Early on the morning of Friday, September 14 2007, nervous savers formed queues outside several branches of Northern Rock — the former building society then writing 1-in-5 of all new UK mortgages.
Waiting patiently to withdraw their money, the Rock’s customers were spooked by news that the bank had taken an emergency loan from the Bank of England, the UK central bank. And once they’d got their cash, at least a few began gold investing. Here at BullionVault, for instance, September 2007 brought more new UK users than the previous 3 months combined.
How did these new gold investors get on? Certainly better than those “contrarians” tempted to back Northern Rock as it fell over. Those who bought and held gold have since made over 200% gains on average. Which outside buying silver, is better than any other asset class over the last 5 years. (Silver’s paid 26.7% net of costs.) Northern Rock shares, in contrast, went to zero. Just like gold never does.
By the time TV news carried shots of the queues that Friday lunchtime in fact, shares in the Northern Rock mortgage lender had already dropped 25% for the day — and NRK stood nearly 60% lower from its high of February.
Because the Bank of England hadn’t acted as “lender of last resort” since 1973, when the collapse of Cedar Holdings — a pioneer of second mortgages to UK homeowners — threatened a crisis in the country’s banking industry. The UK hadn’t seen a banking run, with people queuing up to withdraw their money, since the collapse of Overend, Gurney & Co. in 1866.
Yes, the turmoil in world credit markets starting June 2007 had hit Northern Rock hard. But it had in truth run head-first into the crisis, making a dash for growth actually known, according to ex-employees from the Rock’s Tyneside HQ, as the “Great Leap Forward” when it was introduced in 2004.
Instead of Mao’s Little Red Book, staff were issued with motivational booklets to peel off and stick to their PC monitors. “Do it now!” urged one motto apparently handed to the mortgage approvals team. Which would be a great way to maintain lending standards.
Externally, the Rock strived to top the newspapers’ Best Buy tables for mortgages and loans. Internally, it pushed quarterly targets for new lending. So-called “self cert” mortgages in particular — where the borrower’s income wasn’t verified — had managers wincing. And to fund all this fun, despite also striving to be Best Buy for savers, the Rock was selling its mortgages onto investors and borrowing from the money markets, rather than waiting for new depositors’ money to lend out instead.
So, where net inflows from savers were £1.7bn in the first-half of 2007, wholesale markets lent the Rock £2.0bn. On the other side of the ledger, and with the magic of securitization taking £10.7bn of mortgages off its hands in Jan. to July, that meant it could grow its new loan book by 43% compared with the same period of 2006. So what politicians, economists and analysts both then and since called “excessive risk” wasn’t a risk at all. It was nailed on. Northern Rock was the bleeding edge of the financial crisis, even though only 0.24% of its assets were exposed to subprime US housing debt (where the air was already seeping out of the credit bubble).