Nice timing. The Lehman disaster came a year to the day after the Bank of England first stepped in to rescue ailing Northern Rock plc with a short-term emergency credit line, sparking the first run on a U.K. bank in 141 years and leading to the nationalization of the mortgage bank. The collapse of what had been the nation's fastest-growing lender might well have been the start of Britain's rapid skid toward recession and the beginning of the end for its increasingly beleaguered prime minister, Gordon Brown. To U.S. Treasury Secretary Hank Paulson and the masters of Wall Street, it would have been no more than a distant memory. It was hardly on the same global scale as the bankruptcy of Lehman Brothers Holdings Inc. or the sale of Merrill Lynch & Co.
And yet ... Paulson and Federal Reserve chief Ben Bernanke almost certainly did learn some critical lessons from the run on the Rock. Lesson No. 1: If you're going to move, do it quickly. The Newcastle-upon-Tyne lender took five painful months to land in the government's hands. By then it had borrowed extra billions from the taxpayer and was in a far weaker state than it had been when the central bank first propped it up with a quickie loan. There had also been time for hedge fund investors to buy shares in the bank hoping to make a killing on its sale. There was ample time for several competing buyers to sniff around, find tasty bits of the business and claim they could make money out of it only if there was ongoing government support. When the would-be acquirers finally pulled out, blaming the government rather than their own greed, of course, the big shareholders were left high and dry. So were the small investors, most of whom had no more than a few hundred shares, picked up when Northern Rock changed its status from building society to bank in the 1990s and floated on the London Stock Exchange as part of the deal. For many, especially elderly people reliant on pensions and savings, the shares would have been their only toe in the turbulent waters of the markets and quite likely their only source of dividend income.
In the meantime, the government's policy of shrinking the Northern Rock loan book has left its own reputation in tatters. Borrowers with good credit histories have been encouraged to move elsewhere and find cheaper mortgages. Those that remain with the Rock are those no other bank will take on -- many of them the victims of the bank's reckless drive to build market share by offering loans of up to 125% of the value of their property. In the U.S. they would be called subprime borrowers. Their interest payments are more than they can afford. Northern Rock customers now account for a disproportionate number of repossessions. So much for an allegedly center-left government that claims to care for the poor and the vulnerable!
Lesson No. 2: Know whose morals you are hazarding. Lehman, like Bear Stearns Cos., didn't have small depositors. It had shareholders, including many of its own staff, who mistakenly thought the shares they received in lieu of cash at bonus time would be worth saving up for their old age. But there was no one out there likely to start battering on the door asking for their money back. Even if the victim had been a retail bank, it would have mattered less. After all, federal guarantees cover American depositors up to $100,000 per account (Though heaven knows what such a scheme would cost if the acquisition of Merrill Lynch were to bring down a behemoth such as Bank of America Corp.) In the U.K., however, depositor insurance was available for a more limited amount and it took days for the government to get around to guaranteeing that no one would lose their deposit. Only then did the run on Northern Rock finally peter out.
The third lesson, which the U.S. appears to have learned, but the U.K. has still not fully grasped: act decisively, or look like you are. Paulson and Bernanke have been quick on their feet, ready to knock heads together, ready to nationalize where necessary and allow to fail where they could. Britain is still dithering over what to do next. A year after Northern Rock collapsed, the legislation needed to ensure proper depositor insurance is still not in place (and banks and other far from disinterested parties are fretting that the government is concentrating on depositors rather than on the rights of shareholders and creditors).
Still, in the larger scheme of things, Northern Rock is small beer and ancient history (though still in operation and gradually repaying its debts to the taxpayer). What Britain and the U.S. want to know now is: Who's next? No matter how many lessons the regulator learns, the answer to that question lies in the hands of fate.