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FSA fesses up on Rock

Robert Peston | 08:57 UK time, Wednesday, 26 March 2008

The is a catalogue of mistakes, a tragedy of errors rather than a comedy.

The City watchdog admits to inadequate record keeping. Proper notes weren't taken of important meetings with Rock executives.

Northern Rock branchThere was no rigorous assessment of the serious business risks being run by the Rock, both in the way that the bank was rapidly increasing its mortgage lending and in its financial dependence on selling these mortgages to investors in the form of bonds.

In some ways, it was the riskiest bank in the UK.

But here's what will shock many.

It was treated by the as though it was the least risky bank in the UK: it received deep assessments of its operations less frequently than most other banks; FSA staff had far fewer meetings with Rock executives than they did with executives at other banks; and unlike what happened at other banks, there was no attempt to force the Rock to reduce the risks it was running.

As the FSA itself says, this was not just a failure of more junior staff. Responsibility for these failings ultimately rests with senior FSA management.

Little wonder then that the FSA has committed itself to improve the quality of its staff and to serious reform of the way it supervises all those banks whose failure could damage all of us.

UPDATE: Here鈥檚 the most scintillating part of the FSA鈥檚 review, for those of us obsessed with the ideological differences between that watchdog and the Bank of England over what kind of loans should be made by the Bank of England to a dysfunctional banking system. The killer passage reads:

鈥淥ur understanding is that, during the review period, the FSA鈥檚 approach to liquidity reflected a presumption that, in the event of a crisis like that experienced in August 2007 (when money markets seized up), general market liquidity provided by the Bank of England would be increased and, in extremis, liquidity would be provided for systemically important institutions鈥.

Which is formal confirmation that the FSA was urging the Bank of England to pump money into the markets over the summer 鈥 but the Bank refused, fearing that it would be in effect bailing out the banks for their past recklessness.

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  • 1.
  • At 09:13 AM on 26 Mar 2008,
  • derick nichols wrote:

so who is falling on their sword at the fsa after their admission regarding northern rock. you can be sure that if these failings had been discovered at a fsa regulated firm - similar to our insurance brokerage - they would have wanted blood. one rule for them and one for us it seems.

  • 2.
  • At 09:14 AM on 26 Mar 2008,
  • Norman Cook wrote:

So the FSA admits to failings - it had to come clean after the Treasury Select Committee's report anyway. A root and branch study of its methods will need to be followed by the same study of its senior managers and the so called ' Tri-partite arrangements' which plainly failed.
If the Bank of England does appoint a deputy Director as per the Committee's recommendations then (hopefully) he can force Mervyn King to pump money into the system earlier , in future , to avoid another run.

  • 3.
  • At 09:21 AM on 26 Mar 2008,
  • Peter wrote:

Truth is the daughter of time.....when this all started the City were out to lynch Mervyn King.....but looks like it was their mates in the FSA asleep at the wheel. Why did they have so little contact? Is Newcastle really that far from London?

  • 4.
  • At 09:23 AM on 26 Mar 2008,
  • Iain wrote:

Might the failure to supervise have something to do with the distance of the Northern Rock head office from London.

  • 5.
  • At 09:23 AM on 26 Mar 2008,
  • David Williams wrote:

I imagine it will be too much to expect that anyone at the FSA will resign or be sacked for the incompetence which has cost me and other samll shareholders several thousand pounds. The way these people get away with the damage they cause to ordinary people's lives infuriates me.

  • 6.
  • At 09:30 AM on 26 Mar 2008,
  • M. Cawdery wrote:

Having all these mistakes, their claim that it "probably" would not have made any difference is a farce.
If they have not got the information and they did not do their job properly, they cannot know; the have no proof! The "probably" is no more more than a wild guess and is simply following the example of their Masters, Brown et al who are famous for SPIN.

  • 7.
  • At 09:31 AM on 26 Mar 2008,
  • frank wrote:

This verdict means that shareholders should be substantially compensated

  • 8.
  • At 09:34 AM on 26 Mar 2008,
  • Alex wrote:

Having worked for another regional bank, and having had dealings with the FSA as a result, I suspect the fact that the Northern Rock was in Newcastle, and therefore a pain to get to from London, was a factor in the infrequent visits from the FSA. When the FSA inspectors came up to see us in the Midlands, it was always clear that they could not wait to get back to London (where the FSA is based) at the end of the day.

That said, the risk of the Northern Rock was possibly not very obvious - the FSA concentrates on the big banks in London as they have a bigger impact on the financial system. While the Rock might have been risky to its shareholders, its demise doesn't seem to be that big a deal in the scheme of things (bank runs notwithstanding) - it was just the most vulnerable to the credit crunch. If Barclays (for example) had gone down, that would be a major disaster to which Northern Rock barely compares. The FSA concentrates most heavily on them as a result. And they are in London too, which helps.

Remind me how many staff at the FSA lost their jobs through incompetence ?

Remind me how much these staff are paid ?

Pass the fiddle please Nero

  • 10.
  • At 09:40 AM on 26 Mar 2008,
  • Graham Andrews wrote:

the FSA fail again...they are useless and will heads roll, will people fall on their swords...of course not!!Once more the city will look after its own.
The FSA needs a complete overhaul and more teeth.
just like the Banks , who get greedy, they make dodgy investments and then we the tax payer are expected to bail them out. will they loose bonus's ...course not.
luvley jubbly to quote another dodgy character.
The FSA needs a complete overhaul and more teeth.

  • 11.
  • At 09:42 AM on 26 Mar 2008,
  • MonkeyPatel wrote:

The FSA is a failure and it is as simple as that.If I failed in my job I most likely would be fired so why are these people still in their jobs? This will result in the FSA getting a bigger budget for pay and benefits so the very people who failed in their duty will be given big pay rises and bonuses. Another example of the culture of rewarding failure.

  • 12.
  • At 09:42 AM on 26 Mar 2008,
  • Cassius wrote:

Maybe the FSA inherited the style and complacency of its predecessor, the DTI. If the government had taken action at the time of the Equitable Life debacle (and owned up to failure of regulatory responsibility), the Northern Wreck may not have been the catastrophe it has become.

  • 13.
  • At 09:44 AM on 26 Mar 2008,
  • John Wilson wrote:

How much are these people paid?

How many lives have these people blighted?

Are those who have suffered generally better able to take the financial blows they have suffered than those responsible for their being inflicted?

Would you get away with this level of incompetence in your job?

The retraining should consist of how to pick out the salient features of a P45 and how to prepare oneself for a job interview.

And who is going to monitor whether or not the retraining actually takes place?

  • 14.
  • At 09:51 AM on 26 Mar 2008,
  • Christopher Binding wrote:

Does anyone get sacked from the FSA as a result of this catastrophe?

  • 15.
  • At 09:52 AM on 26 Mar 2008,
  • Ian wrote:

Robert

Could it be that:

-Northern Rock management were either incompetant or pulled the wool over the eyes of the FSA?

-banks in general are playing a game of chicken - requiring central banks to take on risk and to provide capital

-the real answer is to require banks to raise capital themselves rather than resorting to the taxpayer

where are the rights issues? that surely is what the stockmarket is for - to provide capital and take risk?

Bank executives have taken on gearing levels with the acceptance of their shareholders. They are hugely over-geared - it surely is this that should be the focus of our attention!

  • 16.
  • At 09:53 AM on 26 Mar 2008,
  • Alistair wrote:

It's important to note that liquidity WAS provided by the Bank Of England, but that it was the very NEED for this provision that triggered the run.

  • 17.
  • At 09:53 AM on 26 Mar 2008,
  • Andrew Zeyfert wrote:

And not a word about Equitable Life . . . . .

  • 18.
  • At 09:54 AM on 26 Mar 2008,
  • Dave King wrote:

The FSA have continuously failed to regulate the Banks and larger financial institutions properly. (I.E. Equitable Life ) However, the grass roots independent financial advisers, who are responsible for a minute amount of misselling and financial underhandedness in comparison- continue to pay through the nose and by virtue of heavy handed over regulation. When will the Government (any of them) sack the irresponsible heads of the FSA?

  • 19.
  • At 09:56 AM on 26 Mar 2008,
  • Rupert wrote:

Ouch.

That is damning.

Heads should roll for that.

What is the legal situation? I can see a lot of the shareholders looking at that report and thinking "someone must be liable".

If you were a company director with that kind of comment you'd be in trouble...


The second point is that FSA presumption... Basically, they say they didn't actually need to regulate because Bank of England would wave a magic wand - but they didn't need to even check with the bank that it would do so...? Can they spell 'moral hazard' ?

  • 20.
  • At 10:01 AM on 26 Mar 2008,
  • Steve wrote:

Surely this suggests that banking supervision must be put back under the control of the Bank of England. (Where it belongs) The FSA is not fit for purpose. Mediocrity built on mediocre second division management. Shocking report.

  • 21.
  • At 10:08 AM on 26 Mar 2008,
  • Keith wrote:

So, at Northern Rock 2000 lose their jobs. How many at the FSA are going to lose theirs?

  • 22.
  • At 10:11 AM on 26 Mar 2008,
  • WILLIAM MOORE wrote:

Is it any wonder ,the uk financial scene is in a mess.
The FSA surely must be on borrowed time,before we get Govt control.

Given the comments in the report,as a commercial enterprise the FSA would no longer be trading.

Whilst the role of the BOE from government control has proved largely successfull,the FSA on the other hand
appeared to act a free agent.

The FSA regulatory controls should be
direct to the Treasury,with the BOE/Treasury scheduled update meetings to review the complete uk financial scene.

How many more surprises await us.

William Moore.

  • 23.
  • At 10:11 AM on 26 Mar 2008,
  • John wrote:

Interesting how Darling and the Treasury's view was that it was reckless management that was the Rocks' reason for getting into trouble. And here the FSA are basicaly admitting that they approved the banks method of operation.

Looks like a case of the Chancellor trying to defend his position by getting his attack in first.

"Labours Economic competence" - it looks more and more like Incompetence as each day passes!

  • 24.
  • At 10:13 AM on 26 Mar 2008,
  • Paul Amery wrote:

Too few regulators? Instead we should admit that the regulatory system doesn't work, abolish the FSA, stop bailing out incompetently-managed banks, and let shareholders bear the cost. It's time to bite the bullet and start allowing banks to fail.

  • 25.
  • At 10:17 AM on 26 Mar 2008,
  • John Brooks wrote:

Regardless of the failings of the FSA, I still fail to see why any gamblers (shareholders) should be compensated by the taxpayer?
You took a risk & it backfired, which led to your loss. If the bank had gone under would you have got any recompense?
Thought not! so it comes down (as usual) to pure greed on your part.

  • 26.
  • At 10:18 AM on 26 Mar 2008,
  • Graham French wrote:

FSA have handed out 拢millions in fines to firms guilty of failures when selling PPI. What sort of fine can we expect the Treasury to hand out to FSA? Will any of the senior managers be held personally responsible? I won't hold my breath.

  • 27.
  • At 10:30 AM on 26 Mar 2008,
  • Jim wrote:

The FSA's internal report today is an admission of extreme culpability on the part of the UK organisation which was set up to protect consumer interests. The FSA is now bereft of credibility and we must be left wondering how we can have future confidence in this body.

I was under the impression that the FSA is accountable to the Treasury - what action is being taken by HMT? The FSA is supposed to regulate financial services in the UK but who regulates them - it seems to me they are in dire need of an overseer.

Has the time now come to break up this bureaucratic "monster" and replace it with a body which can command the support of all consumers?

At the very least, the FSA Chairman & Chief Executive should today be considering their positions.

  • 28.
  • At 10:37 AM on 26 Mar 2008,
  • Brian Golden wrote:

Thanks Robert.

The misunderstanding between the Bank of Englqand and the FSA regarding the provision of liquidity was key.

This proves that the tripartite system failed. The government got it completely wrong.

Thats one part of the shareholders case.

Another is the bank run. How was a bank run allowed to be sparked and proceed for so long?

The incompetence of the government has been monumental and should not be rewarded by the right to steal other people's shares.

Anyone lambasting shareholders should deal with these points. Otherwise their opinions are incomplete and biased

What would have happened to NR without a dysfuntional regulatory system?

There would have been a hit but I very much doubt shareholders would be looking at close to zero.

  • 29.
  • At 10:39 AM on 26 Mar 2008,
  • Tony wrote:

So, the FSA did nothing because it believed (a) that banks should look after themselves or they would suffer themselves, and (b) that any systemic risk would be covered by injection of liquidity by the BOE.
And the BOE did nothing because it believed (c) that the FSA should be regulating the behaviour of invididual banks, and (d) the banking sector should suffer in the normal way to any other sector to avoid the obvious moral hazard.
All these assumptions look reasonable individually but there is an obvious contradiction at the heart. It suggests the mess cannot be blamed on the FSA or even the BOE but lies directly with the separation of responsibility and the lack of clear definition. And who's mucky paw-prints are all over that?
Answers on a postcard to 10 Downing St. . . .

But putting blame to one side, The key seems to be the accounting rules under which the banks were allowed to operate - securitisation of debt, in other words. Who (in future) takes responsibility for controlling their freedom to do this?


  • 30.
  • At 10:40 AM on 26 Mar 2008,
  • Ian Buck wrote:

What is the Commons Treasury Select Committee doing to ensure that there is future accountability by the FSA and its chief executive, Hector Sants. The NAO audits many public-sector bodies in the UK responsible for the implementation of Government policies and in the FSA its stated objectives are maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime. We have fourth rate governance 鈥 what an indictment of the Prime Minister and this present government!

  • 31.
  • At 10:41 AM on 26 Mar 2008,
  • PeterRobertH wrote:

So the failure of the Northern Rock is not the fault of it's management. The shareholders can get the profits they are entitled to.
The problem was the FSA not doing the management's job for them.
The shareholders can rely on the taxpayer ..

This is surely the part where the head of the FSA resigns, right?

  • 33.
  • At 10:48 AM on 26 Mar 2008,
  • Toby wrote:

So it's official: The FSA are completely incompetent, as were the board of NR.

However Applegarth still walks away with 1.5 mill and I seriously doubt that a single FSA employee will get so much as a reprimand.

The poor old tax-payer, on the other hand, will end up seriously out of pocket. Likewise the shareholders and ordinary employees.

If this is free-market capitalism at it's best then it's not very impressive is it?

  • 34.
  • At 10:49 AM on 26 Mar 2008,
  • Ed wrote:

This is a shocking admission for a regulatory body to admit. This is failure on a grand scale and what makes it worse is the fact that these people are still in their jobs, still overlooking the same banks with the same problems. The people who were in charge of this farce should be held to account for their failings and not be allowed anywhere near a job like this again. The FSA is not fit for purpose and needs overhauling fast!

  • 35.
  • At 10:49 AM on 26 Mar 2008,
  • John A (UK) wrote:

The charitable arm of the bank (The Northern Rock Foundation) recently had it's grant increased to 拢15m. The Chairman of the foundation is Alastair Balls. Does anyone know if he related in any way to Ed Balls?

  • 36.
  • At 10:51 AM on 26 Mar 2008,
  • Jeff Bailey wrote:

As an insurance broker, I agree with the last poster; in our industry, the FSA have proved to be nothing more than pedants and box-tickers.

In our firm last week, the spotty youth they sent to inspect us demanded to see the management notes assessing the competence of a staff member who had demonstrably and sucessfully been 30 years in that role. This wasn't good enough - they wanted to see a bit of paper on file which said so.

It is a pity the FSA couldn't take their own rigid regime and apply it inwardly. Red tape? It's instutionalised at the FSA.

  • 37.
  • At 11:00 AM on 26 Mar 2008,
  • Scott wrote:

I see some blog comments that Northern Rock shareholders should be compensated by the FSA.

Unfortunately, whilst it is the FSA's job to monitor financial institutions it is not - nor should it be - up to the FSA to offer financial backing to everyone who invests in a company that turns out to have been badly run.

Otherwise investing in shares is a one-way street: profits if the company does well, compensation if it doesn't.

  • 38.
  • At 11:01 AM on 26 Mar 2008,
  • Jeanette Millstone wrote:

The incompetence of the FSA is breathtaking. As usual with this government, nobody will be sacked for this 'catalogue of mistakes'. It is always the poor tax payer who pays the price.

Brilliant! This is only the summary report and it proves what many have suspected for years, i.e. the FSA is simply not up to the job. Why would big City bankers go to work for the FSA when they can get such large bonuses trading for real? That's the difficulty that these watchdogs face - how to get the top staff. Surely when the final report comes out, a major restructure will be inevitable. And that's if nothing else goes wrong first...

  • 40.
  • At 11:04 AM on 26 Mar 2008,
  • John wrote:

No-one's role in this fiasco has been blameless. NR top management showed greed and hubris, the BofE were slow to act, and the FSA were London-centric and complacent. The NR employees, their shareholders, and possibly all of us, now pick up the tab.

What to learn from the mess for the future? Perhaps we need Government to keep a closer eye on its experimental changes to supervision. it seems that the only reason for no previous catastriphes was a particularly benevolent economy for 10 years.

  • 41.
  • At 11:05 AM on 26 Mar 2008,
  • richard jacobs wrote:

Who set this system up? The current Prime Minister who was so clever in selling the UK's Gold at less than a third of current levels and who has expanded the public sector by 500,000 employees since 1997. What a clever chap and how modest in his claims of success.

Why not bite your toe nails too.

  • 42.
  • At 11:06 AM on 26 Mar 2008,
  • Ca Ira wrote:

Robert,

The image of the FSA has never been good amongst the city slickers, the 'watchdog role' makes anyone suspect, especially when paid out of our taxes. Nevertheless heads must roll, ca ira !

But let's remember NR had highly paid, high profile, self acclaiming executive management that was incompetent who must be held ultimately accountable.

Don't let anyone NR or FSA or BoE or HM Treasury escape thru the hole and be relieved of their responsibility for the NR demise.

  • 43.
  • At 11:10 AM on 26 Mar 2008,
  • sandra wrote:

maybe if the FSA spent more time at looking at these situations rather than making sure IFA's have the correct filing cabinets etc, this would not have happened!!!

The FSA spend far too much time in thinking of ways to make our jobs harder in the financial services, that they have obviously been looking in the wrong direction.

There is no point in fining them as our charges are high enough to start with, they will just put the cost back on to the IFA's to pay for their errors.

  • 44.
  • At 11:14 AM on 26 Mar 2008,
  • SH wrote:

The FSA has a "fine and shame" policy and they should apply this to the senior management that has failed their duties. Clive Briault and others involved with Northen Rock should not be allowed to leave with pay-offs, they should be fined and not allowed to work in financial services again.

  • 45.
  • At 11:16 AM on 26 Mar 2008,
  • patrick newman wrote:

We should not forget that the FSA has owned up to incompetence - almost refreshing!

BoE has alot to account for as well and surely the roles and relationships should have been coordinated and managed by the government (Treasury).

Is it too much to expect a formal memoradum of understanding and regular tripartite meetings to enforce it?

  • 46.
  • At 11:17 AM on 26 Mar 2008,
  • Peter Bench wrote:

6 of the 7 managers directly responsible at the FSA have left incl the senior manager responsible - what we don't know however is the terms of their leaving. I think Alex's comments on the overall risk of NR to the financial system are pertinent but should be added to: The Govt should have put NR into administration last Summer, guaranteeing the depositors but leaving the shareholders with nothing. The Bank could then have been left as a 'work-out' without the mess to the markets. The shame here is for the Directors who took a punt and put thousands of jobs (Labour voting jobs) at risk.

  • 47.
  • At 11:23 AM on 26 Mar 2008,
  • Bryan Wight wrote:

The FSA is funded by the companies it regulates. If you impose a fine it will be paid by many small firms who have nothing to do with banking right up to the large financial institutions.
Why is no one blaming the management of the Northern Rock whose business plan failed at the first sign of the credit crunch.

  • 48.
  • At 11:23 AM on 26 Mar 2008,
  • james clapham wrote:

Firstly may I say I agree with many people's opinions with respect to the FSAs lack of credibility. I suspect they 'over regulate' IFAs as someone out it, because they can. It's much harder to apply such regulation to people and businesses smarter and richer than the FSA.

With respect to the shareholders in Northern Rock though, I must remind them that holding shares carries a risk that your chosen firm may underperform and even go under. I'm not sure that the collapse of Northern Rock was anyone's fault but the board at Northern Rock and if you've lost money as a direct result, that's the risk you take. Maybe you should have examined the risk being taken more thoroughly first, or even considered wider diversity to reduce your risk exposure? Ultimately, if a shareholder has lost money and is upset about it, it's their own fault for not taking on more suitable investment to more closely match their risk tolerance. No one was forced to invest in NR shares over and above any other investment.

  • 49.
  • At 11:26 AM on 26 Mar 2008,
  • James Turinghof wrote:

And what part did you play, Robert, in the bank's demise? It could be said that your lurid reports created a run on the bank and, notwithstanding the risk inherent in NR's business model, the outcome could have been different for shareholders. See you in court...

  • 50.
  • At 11:34 AM on 26 Mar 2008,
  • Wiliam wrote:

What the report starkly demonstrates is the mess that Gordon Brown created when he set up the regulatory triumvirate of the FSA, Bank of England and Government (Treasury).
One can clearly see that Brown did not even consider the need for an agreed sharing of the roles and responsibilities, nor the requisite relationships between them. The result is that the FSA seemingly failed to instigate acceptable operating standards, practices and procedures.
David Cameron must surely challenge Brown on this in Prime Minister's Questions.

  • 51.
  • At 11:35 AM on 26 Mar 2008,
  • Ken Barrass wrote:

The FSA have proved themselves a pretty but useless acoutrement. It urgently needs sorting with people put in place that are WILLING and ABLE to carry out the job properly. Ultimately, however it was the banks management at fault and thus the shareholders for empowering them....sorry shareholders but it is your company and your responsibility.

  • 52.
  • At 11:36 AM on 26 Mar 2008,
  • david wrote:

The people who are responsible for this disaster did not work at the FSA.

Their names are Ridley, Applegarth and Wanless, the former directors of Northern Rock.

  • 53.
  • At 11:37 AM on 26 Mar 2008,
  • adam wrote:

demotivated staff = demotivated analysis. watch out for the next blow-up.

  • 54.
  • At 11:39 AM on 26 Mar 2008,
  • Michael Ginn wrote:

I asked before how it was that the FSA allowed Northern Rock to sleepwalk into disaster. Now we know. The bottom line is that the FSA paid peanuts and got monkeys on their front line. This is not the fault of the FSA management. This is one of many cases where being cost conscious winds up as a false economy. Blame Gordon Brown as Chancellor who was the FSA's paymaster.
Robert Peston needs to ask himself whether if the salary offered by the FSA had been sufficient to tempt him away from the 成人论坛 and into the role of supervising Northern Rock in early 2007, that he would have seen the potiential for disaster and told the management to stop lending and get their debt equity level down to acceptable levels. Would he have? It is easy now in 20/20 hindsight to see what was wrong, but who were the wise people who saw it coming?
Certainly not the Northern Rock boss whose payout for failure was obscene. 拢1.5m? Does the guy have any kind of a conscience?

  • 55.
  • At 11:43 AM on 26 Mar 2008,
  • Vicky wrote:

Robert, can you shed any light on *why* NR was treated as the least risky bank in the UK?

That's the big question but the answer seems to be a secret!

Policy decision? Incompetence? Bad judgement? Too commplex for them to understand?

  • 56.
  • At 11:45 AM on 26 Mar 2008,
  • Anon wrote:

I'm a former FSA supervisor, and I'd add a couple of comments after reading the Executive Summary.

The first is an omission, one I believe is critical in explaining why NR came out as a low risk firm. It is because NR was seen as a mortgage bank, and it had essentially fungible assets. This prevailing assumption, operative when I was a supervisor and apparently operative every time NR was risk-assessed, meant that if the firm ran into difficulty, the FSA reckoned that rectifying problems would be as simple as selling off the mortgage book; at or close to par, as the pre-credit crunch prevailing wisdom at the FSA assumed.

This is not meant to be exculpatory; it is simply the case that the magnitude and breadth of the current credit crunch was not anticipated. Not by the multi-millionaire City bankers, and certainly not by humble FSA supervisors or their managers.

The second point is this. The FSA report is full of references to liquity. Excellent. Good start. But here's the dodge - in paragraph 31, the reports says in the area of liquidity risk, "monitoring of compliance with the qualitative Handbook material introduced in December 2004 was variable within our sample of firms."

This is nonsense, because it expects someone to be able to monitor compliance with rules that do not exist. There are precisely two rules in the FSA handbook on liquity risk, they are:

(In SYSC 11, for reference)

A [bank] must have policies and processes for the measurement and management of its net funding position and requirements on an ongoing and forward looking basis. Alternative scenarios must be considered and the assumptions underpinning decisions concerning the net funding position must be reviewed regularly.

AND

A [bank] must have contingency plans in place to deal with liquidity crises.

That, ladies and gentlemen, is the sum total of hard rules on liquidity risk. Capital requirements appear as handbook rules, they result in hard limits and unambiguous obligations for regulated firms; but liquidity consists of a pile of guidance with which no firm is obligated to comply, and no supervisor can ultimately enforce.

Finally, there was virtually no dedicated liquidity policy expertise in the FSA until the NR crisis broke. Indeed, I have heard that the Liquidity Policy group was disbanded in early 2007; I don't know if it is true, but it is definitely the case that senior management at the FSA, over a fairly long period, had gradually deprioritised liquidity risk.

Everyone at the FSA was caught unprepared for the NR blow-out, I think it would be flat wrong to judge this as a failure at the coal-face of supervision, notwithstanding some of the justified criticism.

  • 57.
  • At 11:51 AM on 26 Mar 2008,
  • Sue Wilson wrote:

Lets face it the FSA has proved itself about as useful as a chocolate teapot and needs to look seriously at itself before regulating other institutions to death. They don't seem to comprehend the seriousness of its laxity in this matter.

  • 58.
  • At 11:51 AM on 26 Mar 2008,
  • Malcolm Solts wrote:

Reading some of the comments regarding the distance from London to Newcastle and maybethis is why the FSA failed to respond quickly. Does this mean that any financial institute north of Watford is unsafe?

If (and this is very unlikely) the FSA gets fined,will the shareholders receive a portion of the fine or would it go to the Treasury (Govt.)which now owns Northern Rock?

  • 59.
  • At 11:53 AM on 26 Mar 2008,
  • Andrew wrote:

Is this showing a lack of systems and controls then? to quote some of their own rules and regs!!

How can the FSA be taken seriously now?

I still believe that the media were very much responsible for encouraging the run on the bank and YOU must accept this Mr Peston, as you accepted an award for scoop of the year recently.

Good show!! Not...

speaking as someone who has lost their job as a direct result of the following credit cruch, Fancy paying my mortgage for me? no, thought not.
But my payment protection will.

  • 60.
  • At 11:59 AM on 26 Mar 2008,
  • Anon wrote:

One point to the folks here asking about accountability.

People involved in supervising NR have been fired and demoted. Clive Briault, one of the FSA's managing directors, is leaving the organisation to pursue "other interests". Go figure. I suppose it's too bad we don't go in for public lynchings any more, but don't think there have not been consequences for individuals implicated. The FSA has promised to publish the full report by the end of April; unfortunately for some of you, individual names will be redacted.

Another point, for those wondering if the FSA has inherited some sort of bureaucratic inertia from precessor regulators... well, the FSA was initially run by former Bank of England people, for the most part. More recently, private sector folks have taken over.

I'd put the NR mess-up down mainly to an absence of any sort of robust liquidity policy framework. That's where the FSA's auditors ought to be looking, and to be fair they do touch on it, albeit rather perfunctorily, in paragraph 50 of the report.

  • 61.
  • At 11:59 AM on 26 Mar 2008,
  • Scamp wrote:

The FSA should be run by engineers who have had absolutely no connection with the City and are all fully paid up member of the sceptics club.

We engineers can recognise a faulty structural design from just looking at it... The FSA City types wouldn't recognise it unless it fell on their head... Which it did of course !

  • 62.
  • At 12:02 PM on 26 Mar 2008,
  • Les wrote:

The FSA asleep as usual watching butterflys drifting past their windows which has resulted in the critical failure of Northern Rock at a massive cost to us the taxpayer with thousands lost to ordinary peoples investments and the loss of over 2000 jobs,put them all on the dole and let them have a reality experience.

  • 63.
  • At 12:07 PM on 26 Mar 2008,
  • Simon wrote:

The FSA report makes a great read-- one thing I haven't seen mentioned so far is the admission (paragraph 19 of the report) that FSA staff didn't even understand how they were supposed to supervise the bank and that they needed to re-assess their view when the market or the business changed.

Obviously the FSA made a mess of this, but I can't agree that the report means shareholders should be compensated. The ultimate responsibility still has to lie with the bank's management. It's also not as if the business model that led to its collapse was a secret. The wholesale funding strategy was well disclosed by the bank and shareholders have to take responsibility for understanding the risks involved in their investments -- even if the regulator doesn't.

  • 64.
  • At 12:13 PM on 26 Mar 2008,
  • John white wrote:

Keeping Ally D and Mother B out of the firing line is priority number one for number ten but this report on Northern Rock is a horror saga of incompetence. The FSA was established by GG Brown and has failed miserably at the first real test. Quo vadis Mr Sants? Will the FSA be deemed not fit for purpose or must we wait for the next bout of incompetence. Tubby Isaacs reckons that the Sants was looking very green about the gills yesterday when he was clearing a plate of whelks. Mind you Ally D has been keeping clear because he has read the tea leaves and the prospect of the Boris replacing the Newt is driving Mother B under the table. Distractions are needed so somebody will be thrown to the lions. The problem is who.

  • 65.
  • At 12:17 PM on 26 Mar 2008,
  • Jonny wrote:

The Northern Rock scandal , the Equitable Life scandal , the Barlow Clowes scandal, the Maxwell, the Leeson , the endowment mis-selling, the pension mis-selling and the all rest........ Financial Regulation?
Rubbish.
What a joke!
Twenty years ago in April 1988 financial services "regulation" came into force in the UK.
There have been MORE scandals under the so called UK regulation than there ever was before, without it.!

Four years ago, UK mortgages were regulated.
So how is a UK lender "allowed" to offer 9 times salary as it did last year?

In two years time, when UK repossesions have hit a record high and no one can sell their house we will be hearing then that the "mortgage regulator" failed to regulate properly.

Remember FIMBRA the first of many names for regulators? It was launched in 1988 and within a year it was insolvent!

Nothing has changed in 20 years.

Incompetent and shambolic.

  • 66.
  • At 12:19 PM on 26 Mar 2008,
  • A Londoner wrote:

The FSA's primary duty is to savers and borrowers, and to keep an orderly market, do they have any duty to maintain shareholder value in a bank? A shareholder should know about the company they have invested in and take action accordingly.

Of course, if you were advised to buy these instruments directly or through another vehicle by a registered person they will take up a case on your behalf. That is really a by-product of institutional marketing leading to participation in capital markets by people who cannot really afford to take the risk that the product may go down in value. It is right and proper that the salesmen who receive payment or commissions are accountable in that case, but not if individuals use non-advisory execution only services.

Is direct access to capital markets really the right thing for most individuals? Did it start to go wrong with Sid? How many Sids truly understand the difference between a cash ISA and a savings account, or a unit and a share?

Is amy also be time to look at the qualifications of commentators who herd the masses one way or another according to their own agenda of self promotion. These are almost as bad as the marketeers - although usually working for the downturns.

  • 67.
  • At 12:29 PM on 26 Mar 2008,
  • Liam wrote:

Oh, heads have rolled...

Clive Briault, FSA retail chief - head of the team that monitored Rock is the only person who has been sacked.

With a payoff of almost 拢400,000.


拢400,000!!! Rewarded for sheer incompetance?!

It disgusts me.

  • 68.
  • At 12:34 PM on 26 Mar 2008,
  • Jel wrote:

The credibility of self-regulation is shot, it's time to reimpose truly independant external control on the Sector.
The FSA have been running the Banking Sector for the sole benefit of the Banking Sector. The days are gone when the Government owed the Banks so it couldn't control them, but the Banks don't want to recognise the fact, and the FSA has been packed with bankers in the hopes they'd know their way around.
Ever try an appeal to the FSA (like charges for incoming STP euros) ? The bum's rush every time.

  • 69.
  • At 12:37 PM on 26 Mar 2008,
  • Donald wrote:

The rock went from 3-4% mortgage share to over 20% of the UK market, higher than the Halifax.This is like Greggs the Bakers having a larger market share than Tesco's and the FSA(Frankly Asleep Again) didnt notice. Someones Head should role without a payoff, this will ensure that the next person in charge is not as negligent.

  • 70.
  • At 12:46 PM on 26 Mar 2008,
  • P. Dough wrote:

Q: Where on Earth would you get an understanding that BoE liquidity would be increased and provided?

A: From only the banks themselves.

The FSA was in the pocket of the banks whereas the General Principles of Bank Regulation states that Banks are required to be issued with a bank licence by the regulator in order to carry on business as a bank, the regulator supervises licenced banks for compliance with the requirements and responds to breaches of the requirements through obtaining undertakings, giving directions, imposing penalties or revoking the bank's licence.

This is the kind of headlines that we would rather be reading as shareholders and as the public, instead of "central banks try to bail out malfunctioning banks leading to run".

I couldn't agree more with John McFall when he demands a root and branch reform of the FSA with lessons to be learned by the financial services industry, Bank of England and government too, not just the financial watchdog.

Central banks around the world could take a leaf as well.

  • 71.
  • At 12:46 PM on 26 Mar 2008,
  • Jacques Cartier wrote:

The FSA was putting on an indignant front a while back. Now the facade has cracked. Perhaps Callum McCarthy and Hector Sants will start going after some of those big-business creeps who caused all this trouble. Fingers crossed, eh?


  • 72.
  • At 12:51 PM on 26 Mar 2008,
  • harry e wrote:

Seems to be some editing of the comments here.

There used to be a lot of criticism of Robert Peston's 'scoop' and sensationalist reporting triggering a retail run on the Rock (following a wholsesal run as a result of the global credit crisis).

All banks become insolvent if there is a run...they all borrow short and lend long.

I recall clearly this was your sole criticism of the Rock's business model originally Robert. I think you know a lot more now and were more careful when it came to the HBOS issue last week.

If this does not get printed I shall lodge a formal complaint.

  • 73.
  • At 01:10 PM on 26 Mar 2008,
  • Richard Bagnall wrote:

Aren't the FSA just totally incompetent and a waste of taxpayers' money? Isn't this just a repeat of their failure to protect us against the Equitable fiasco?

  • 74.
  • At 01:15 PM on 26 Mar 2008,
  • Verano wrote:

"Our understanding is that, during the review period, the FSA鈥檚 approach to liquidity reflected a presumption that, in the event of a crisis like that experienced in August 2007 (when money markets seized up), general market liquidity provided by the Bank of England would be increased"


This also confirms that our lead economists as a group of people:

1. Are often not talking to each other, let alone agreeing.

2. are working on presumptions and assumptions without questioning them.

3. are following a liberal approach whose outcomes they BELIEVE someone else will manage for its risks.

As for the economists, whom have talked the U.K., (and many other countries in the world) into sacrificing itself to the untested oceans of globalized economics: how and why have they been allowed to lead intelligent people in this Pied Piper fashion?

  • 75.
  • At 01:39 PM on 26 Mar 2008,
  • James Butler wrote:

Will NR shareholders be given preference in applying for shares when the company is floated again or do you get some shares back? Is there any point in keeping share certificates?

  • 76.
  • At 01:39 PM on 26 Mar 2008,
  • David Alexander wrote:

The FSA has 4 statutory objectives
1) market confidence 2) public awareness of financial system 3) consumer protection 4) reduction of financial crime
No mention of shareholders - shareholders are owners who have a vote and a say in the way a company is run, due to their equity investment. They are not consumers. The FSA is not responsible for their losses.
Solution - read the annual report and audited accounts - if you think a company is playing fast and loose with your money sell the shares. If you can't understand the reports you should not be investing. You should put your money in a savings account.

  • 77.
  • At 01:42 PM on 26 Mar 2008,
  • Armand Borisewitz wrote:

Mr. William Moore writes "Whilst the role of the BOE from government control has proved largely successfull,..." really??? Who appoints members of the BOE Monetary Committee? Why is it that we have two (massaged) means of measuring the rate of inflation, both of which are now above target? and why has the value of the 拢 relative to the Euro fallen from 1.60 euros to the 拢 to 1.27 to the 拢 since 1999 if the BOE and Gordon Brown as Chancellor have been such a success? As to the FSA and Northern Rock debacle, not only should heads role (as indeed some already have) but all those complicit either directly or indirectly, should be prosecuted for a whole variety of reasons. Only Generals lead foot soldiers to the slaughter. Isn't that what has happended to the many thousand small N.R. shareholders and the 2,500 staff of the bank who are about to lose their jobs? Saying 'Sorry' or and 'drawing a line under and moving forward' is simply not enough!

  • 78.
  • At 01:44 PM on 26 Mar 2008,
  • Darren wrote:

To all those who think banks should be left to fail, do you have any idea what would happen to the UK economy if our banks were allowed to fail? Think of the people these organisations employ, the lives of not only employees but the wider economy as a whole. Allowing banks to fail would be a catastrophe. We would see a depression not seen since the 1930s which would not only be long lasting but also far reaching. Also, I wouldn't consider the Bank of England's loans as a bail out, more of a stop gap until the money markets return to a more normal state of affairs. To use an analogy, when someone is ill, a doctor prescribes pils to aid the human healing mechanism until it can fight the infection itself, all the BoE are doing is prescribing medicine until the the banking system 'heals itself'. I'm not saying the system is perfect but allowing it to fall apart in order to rebuild it is not an alternative.

  • 79.
  • At 01:48 PM on 26 Mar 2008,
  • Armand Borisewitz wrote:

Mr. William Moore writes "Whilst the role of the BOE from government control has proved largely successfull,..." really??? Who appoints members of the BOE Monetary Committee? Why is it that we have two (massaged) means of measuring the rate of inflation, both of which are now above target? and why has the value of the 拢 relative to the Euro fallen from 1.60 euros to the 拢 to 1.27 to the 拢 since 1999 if the BOE and Gordon Brown as Chancellor have been such a success? As to the FSA and Northern Rock debacle, not only should heads role (as indeed some already have) but all those complicit either directly or indirectly, should be prosecuted for a whole variety of reasons. Only Generals lead foot soldiers to the slaughter. Isn't that what has happended to the many thousand small N.R. shareholders and the 2,500 staff of the bank who are about to lose their jobs? Saying 'Sorry' or and 'drawing a line under and moving forward' is simply not enough!

  • 80.
  • At 02:03 PM on 26 Mar 2008,
  • FR wrote:

How is a toothless old hag like the FSA meant to police the slavering-wolf CEO's and Chairmen that stalk the corridors of the high street banks head offices?

In recent boom times, the like of which have sadly passed, everyone was happy to see their house price double then triple, their car transform from an escort to a BMW, their great leaders collect more tax to spend on far-flung wars and their ability to buy whatever they want with a swipe of a card. Who was going to pee on them fireworks, right in the middle of the party?

No one at the FSA, that's for sure.

No one anywhere, for that matter.

The truth hurts - that the greater majority of people in this country have little or no idea where money comes from, how it's managed or where it all goes at the end of each month.

It's time to wake up and face the consequences of our actions, and blaming an impotent governing body for our failings will only makes us feel better in the short-term.

  • 81.
  • At 02:17 PM on 26 Mar 2008,
  • Brett Wiltshire wrote:

"This verdict means that shareholders should be substantially compensated"

Frank, shareholders bought a portion of a business that they entrusted to the management.

While it may be true that the flaws in NR's business model should have been highlighted by the FSA, it wasn't the FSA that ran the business on a model that turned out to have near fatal exposure to the credit markets.

Would you be so vehement if this crisis had not yet occurred? Would you be happy if enforcement of a less risky more tightly controlled business model adversely effected the value of your investment?

And let's be clear, your statement demands compensation for the business owners who profited (and subsequently lost) from the NR business model, not for those 2000 who may lose their jobs, or those who may lose their homes as their mortgages become unaffordable.

  • 82.
  • At 02:23 PM on 26 Mar 2008,
  • Paul Conlon wrote:

After the latest news, there still seems to be no mention of Mr Applegarth and Co who off loaded their shares three months before things hit the fan,being charged with insider dealing ,if they did not have prior knowledge in their position,why on earth were they being paid the astronomical salary that they were on.

  • 83.
  • At 02:46 PM on 26 Mar 2008,
  • John wrote:

The press commented last week that almost all the people in the FSA directly responsible for NR supervision have gone (including the relevant MD). Publicly fired and humilated? No, but gone.

There clearly was a substantial failing at the FSA, and it needs to act on any remaining people and on its processes, but:
- Northern Rock's failure was primarily its managers fault
- Confidence in the UK markets hasn't been halped by BofE and Government delays in acting (cf Bear Stearns)

Nobody needed to be a "banking expert" to work out that lending thousands of people 6 times their salary and up to 125% of their property value would end in tears. O level arithmetic would have been an adequate qualification.
You did not need to travel to Newcastle to work out that Northern Rock was acting recklessly, you only needed to look at their website and see how the Together mortgage was structured.
Reduce FSA staff numbers to a few dozen, send them to evening classes in arithmetic, and tell them that they will all be sacked, including the chairman and every other highly paid individual, if anything like this ever happens again.

  • 85.
  • At 02:46 PM on 26 Mar 2008,
  • Glenn wrote:

Simply add Northern Rock to Equitable Life and Independent Insurance. There has yet to be an effective government body that oversees financial institutions. We need one now!

  • 86.
  • At 02:47 PM on 26 Mar 2008,
  • Charles Bartholomew wrote:

Yes but.... If the management of Northern Rock had been doing a good and cautious job rather than "pushing the envelope" for ever faster growth then surely it would not have mattered how well or badly the regulator was doing their job?

  • 87.
  • At 02:55 PM on 26 Mar 2008,
  • Stuart wrote:

What is clear from this catalogue of failures, is that when the FSA confirmed to the Chancellor and the Bank of England that NR was a going concern and merely suffering from liquidity problems it really didn't know one way or the other.

  • 88.
  • At 03:00 PM on 26 Mar 2008,
  • James Whitaker wrote:

So who is this FSA boss who has just announced his "retirement". Please can we see Paxman asking him a few strong questions on Newsnight before he swans off to the Carribean never to be seen again?

  • 89.
  • At 03:13 PM on 26 Mar 2008,
  • Robert Carnegie wrote:

Northern Rock went bust by itself - admittedly because they were dependent on market money-borrowing opportunities that ceased to be available. It seems that the FSA should have noticed sooner that NR was getting into trouble, but the FSA was not responsible for running the company.

  • 90.
  • At 03:42 PM on 26 Mar 2008,
  • Paul wrote:

#20 Couldnt agree more, its going to be a case that will go all the way to the House of Lords vis a vis the recent pensions debacle, and quite possibly the European Court vis a vis Equitable Life, and if in the end HMG loses its case who pays........ us a lovely symetric double whammy, atleast polititions are accountable via the ballot box, what bonus did the FSA chairman and his ilk receive via the public purse, for preciding over this debacle, is his predessesor going to pay his bonus back for malfeasance, incompetence, I doubt it. The only decent thing that has happened out of this mess, is finally someone put their hand up and took the blame, a refreshing change from obstification and backsliding that Brown Darling and his voodoo accountants normally employ

  • 91.
  • At 03:45 PM on 26 Mar 2008,
  • Stephen Swift wrote:

The quoted paragraph in the original article says it all - it shows that the FSA was relying on the Bank of England to come to the rescue if any bank got into difficulties.
If the BoE was to take responsibility for this what exactly did the highly paid individuals at the FSA think their own role was?

  • 92.
  • At 03:48 PM on 26 Mar 2008,
  • Peter wrote:

I think it should be remembered that the directors of NR, voted in by the shareholders, brought the company down by their cavalier lending behavior. They assumed the BoE would bail them out if they faced a liquidity crunch but they didn't and didn't have to. The FSA may have failed in their supervision, which is their duty to protect depositors, but they didn't bust the company; the directors and shareholders did that.

  • 93.
  • At 03:49 PM on 26 Mar 2008,
  • Stephen Swift wrote:

The quoted paragraph in the original article says it all - it shows that the FSA was relying on the Bank of England to come to the rescue if any bank got into difficulties.
If the BoE was to take responsibility for this what exactly did the highly paid individuals at the FSA think their own role was?

  • 94.
  • At 03:50 PM on 26 Mar 2008,
  • Peter wrote:

I think it should be remembered that the directors of NR, voted in by the shareholders, brought the company down by their cavalier lending behavior. They assumed the BoE would bail them out if they faced a liquidity crunch but they didn't and didn't have to. The FSA may have failed in their supervision, which is their duty to protect depositors, but they didn't bust the company; the directors and shareholders did that.

  • 95.
  • At 03:56 PM on 26 Mar 2008,
  • Michael Spears wrote:

To me the arguments re liquidity smack of after the point justification.

I suspect that those at the FSA (like the Northern Rock management and me as well) assumed that there would always be a market for AAA rated securities and that risks centred around solvency rather than liquidity.

Possibly a high level look at liquidity risks had assumed that there would have to be a system wide problem before AAA securities became unsaleable and that such a systemic problem would be addressed by the central bank (exactly as has happened more recently)

This would fit in with the assumption that NR being a well capitalised mortgage only bank (indeed with most of its mortgage book securitised to reduce its exposure to house price risk) was less risky and less in need of close regulatory supervision compared to the investment banks dabbling in exotic derivatives.

In my opinion this is just the sort of area where the regulator should be doing basic research and analysis from an overview perspective which the individual market players 'at the coalface' would not be expected to see. I am guessing that this is not how the FSA is set up; with the separation of powers from the BoE I can imagine this sort of 'sexy' activity would be more the sort of things the economic mandarins at the BoE would see themselves doing than the bureaucrats at the FSA.

  • 96.
  • At 04:11 PM on 26 Mar 2008,
  • Tim Pritchard wrote:

Can anyone remember why Gordon Brown thought it was a smart idea to take banking supervision & regulation away from the Bank of England and give it to the FSA? As I recall, the B of E took its regulatory role quite seriously and enforced little things like liquidity ratios, whereas the FSA...
But perhaps this was no more dumb than flogging off all our gold reserves at the bottom of the market...

  • 97.
  • At 04:15 PM on 26 Mar 2008,
  • Mike wrote:

In the light of Northern Rock, could someone explain, in simple terms, the purpose of the Basel II Operational, Market and Credit Risk obligations on banks? Isn't this meant to prevent this sort of thing from happening, or at least mitigate the risk?

  • 98.
  • At 04:20 PM on 26 Mar 2008,
  • Stuart wrote:

The difficulty with Micheal Spears argument that NR was well capitalised mortgage bank that had reduced its risks through securitisation, is the unknown risks in its off shore entity Granite where some of its off loaded mortgages are held. I suspect, given the way nobody wants to hold this baby, that even where mortgages passed further on to other investors that there are some recourse features in the securitisation process, which will in due course lead to a NR having to stump up monies to cover the bad debts.

  • 99.
  • At 04:24 PM on 26 Mar 2008,
  • John Evans wrote:

It's no wonder teh FSA fails in its regulatory responsiblities: it's website and rulebook is impenetrable! I'm hardly surprised that its own staff find it hard to interpret the rule book and therefore make mistakes.

  • 100.
  • At 04:25 PM on 26 Mar 2008,
  • John wrote:

"To all those who think banks should be left to fail, do you have any idea what would happen to the UK economy if our banks were allowed to fail?"

I'm sorry Darren but that logic won't cut it. It is the very fact that the banks expect to be rescued that allows them to take on unacceptable risks.

  • 101.
  • At 04:27 PM on 26 Mar 2008,
  • David Gale wrote:

All this seems to prove that the more possibilities there are for passing the buck then the more risk that will be taken. This seems to be Mervyn King's point. Clearly here the shareholders were asleep at the wheel as was the FSA while goodness knows what the NR directors themselves were doing. Surely we'd all be better off without an FSA to muddy the waters whilst the Bank and the Government worried about the security of the system as a whole rather than that of the individual parts whether NR or Equitable Life.

  • 102.
  • At 04:27 PM on 26 Mar 2008,
  • Mike Sadler wrote:

This endorses my view that the shareholders, many of whom are staff who had reinvested their earnings in share schemes or taken performance awards in shares rather than cash, must now be substantially rewarded, for had the FSA done its job properly, the Rock would have avoided such a dramatic collapse. Scrap the FSA and give the job back to the Bank of England where in the past it was done properly.

  • 103.
  • At 04:28 PM on 26 Mar 2008,
  • Vish wrote:

Umm, why dont people blame the banks? If you took away murder laws, it still makes murder wrong.

The fact that the FSA are a bunch of toothless fools is purely down to the banking fat cats crying like little babies at the government for "less legislation" and asking for market forces to reign supreme.

When the fat cats greed becomes so much that they actually face detroying the system that they milk off, they come running to government begging like children for tax handouts to cover the mess that THEY made in the first place.

The fact that the FSA is falling on it's sword so it can cover up the failings and greed of the banks themselves is disgusting! Northern Rock should have been allowed to collapse, the Bank of England should have shown the two finger salute to the other high street banks when they came begging! We should go back ot the days of traders throwing themselves out of the 20th story window when things go wrong as they have lose their OWN money rather than being bankrolled by the tax payer everytime the screw up!

  • 104.
  • At 04:29 PM on 26 Mar 2008,
  • Mart wrote:

Its been quite obvious that this bubble was unsustainable for the past 2-3 years at least.

But all the time house prices were booming along with city bonuses, why would anyone in government, bank management or the FSA want to suggest that things were getting out of hand? Better to just trouser the bonus and worry about what happens next another day.

Now in traditional British fashion we're shutting a series of stable doors long after the horses have bolted.

And meanwhile the Bank of England (and other central banks) are laying the foundations of the next financial Armageddon as they bail out failed banks with massive loans, lower interest rates, and just generally fail to let the city learn from its mistakes.

When mining was no longer paying its way, we let the mines close. When Rover could no longer make money, we let it collapse. But when faced with the prospect that a few highly paid bankers might lose their bonuses, if not their jobs, these cheerleaders for capitalism are demanding and getting socialist bailouts.

We're all suckers for electing people who let this continue.

  • 105.
  • At 04:29 PM on 26 Mar 2008,
  • Mike Hardy wrote:

It's easy for us all to be wise after the event. The inter-bank markets completely shutting down was one of those black swan events that are difficult to foresee. I'd like to see our press and representatives making more noise about the BoE potentially accepting collateral in leiu of short-term lending (i.e. adding liquidity) which is fine, versus what the Fed are proposing w.r.t. Bear Stearns & JPM - i.e. accepting a $30b loss which the BS shareholders and bondholders should be taking. This is short-changing US taxpayers big time IMO, and represents a major moral hazard and injustice. Armageddon? Let's see the whites of their eyes before we begin to bail 'em out.

  • 106.
  • At 04:31 PM on 26 Mar 2008,
  • P Baker wrote:

No doubt the offending FSA Management will be rewarded with a huge golden payoff and a choice job in another financial institution.

That's how failure by senior executives in the UK is generally dealt with. Unless you know otherwise !!

  • 107.
  • At 04:40 PM on 26 Mar 2008,
  • J Robertson wrote:

I am always amazed that the people responsible for these terrible errors of judgement are never named. I would like to know who was responsible for the mess and what disciplinary measures have been taken. It is too easy for the culprits to be shielded by a government sponsored cloak of anonymity. We pay the salaries of these people, so why can't we know who they are?

  • 108.
  • At 04:46 PM on 26 Mar 2008,
  • JohnM wrote:

Apart from nos. 27 and 45 above, most of these responses miss the crucial point, which Robert Peston has quite correctly highlighted. FSA had assumed that given a liquidity crunch, BoE would act as lender of last resort.

Perhaps they could be forgiven for this - it's what most people have assumed for as long as I can remember. But given the dependence of NR and other banks on being to refinance loans placed inside SPVs of this kind, it seems such a crucial point that FSA should have had a continuing dialogue with BoE on this topic in relation to the systemic risks to ALL banks. Or had they received reassurances that were not matched by BoE actions when the crunch came???

Therein lies FSA's most important failing. However good or bad the supervision at a detailed level, would not NR have suffered the same fate because of its liquidity exposure? Most of the points brought out in the FSA report seem to be at a secondary level of detail - certainly the failings should be fixed, but they weren't the main cause of the NR debacle.

It would be good to see more attention paid to one specific lesson to be learned about "off-balance sheet" financing generally that emerges from NR. It should only be allowed to come off the balance sheet if there is virtually no risk that the originating bank will be called on to meet any future liability for it - including refinancing at the planned expiry date. That might involve locking into securitisation for much longer periods, even if it proved more expensive for originators.

Otherwise, it should still be regarded for all purposes - including liquidity management - as a liability of the bank, and a tough regulatory stance taken on the risk that nobody will want to take on these loans when they need refinancing. There is after all nothing new in seeing credit markets dry up when times get tough elsewhere.

A topic for you to pursue, Mr Peston?

  • 109.
  • At 04:57 PM on 26 Mar 2008,
  • ghouse wrote:

What a hue and cry the Bank of England made when it came to the BCCI.
"In some ways it was the riskiest bank in the UK" you say referring to Northern Rock but they seem to have carried on regardless before the beans were spilt.

  • 110.
  • At 04:59 PM on 26 Mar 2008,
  • David wrote:

A great example of Blair and Brown's so called 'light touch' (aka free-for-all) handling of the economy.

  • 111.
  • At 05:03 PM on 26 Mar 2008,
  • gjc wrote:

Surely it is comic that proper/ adequate risk assessments were not carried out. What on earth did they think banks did as a business??

  • 112.
  • At 05:07 PM on 26 Mar 2008,
  • Jerry wrote:

I noticed that the FSA review upheld the view that a principles rather than a rule based approach should continue to be adopted. Unambiguous rules rather than ambiguous principles would in my view provide a greater degree of certainty in a time of great uncertainty.

  • 113.
  • At 05:10 PM on 26 Mar 2008,
  • Oisin Gantly wrote:

This is hardly surprising. All the so called regulators from Ofcom and Ofwat through to the OFT are asleep on the job.

  • 114.
  • At 05:11 PM on 26 Mar 2008,
  • Richard Bruce wrote:

This is another example of the FSA's lack of proportionality in respect of regulation.

Whilst we have the heavy handed approach to over regulation of general insurance brokers, who are deemed to be low risk and yet pay a high price in terms of fees, time and valid concerns: the real financial risks from banks and illegal share trading are at best missed and at worst overlooked.

It is time the FSA pulled back from forcing small insurance brokers out of business by over regulation and concentrated on policing the real financial risks in the market. The Treasury should wake up and redirected the FSA's strategy in respect of effective financial regulation.

  • 115.
  • At 05:28 PM on 26 Mar 2008,
  • Arthur crumpton wrote:

The FSA were sleeping whilst Eqitable Life went under (no sorry message in their review of that one)
Perhaps if action had been taken then the Northern Rock fiasco would not have happened.Still no Government money or buy out for Eqitable.

  • 116.
  • At 05:37 PM on 26 Mar 2008,
  • oliver holmes wrote:

NR was a side-show. The real crisis was with at least 2 clearers and this explains the FSA's lack of focus.

  • 117.
  • At 05:51 PM on 26 Mar 2008,
  • Robin McKinlay wrote:

Once again a Government Agency responsible for regulating the activities of financial institutions has failed in its responsibility to ordinary investors. Such investors believed that they were safe in dealing with those institutions simply because there was the back up of eternal supervision, audit and accountability. Investors in Equitable Life held exactly the same view and they too were let down badly by those whose duty it was to protect them. There appears to be a lack of honour and integrity amongst those who appoint the officers of these agencies or who hold daily responsibility for their conduct. The absence of resignations or dismissals seems inexplicable in the face of such culpable negligence.

  • 118.
  • At 06:02 PM on 26 Mar 2008,
  • Alexander wrote:

Never mind chaps, Carla Bruni-Sarkozy is here now to cheer us all up and forget all about the great Northern Rock cock up.

  • 119.
  • At 06:07 PM on 26 Mar 2008,
  • Tim Jones wrote:

The FSA, being appointed by the state, does have a moral responsibility to shareholders. But, in my view only some of them.

There were three basic classes of shareholders in NR.

1) professional investors investing their surplus funds for a return. They know they are in a risky business and do not need sympathy. To be fair, I don't think many of them would think they deserve sympathy either.

2) people who were given their shares on demutalisation. That is, given them, not paid for them. And then they got healthy dividends for a number of years. As they were given them they haven't really lost anything. I was lucky enough to be in that position.

3) Pension funds and the like. To me this is where the FSA have realresponsibility. We nearly all have to save for our retirement and, with the near abolition of final salary schemes, for most of us that means pension schemes. We don't pretend to understand them, but are given big tax incentives to put money into them. We don't actively manage their investments. In fact most of us just put the money into the scheme our employer will also contribute to.

I don't know if the scheme I am in had exposure to NR. I don't know what else it is exposed to. But even if I did know moving the money out isn't practical. Unless the government wants a nation to actively manage its individual pension (and provide the education at school to enable us to do this) it has to have a functioning regulatory system that stops people gambling with someone elses money, taking a huge salary in the good times and then being bailed out when it goes wrong. The FSA was meant to be part of that system. The system failed. The system therefore needs changing.

There is a lot on the blog about its right that savers' deposits are safeguarded. I agree. But please remember for most of us our real deposits are in pension funds who own shares. saving are often surplus cash. Pension are often absolutely essential money.

  • 120.
  • At 06:47 PM on 26 Mar 2008,
  • G.Rawson wrote:

This is a carbon copy of Equitable Life, the FSA are completely useless and when anything goes wrong nobody wants to know. I am told MP's got out of Equitable "collectively" before the public were told.I have long felt that this was insider trading but although I have written to everyone I can think of no one will even reply to my letters. I lost half my life savings following government "advise" about pensions but as I say - when anything goes wrong , as ever, they don't want to know.
I feel sorry for the investors in Nortern Rock, they will get cheated somewhere along the line

  • 121.
  • At 06:51 PM on 26 Mar 2008,
  • Adam Samuel wrote:

Actually, the Board Director responsible for Northern Rock has already left "by mutual consent". Unusually, there has been some accountability.

  • 122.
  • At 06:51 PM on 26 Mar 2008,
  • John from Hendon wrote:

The problem with aggressive supervision is that if the financial markets were to be subjected to such a regime many if not most of their businesses will evaporate.

Most financial transactions rely on confidence and trust and if the supervision was to become sufficiently robust to prevent Northern Rock's little problem it would also prevent most financial activity.

The FSA could not have employed proper staff for if it had the markets and business would have suffered more severely than we are suffering today and we would all be much poorer.

If the FSA now employs 'proper' regulators as they propose they will harm us all - in a sense we need incompetent amateurs to both run, manage and regulate our financial businesses and luckily that is just what we have.

We all need lip service regulation for the markets to exist - if the gamblers fully understood the risks they are running they would not throw the dice. This has always been the case and will always be the case.

Markets rely on incomplete knowledge to function - after all it is a zero sum game of pass the parcel (of sup-prime mortgages in the case or whatever it will be next time.)

I like to read of historic scams presently the Teapot Dome fraud is interesting me!

  • 123.
  • At 07:10 PM on 26 Mar 2008,
  • robert marshall wrote:

The FSA has shown itself singularly impotent in every avenue of its operations and the few principles the Bank of England had not to support/bail out banks who screwed up have alsop been decimated.
The previous CEO of the FSA jumped before he was pushed and the present Chair sits it our until his term is over making him a total dead duck.
This is what happens when an incompetent chancellor hell bent on interfereing is allowed to do as he chooses with impunity.
As a small insurance broker the FSA woudl nuke us if we so much as put a pen in the wrong place yet large firms get away with a tut tut.
Until the FSA cuts the rhetoric, gets its own house in order, treats all firms the same and stops discriminating against small firms whilst letting large ones off every time and establishes what exactly constitures an asset, this mess will happen again and again.
It's about time the FSA showed some humility and accepted its rule book is a joke and that the treating customers fairly is a red herring to cover up for its inadequacies. Any firm understading what customers expect is already doing way more than the FSA requirements in regards to that and it just shows how desperate they have become to clutch at anything.
The Chair should retire now uncompensated for loss of office
(fat chance) and the new CEO should let it be known the basis of previous management operations is over.

  • 124.
  • At 07:18 PM on 26 Mar 2008,
  • hank wrote:

I find it odd that so many people are commenting on this. The only people who are actually affected are the shareholders. If any other business failed because of a dodgy business model, nobody would bat an eyelid, and there would be no compensation from the state as this is a risk investors take.

With regard to the FSA, you have to look to the government. They created the current system, and it is now shown to be totally unfit for purpose.

  • 125.
  • At 07:21 PM on 26 Mar 2008,
  • robert marshall wrote:

The feeling is that the Federal Reserve bailed out Bear Stearns because that way it would save the exposure of other banks deemed assets for what they really were i.e no where near marekt value.
These banks paid out huge bonuses regardless and still they plea for more money.
It is simple if they believe in the strength of capital markets let them go to them for more money via a deep discounted rights issue and leave the tax payers out of it.
Why wont they? because their off balance sheet assets are literally worthless and they would have to come clean publically which they daren't in the US and in the UK.
So they batter Bernake and King for more money/ We can only hope that these two folk and their boards tell teh banks teh party is over and they must act they would tell any customer go find your capital from your shareholders and keep teh taxpayer out of it

  • 126.
  • At 07:28 PM on 26 Mar 2008,
  • Adam Samuel wrote:

Your comment about liquidity suggests a misunderstanding of the internal audit report.

The report explains the FSA's sloppiness at checking firm's liquidity by pointing out an assumption that the Bank of England would pump credit into any high impact institution if needed. The Bank of course did this by lending vast amounts of money to Northern Rock. The problem was that the original support when it became public knowledge triggered the run on the bank which actually ate up most of the original facility.

Since the FSA had never stress-tested its own assumption, it did not realise that liquidity help could be of limited assistance.

  • 127.
  • At 08:06 PM on 26 Mar 2008,
  • Derek wrote:

As you know one rule for the FSA and a different one for everyone else, i complained to them already with regard another bank and they did nothing then either, big business can get away with murder...

  • 128.
  • At 09:09 PM on 26 Mar 2008,
  • Philip Desborough wrote:

Gordon Brown's masterpiece - a three legged stool and one leg has dry rot. Predictable consequences. Hope it hurts!

  • 129.
  • At 09:40 PM on 26 Mar 2008,
  • Brian M wrote:

As someone who was of the "deserves no sympathy" group ie institutional investor category I thought I'd put in my viewpoint as many people seme to be missing the relevant ones.

Firstly it is entirely reasonable for the FSA to spend less time on Northern Rock than other banks. It was essentially in two businesses - collecting UK deposits & mortgage lending (three if you include securitising them.) Compare that with Barclays which in addition does business banking, has big overseas operations, huge credit cards business, etc. I know which one I would want the FSA to spend more time on and its unfair of Robert Peston to imply otherwise.

Secondly there is, so far, no problem with credit risk in Northern Rock's lending. The problems arose not due to their bad lending, but the bad lending of others.

Thirdly, and relatedly, the issue of liquidity did crop up in investor meetings. The accepted view, wrongly as it would seem, was that unless credit became an issue their bonds would remain liquid. The chance of a bank with sound assets not being able to get interbank liquidity was seen as so unlikely as to not be worth bothering about. The phrase unprecidented seems like a cop out, but it does apply here. The comment from the former FSA employee suggests they would concur with that view. It takes a big step to imagine the unimaginable.

With hindsight everyone seems to think the FSA shouldn't have allowed it to get in that position. But initially liquidity *was* provided by the BoE. The problem was this provoked a run on the bank. I remember saying to someone the weekend it all broke that rationally Northern Rock shouldn't have a problem. But many people's equally rational viewpoint was why take the risk. I'm curious to know what the FSA's procedure's are for that - a run is not an unprecedented happening!

  • 130.
  • At 10:40 PM on 26 Mar 2008,
  • nick hope wrote:

Most people understand how a building society works lending money it has from savers.Most financial people understand that banks can lend money to another bank providing that bank has the cash flow at some point in the future to repay the money.What a regulator must demand is that banks operate within safe channels of lending growth for given time periods or they are in effect overtrading in that timeframe.Like gambling stupidly with borrowed money on the last race of the day Forget the riskiest race today and earn some money tomorrow with less risk should be the advice.

  • 131.
  • At 11:24 PM on 26 Mar 2008,
  • NR_Staff_Member wrote:

"FSA fesses up..."

How old are you Bobby, 17 ??

I agree NR was a side issue, 2 clearers were in the brown stuff and had already gone cap in hand to the Bank of Ignorance for some readies. Hence the FSA were otherwise engaged.

How come you've stopped claiming the credit for all of this Bob, you did nothing else for 6 months. Bit nrevous are you, that there may be 2,000 staff and families searching you out ?

Perhaps in the light of the FSA admissions, they may wish to recruit some of their additional staff in the Newcastle area. I understand there will be some suitably qualified staff on the market soon.

  • 132.
  • At 11:38 PM on 26 Mar 2008,
  • wrote:

One of the more comical episodes in Nick Leeson's autobiography is when he describes being given a copy of the Bank of England investigation into the collapse of Barings in his prison cell. He notes from the front page that the report is both written by the Bank of England and addressed to itself. He concludes this is the old boy network protecting their own backs rather than an independent investigation.
Compare this to the FSA review of the collapse of Northern Rock. The Director of Retail Markets, Clive Briault is ex-Bank of England, the Head of Department responsible for Northern Rock at the time of its collapse is ex-Bank of England, the Head of Department responsible for issuing the rule waiver allowing Northern Rock to reduce its capital requirement is ex-Bank of England. And the FSA review was conducted by their Head of Internal Audit, Rosemary Hilary who, yes you've guessed it, is ex-Bank of England as well.
So not much has changed in the world of banking supervision since the last Bank collapsed other than the same psople moving to FSA.

  • 133.
  • At 11:52 PM on 26 Mar 2008,
  • Colin Saunderson wrote:

NR and the FSA

Nobody needed to go to Newcastle or do anything but review the annual accounts to see the high level of gearing and,therefore, the risk the company was taking as the figures of page 98 of the accounts show. I sumarise them as follows :-
All figures in 拢's Bn
Due within Assets
1 yr 11.2
1-5 yrs 13.8
Over 5yrs 76.0

Total 101.0
Liabilities
1yr 42.0
1-5yrs 10.2
over 5yrs 45.6

Total 97.8
Shareholders funds were 拢2bn

It could be argued that inter bank short term funding had been readily available for years without
a problem. No doubt the FSA
and Price Waterhouse Coopers(auditors) have done that but the lack of balance is quite horrendous. It certainly does not require
an increase of 100 people to
do a regular analysis of accounts to see where the risks lie.

  • 134.
  • At 01:06 AM on 27 Mar 2008,
  • JOHN COYLE wrote:

What a clear admission of failure. It is so unusually clear that those who are culpable must be promoted at once.
The banking sector and its regulators need more honest chumps higher up the tree.
We look forward to the announcements of job promotions.
Are n't beaurocrats just marvellous!

  • 135.
  • At 01:08 AM on 27 Mar 2008,
  • Chris wrote:

I went for an interview for a job at the FSA a couple of years ago. A selling-point that was emphasised was the opportunity to get their training and then get a better-paid job at a bank. This might account for why the 'spotty youths' are having rings run round them by the industry they're supposed to be regulating.

  • 136.
  • At 08:38 AM on 27 Mar 2008,
  • Ian wrote:

Even if FSA had challenged Northern Rock over their business model, what wouild the bank have done?

1 Downsized?
2 Accepted the challenge and accepted the risk?
3 Changed their business model completely?

Number 2 I think so we would be in this position now anyway.

  • 137.
  • At 08:58 AM on 27 Mar 2008,
  • richard hawkins wrote:


I wonder if Sir Derek Wanlass will
be seeking any future advisory role
with the FSA?

  • 138.
  • At 09:13 AM on 27 Mar 2008,
  • Bob the Bear wrote:

"The FSA has 4 statutory objectives
1) market confidence 2) public awareness of financial system 3) consumer protection 4) reduction of financial crime"

Seems the FSA haven't met ANY of the above objectives, so what exactly is it's purpose?

Did the FSA protect me when it suspended my overdraft claim getting to court? Will the BoE bankroll the refund of these unfair charges? I just hope my 拢3000 refund (if and when it happens) will be the one that breaks the liquidity camel's back.

The greedy banks have behaved like criminals for years, helped by a weak FSA and lying government. Its a shame that Joe Public & Son will (of course) pay for this mess.

PS. Falling 拢 versus Euro. Watch for the ECB cavalry coming to the rescue of the BoE. Gordon will sell us all to Europe without the need for a referendum, and probably tell us what a good price he got for us !!!!!!!!!

  • 139.
  • At 01:51 PM on 27 Mar 2008,
  • LouiLoui wrote:

Total lack of understanding - that's what is the fundamental problem here. The banks decided to 'invent' some products - neither the FSA nor the BoE understood them until Summer 2007 - by which time it was too late. Anyone with a decent grounding in economics would know that relying on the money markets for liquidity carries a risk. It may have been a small risk, but it still exists. Sure the drying up of the money markets was unforseen and unexpected - but that is exactly why there is a risk attached. Were the NR shareholders aware this is how NR operated? If they didn't, then they must take legal action, however if this was disclosed by the bank in the annual accounts / report - then I'm afraid it's tough. Know your investments - they are not toys.

  • 140.
  • At 11:23 PM on 27 Mar 2008,
  • Mike wrote:

101. whats so right on taking collateral?? Do you know it is the stuff the banks cant sell on the market because the loss would bankrupt them??
The Gov should make it clear to all the "to big to fail" guys we nationalise you the moment you go bankrupt and that would be it...

  • 141.
  • At 09:16 AM on 28 Mar 2008,
  • Chris Burke wrote:

Assuredly Mervyn King was right not to rush into pumping liquidity into the market. Northern Rock happened because of the high risk strategy of Rock's management and board. It is right that they have gone into nationalisation and it is right that the shareholders suffer the loss in share value. Perhaps this will encourage other banks to avoid high risk paths. It is right that other banks do not think that the Central Bank will rush to their aid when their own folly brings about a crisis.

Seeking rapid growth and 125% mortgages have fueled the house price boom, making housing all the more unaffordable for first time buyers. The credit crunch and the easing (end?) of house price inflation, for the time being, may be to the eventual benefit of the housing market, though hard on those who took the high risk strategy and overstretched their borrowing.

There is much to be said for caution.

  • 142.
  • At 09:15 AM on 30 Mar 2008,
  • ournorfy wrote:

What's with this 'fesses up'? Are you turning American or something? Use of the correct word 'confesses' does not use any more space and is perfectly understandable English.
'Fesses up' sounds like a weak attempt to be 'with it', but whatever 'it' may be, you would be better off without it.

  • 143.
  • At 08:59 AM on 31 Mar 2008,
  • Paul wrote:

Re Peter 9:21 London's too far from anywhere.

  • 144.
  • At 10:10 AM on 31 Mar 2008,
  • Willy Peel wrote:

When failures at the 'bottom end' of the job's market are sacked (or should that be released from their contract) they are given no big pay-off. Why is it that the failing executives and directors always get a big pay-off?

Shouldn't they suffer the same consequences for failure as all other staff?

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