[NYTr] All Brit banks now may expect govt rescue

[All the News That Doesn't Fit]

Financial Times - Sep 17, 2007
http://www.ft.com/cms/s/0/2e4257da-656a-11dc-bf89-0000779fd2ac.html


All British banks now may expect government rescue

Stopping a Crisis from Becoming a Catastrophe

By Philip Stephens

In the end fine economic judgments were swept aside by politics,
calm deliberation by panic on the streets. Never mind that investors
in Northern Rock, Britain's fifth-largest mortgage lender, had been
assured their money was safe.

The television images of thousands queuing to empty their bank
accounts the length and breadth of Britain were too much for Gordon
Brown's government. Signs that the contagion was spreading to other
leading banks risked a crisis turning into a catastrophe. Only a
blanket guarantee would do.

Such was the judgment that led to the extraordinary announcement
last night that the Treasury is ready, in effect, to stand behind
depositors not just in Northern Rock but in every other British
bank. Government ministers -- notably Alistair Darling, the chancellor
of the exchequer -- presented the guarantee as a prudent safeguard
against the risk of systemic breakdown.

In truth, the panic that had brought down Northern Rock was fast
spreading through the corridors of power in Whitehall.

Gordon Brown's government has built its reputation on economic
competence. Stability was Labour's trump card in the three general
elections fought and won by Tony Blair. As chancellor through that
decade Mr Brown could claim much of the credit. This week's scenes
of anxious voters emptying their bank accounts, redolent of Latin
America 20-odd years ago, threatened to sweep it all away.

That, after all, is what happened to the Conservatives on September
16, 1992, when a wave of financial speculation saw sterling ejected
from the European exchange-rate mechanism. The Treasury wasted
billions in the pound's defence. The then-Tory government never
recovered its reputation for sound economic management.

Now Mr Brown's administration is haunted by the memory. It can
hardly have escaped the present government's notice that the latest
turmoil has coincided almost to the day with the 15th anniversary
of what became known as Black Wednesday.

The impact, to be fair, has been much more limited. There have been
no emergency rises in interest rates this time. The prime minister
has escaped public humiliation. Most voters have been as yet
untouched. But the damage to the government's reputation may be
considerable -- the reason perhaps why Mr Brown, less than three
months in 10 Downing St., has seemed reluctant these past few days
to step out of the shadows.

How is it, voters might reasonably ask of the politicians, that an
upheaval that began with some dodgy loans in the American mortgage
market could bring one British bank to its knees and threaten the
future of several others? Why, if London claims to be the world's
pre-eminent financial centre, did the regulatory system not work?
Most people will not be much interested in complex explanations
about the implications of the integration of global financial markets
or about the balance of regulatory responsibilities in Britain
between the government, the Bank of England, and the Financial
Services Authority. The buck has to stop somewhere; that may well
be Downing Street.

The speed with which a squall became a hurricane leaves some of the
big questions unanswered, even among the experts. Britain's regulatory
system, with responsibility split between the Bank of England and
the FSA, and the government one step removed, looked fine on paper.
Many saw it as a model for others. But during recent days, the big
question has been: Where does responsibility lie? With the FSA, the
Bank of England, or the government? Sometimes it has seemed the
real answer has been nowhere.

Mervyn King, the BoE governor, has played by the book. His refusal
to bail out the banks when the credit squeeze began to bite set him
apart from central bankers in the US and continental Europe. But
it also carried the right message: Commercial banks should not
expect to be rescued by taxpayers from bad decisions. Likewise,
shareholders in Northern Rock should have expected to pay the price
for a business model that relied on limitless liquidity. But, as
Mr King has discovered, being right can also sometimes carry costs.

Mr Brown must hope that by writing a blank cheque to worried
depositors the government will restore trust in the financial system.
It also seems likely that ministers will move swiftly to improve
the protections afforded to bank depositors, borrowing, with perhaps
a blush, from the American model. But even if calm is restored, the
second-round impact of the crisis is yet to be felt. Voters may
soon find themselves paying more for their mortgages just as house
prices begin to fall. Consumer confidence may slide further. The
Conservatives and Liberal Democrats, though supportive of the
emergency measures, will make political hay.

All of a sudden the political mood that a week or so ago was said
to be tempting Mr Brown to call an early general election is
altogether darker. Only the other day I heard one senior minister
predict that if the prime minister went early he would romp to
victory. Now nothing seems quite so solid. Politics, as they say,
has got interesting again.

[Phillip Stephens is a columnist for the Financial Times.]