Oh what a chorus of half baked ill informed wingers. Since the decision to “nationalise” the Rock last Sunday, we seem to have suffered the rants and ravings of anybody with a view about the apparent impending demise of this institution.

With all the reliability of playground bullies, it appears that many were happy to give a good kicking to this wounded and pained beast that lay crouching on the ground. Perhaps then it is a good time to separate some of the facts from the fiction.

Let me be clear though, the management of the Northern Rock are not wholly innocent of causing the devastating damage to their institution. Their policy of funding the expansion of their mortgage book from the well of the wholesale markets was always going to be a strategy with some fundamental risks – especially if that well ever dried up!

However, they were certainly not alone in this type of funding as many other highly respected banks had followed this same path, but none quite to the same extent. Additionally the credit crunch that drained the well was not foreseen by most of the analysts looking at the Rock and still seemingly most bullish even though the share price was well over £10. The Rock didn’t cause the credit crunch – it was a victim of it. The toxic bonds emanating from the sewers of the institutional bankers were the catalysts that resulted in the “perfect storm” that was to be the Rock’s nemesis.

Despite this, the Rock has a lot in fact to be proud of. For the past few decades it had been recognised as a successful innovator in the mortgage market, producing highly competitive products which were popular with both clients and intermediaries alike. Add to this the reputation for their operations in the North East which were highly regarded for their service and efficiency, in an industry often renowned for the opposite. This is a great credit to the staff and manager of these operations.

I remember when the business was nicknamed as the bank that used to say “no”, not to be negative but to underline their reputation as not being like other banks that tried to do everything to everyone – usually rather poorly. They prided themselves on primarily just doing mortgages – very well.

Also, may I remind you of the Northern Rock Foundation. When the Rock floated on the market, this was seen by some as an anachronism. Public companies building in a stream of profits to their own foundation to do good works? Whilst other companies have their charitable donations, the Rock insisted on having a programme designed to give back to its community harking back to its original foundation as a mutual. There are many clubs and enterprises that owe a great debt back to their benevolent neighbour.

Now though, the bill to take over the bank has been passed and the company will be “nationalised”. However, this is not and should not be mistaken for nationalisation in the old state form of coal and steel, but much closer to the model of coming under the wing of the Bank of England until the restructuring is complete. Unfortunately for Ron Sandler, he will have the full glare of media scrutiny as well as political opportunism to deal with whilst carrying out his necessary and probably somewhat painful surgery.

For the shareholders – they must wait to see what the arbitration produces. I feel sorry for those, often staff and ex staff, who have held their shares loyally for years only to see them collapse, and some less sophisticated holders will have suffered a greater disproportionate pain as their nest egg for their retirement disintegrates. On the other hand though, we should ignore the crocodile tears of those shorter term punters (not investors) including the hedge funds who took advantage of the Rocks pain and now seek to defend their holdings as longer term co owners of the business. When a £400 million company has to rely on a £25 billion facility from the Treasury, we can see quite clearly who the “de facto” is

So after credit crunch, the abject failure of our banking regulation, and months of political dithering, the Rock looks in a sorry and chipped state. The arrival of highly respected Ron Sandler will be a turning point, and one which I hope will provide the opportunity for an “NR2” to be carved out of the granite that was at the heart of the old Northern Rock.   

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And finally…….I read that a vigorous anti-vandalism campaigner in Poland who posted signs up on bus stops urging vandals to stop vandalising bus stops has been arrested – for vandalism.

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited