Saturday, September 22, 2007

Let's! Go! Fly a Kite!

Took a break from carrying 100 kilos of coal up from the cellar: read the Weekend FT. Chris Giles and Peter Thal Larsen have an extraordinary piece on the Northern Rock débacle:

On Monday evening Mervyn King believed the first real crisis of his Bank of England stewardship had - as he put it to friends - been sorted.

Beset by images of customers rushing to withdraw their money from Northern Rock, Alistair Darling, the chancellor, had offered depositors a blanket assurance that their cash was safe.

But within five days, Mr King's optimism had been proved comprehensively and humiliatingly unfounded. In one of the most extraordinary weeks in British banking history - one which saw the global credit squeeze spill on to the nation's streets - the Bank had on Wednesday performed an abrupt volte face. It had decided to extend emergency lending against mortgage collateral to all banks - a step that just 24 hours earlier the governor had -privately ruled out.


By early [Tuesday] evening, when the heads of Britain's banks came to Threadneedle Street for a meeting with Mr King, executives, including Sir Fred Goodwin of RBS and HSBC's Mr Geoghegan, one by one urged him to follow other regulators and take action in the money markets. Mr King responded with a lecture on the importance of avoiding moral hazard. Nevertheless, he also hinted that the Bank might be willing to alter its stance.

The following morning at 11am the extent of his change of heart became clear: the Bank would conduct a series of weekly auctions to inject liquidity into the three-month money markets by lending against a wider range of collateral, including mortgages. At the first auction it would supply about £10bn. The move was the direct opposite of Mr King's stated public position, and ran contrary to everything he had been saying in private as recently as 24 hours earlier.

At Northern Rock's headquarters in Newcastle, the news was greeted with disbelief. Executives erupted with fury as they realised that the Bank had agreed to a move that, if it had only come a few weeks earlier, would probably have saved Northern Rock, and its depositors, from the crisis they had just suffered.

But the £10bn question remains: what triggered Mr King's U-turn?

the rest here

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