- The Treasury’s primary spin-line is that it is all because of the sub-prime crisis in America and that no one could predict it coming.
- The second line of spin is that it is the Bank of England’s fault for not flooding the market with liquidity when trouble came.
King thought not on September 12, yet under pressure from Alastair Darling, the very next day he supported the bail-out of the Northern Rock management. There was no systemic risk to the financial system which could justify such a move. Now with the Treasury promising to guarantee all bank deposits, the British banking industry has become Moral Hazard central. The news that King has been forced to effectively reverse a sound policy means all risks have been transferred to the taxpayer. So if today an RBS trader “did a Leeson” the Treasury would end up picking up the tab.
The second line of Treasury spin is that the Bank of England should have flooded the markets with liquidity. That is never generally a good idea for an institution obliged to fight inflation. Market participants were in any event able to borrow from the bank window at penalty rates (and some did). Northern Rock could not do it because they did not have the necessary collateral.
The blame lies not with Mervyn King but squarely with Northern Rock’s management. The Northern Rock board took the risk in their dash for profit growth, a risk that should have been spotted at board level by their risk management committee chaired by Sir Derek Wanless.
Wanless should resign immediately and be stripped of any bonuses and performance related payments.