Northern Rock - some thoughts

(Please see UPDATE at end)

I don't have an account relationship with Northern Rock - I haven't had one for almost ten years (I just checked my files). I do have a small number of Northern Rock shares which are now worth considerably less than they were only a few days ago and much, much less than they were worth at the beginning of the year; however, even at their highest value the absolute amount was still pretty small so I have never been unduly concerned; I tend to be a long-term investor in whichever shares I own and accept that some will fall in value, but this is normally [more than] compensated for by a rise in value of other shares in my reasonably well diversified if relatively modest portfolio.

Why have I not had an account relationship with Northern Rock for about ten years though? At one time I did have a couple of quite significant deposits there (in excess of GBP50k), but the way the accounts were administered seemed to me to be unsatisfactory for me as a customer (I dealt with them by post only, never through a branch); I came to feel then, as I feel today, that their business-style is very aggressive both for depositors and borrowers (the latter from anecdotal evidence only). So when the desposits came due I simply put the money elsewhere. I must record that there was no particular difficulty, or delay, when I withdrew the funds though.

Just at present I am, however, experiencing a delay in releasing some funds from another institution; instructions about a term deposit falling due earlier this month were given last month and I await the cheque with the proceeds. It should have been here last week, but has so far not arrived; telephone inquiries seem to show there is no particular problem, simply that there has been an administrative foul-up, but I do wonder if there is not come cash-flow problem in that other institution, too, which is contributing to the delay. Obviously the amount of my deposit (substantial for me, but miniscule in terms of the overall business of the institution) will in itself be insignificant, but perhaps I am not the only customer experiencing a delay there and perhaps if this is the case their aggregate value is of more importance. My call on Friday seemed to show the matter would be resolved, but another today showed it had not yet been done. I was assured that action would now be taken urgently; I hope by Wednesday or Thursday at the latest to have the cheque. If it has not arrived by then I will have to take steps to release other monies for some expenditure I need to make in the next couple of months; if I need to do this it will be, to put it mildly, extremely inconvenient.

I am not in the business of spreading rumours and possibly helping to create a problem where none exists, so I am not naming the institution concerned for the time being; it is one of the largest in the country and has not so far been mentioned in any reporting on the current 'credit crunch' so far as I am aware, either online or in print. There are a few good journalists who have, in the past couple of days, tried to exercise some degree of intelligence in the way they are reporting recent events in UK financial markets, but most have decided to go for sensationalism shorn of much balance or context - which in my view has contributed substantially to the numbers of people who have felt it necessary to queue up outside Northern Rock branches to withdraw funds, despite the assurance that there is an open-ended guarantee in place from the Bank of England to meet any deposit withdrawal. I am hesitant even to be writing this article; I had written an earlier, somewhat different, version a few days ago but decided not to press the 'publish' button. As a former banker I know very well that confidence and trust are commodities not easily earned, but very easily lost and I do not wish to contribute in however small a way to the wave of 'jitters' sweeping the UK at present.

UPDATE: (Thursday 20SEP07 20.50 BST) Well I am happy to say that the cheque turned up yesterday; I am still not entirely convinced it was totally unconnected with the 'credit crunch' we have heard so much about in the past week, though. I suspect it is more than just Northern Rock which has serious problems; and it is no good saying that Northern Rock is 'solvent', if illiquid - the whole point is that unless people or organisations such as Northern Rock are able to meet their obligations on time (for example when that involves a requirement to roll-over short-term borrowings in order to fund longer-term extensions of credit, and the sources of such short-term borrowing have dried up) then I don't consider that to be a sign of an organisation which is 'solvent', whatever Alistair Darling may have been urging us to believe over the past week. Whilst the immediate crisis is over in terms of having people queueing outside Northern Rock branches around the country, the share price of that bank has continued to fall and this evening the share price is less than a third of what it was just a week ago, itself a lot lower than it was at the beginning of the year; will it even exist as a separate entity in a year's time? Or even by the end of this year? Is anyone interested in, or indeed capable of, acquiring it with the markets in the state they are at present?

I did not share some of the more hysterical reactions toward the Governor of the Bank of England I have seen in some blogs and newspapers over the past couple of days; I thought he acquitted himself pretty well this morning before the Select Committee of Parliament, as did the Deputy Governor. The fault for the shambles that has overtaken the UK financial sector over the past week or so lies squarely with the idiots who govern us, most notably our Prime MInister and for the last ten years Chancellor of the Exchequer, Gordon Brown MP; his reputation as a 'prudent' steward of the nation's finances is laughably erroneous, as I have been saying ever since I began writing this blog five and a half years ago and before that on my main website's comment pages; before that (and whilst I was still closely involved with the Opposition political party) I would tell anyone who would listen that his policies would ultimately lead to disaster. I take no pleasure in being proved right.

However, whilst it is convenient for a lot of British people to complain whenever things go wrong, and oh! how we have seen that this past week, many of these people will have been the 'saps' who voted the current shower of incompetents into power in 1997; as always people reap what they sow! Naturally what is occurring in the UK just now is to a large extent tributary to what is going on over the Atlantic where the profligacy of our American cousins for many, many years may be beginning to feed into the world economy in a serious way. Where all this is going to lead is something I hesitate to speculate about; except to say that I fear things are going to get a good deal worse over the coming months and years. Individuals will have to work out their own strategies to weather what is coming - and the wisest will not be placing their reliance on what the UK or any other government seeks to reassure its citizens it is doing; let's face it the horizons of most politicians stretch no further than the next opinion poll or election.

As for me, well things are OK - I am relatively asset rich and completely debt-free. However, if inflation is allowed to become resurgent again, as it could do if the efforts to stave off the current liquidity crisis continue to involve the pumping of more money into the markets by various central banks around the world and the cheapening of the price of credit that some have been allowing over recent days, then the day of reckoning may be delayed, but it will catch up with all of us eventually. If there is to be a genuine restructuring then I'm afraid that there will have to be pain for some of us - however electorally unpopular that proves to be for the political party with the courage to do put in place the necessary policies; none of our current major political parties seems prepared to contemplate this. Indeed, whith their focus on winning elections and with populations interested only in their short-term comfort and standard of living, who can blame them? Is all this depressing enough?

Actually, whilst I have been incredibly busy over the past couple of days, I am in an extremely good frame of mind at present; as I mentioned above it's all a matter of having formulated one's own strategy. I can't know if my own is by any means perfect, but I am pretty confident it is a whole lot better than that of many (most?) others; and a half bottle of claret helps, too.