Northern Rock vs. Gold Was No Contest

Five years on, what does the Northern Rock crisis mean for gold investing?

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The first to go, you might imagine the Rock had therefore been the most reckless. Yet incredibly, its creditors were rescued immediately by taxpayer funds. That set the template for the last 5 years, helping the crisis move on from swallowing banks to devouring sovereign governments whole. “Northern Rock is not a reckless lender,” Angela Knight, head of the British Bankers Association, claimed on BBC Radio 4 the day the run on the Rock began. Urging the bank’s savers not to withdraw their money in panic, “the mortgage lending it does well and it does in a high quality, high calibre way,” she added. Knight was in good company, with national UK newspapers urging their readers to buy Northern Rock’s shares throughout the summer of 2007, even as the plumbing of wholesale money markets gurgled and gulped air.

The smartest hedge-fund managers couldn’t get enough of it either. Nor could politicians. The UK’s then-new chancellor, Alistair Darling, had his mortgage with the Rock. So too all too-many of the bank’s 6,300 staff. Indeed, what one ex-member of staff calls “the cult” sought to care for all its employees needs. People had their home-loans, bank accounts, pension savings (via the share-saver scheme) and even gym membership with the firm. North-east England’s biggest private-sector employer (a spot since taken by Greggs, the pie shop), it sponsored Newcastle United FC. It sponsored the arts. In 2005 and 2006, it gave more to charity than all but one of the UK’s other largest 100 companies.

Roll further back, in fact, and Northern Rock’s rise, rise and fall is all too emblematic of the UK and broader financial sector’s fortunes. The Northern Counties buillding society first met in 1850, with the boring, unprofitable aim of matching deposits with loans. The Rock was founded 15 years later, but it wasn’t until 1965 that they actually got together. Boredom continued.

But come the UK housing crash of the early 1990s, the merged building society – “at the invitation of the Building Societies Commission,” according to Building the Northern Rock by Stephen Aris (a former Times journalist), published in 2000 – mounted a rescue of the stricken Lancastrian Building Society, a competitor which had in the Rock’s internal view, “spent too much money in too short a time.”

Rather than trying to keep Lancastrian running, however, “shutting it down immediately and incorporating it into Northern Rock would bring substantial benefits,” writes Aris. “The reserves were liquidated to pay off current losses: closing branches, eliminating the head office and getting rid of senior staff reduced costs; while the mortgage book added to Northern Rock’s strength in the north-west.

“It was, in effect, a government-licensed asset stripping operation.”

As the early 1990s crash wore on, Northern Rock expanded further by takeover, swallowing the Surrey in 1993 and North of England Building Society in 1994. And then – with the Rock and the other players still standing getting bigger through consolidation – came 1997. That shake-up of UK banking allowed building societies to float on the stock market, paying off their members (ie, customers, but now known as “carpet baggers”) in return for voting “Yes” to the switch.

“I am going to take out the lot, every penny,” said one Northern Rock saver to Bloomberg as he queued outside the bank’s West End branch in London in September 2007. The ex-building society’s customers had said pretty much the same thing a decade before, and any search for the source of the crisis has to look at late ’90s deregulation – both in the US and UK, as well as Europe – as a catalyst.

Equity funding, plus access to wholesale capital markets worldwide, eventually led the Rock to call on that other source of bank-only cash – emergency loans from the Bank of England. Anyone choosing silver or gold investing then or now might well wonder who back-stops the lender of last resort. For now, the answer remains the printing press, and behind that remains default.

Those 200% gains might yet have further to run. But in a world where bank shares, mortgage bonds, houses, currencies and government bonds can and do go to zero, gold and silver’s real value may have little to do with their nominal price.

 

 

 

 

 

 

 


Article printed from InvestorPlace Media, http://investorplace.com/2012/09/northern-rock-vs-gold-was-no-contest/.

©2014 InvestorPlace Media, LLC

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