TV from my desk and saw queues appearing outside Northern Rock’s Moorgate branch.
There was no guidance from Brown or the tripartite. They had frozen. People were terrified at the prospect of losing their money.
Northern Rock urgently needed liquidity support from the Bank of England, to replace funds it was unable to raise from the money market. If not, receivership was the only option.
Finally, the outside world had caught up with what we in the markets — and the regulators — had known for months: Northern Rock was holed beneath the waterline.
What followed was inevitable: the first major run on a UK bank in 150 years, despite regular briefings from people like us about the parlous state of the Rock’s finances.
Eventually, to calm the fears of its many savers, Chancellor Alistair Darling made it clear that deposits over £50,000 were safe. By the end of the banking crisis, the amount had been increased to £80,000.
The crisis gathered momentum as if it was under a wet sail.
By February 2008, Northern Rock’s share price had fallen to 80p. On February 22, 2008, it had been fully taken over by the Government at a cost to the Treasury of £26.7 billion. In early 2009, Bradford & Bingley became the first major bank to miss an interest payment.
A few months later, Rock declared a loss of £585.5 million and 1300 out of 4000 staff lost their jobs. It’s hard to know whether that chaos and pain may have been prevented if the regulators had listened to our clarion calls of warning in early 2007.
In hindsight, the tsunami that followed the collapse of Lehman Brothers made the Rock’s troubles look like a splash in the bucket.
But it seems clear to me the City’s regulators had become far too remote from the markets they were supposed to regulate.
Andrew Bailey’s Financial Conduct Authority has largely rebuilt over that gulf, and the world is safer for it.
Anniversaries like this week’s are important to remind us all why.
David Buik is a market commentator at Panmure Gordon, and is formerly of BGC Partners