Five years on, what does the Northern Rock crisis mean for gold investing...?
EARLY ON the morning of Friday, 14 September
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 home-owners
– 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
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).
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
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
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.
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.