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The Rock slide

I have always been in favour of different forms of ownership for financial services companies believing that it leads toa diverse and healthy market and choice for advisers and consumers. I would draw the line at a pattern of ownership that goes from building society, public limited companyand then publicly owned bank.

Northern Rock’s path to nationalisation has been extraordinary while the path to any float or sale to take it back out of public ownership appears to be fraught with hazards too.

How do you wind down a business while hoping to maintain it as fit for sale? Is it possible for a bank to compete for a share of the mortgage market or of deposits against the private sector in a world in which every clause of legislation is based on the assumption that competition between banks takes place is in the private realm.

Is there so much value within Northern Rock to pay taxpayers back? Is it possibleto keep things ticking over until the credit markets return to normality? We are probably about to see large-scale layoffs.

We may be about to see the break-up cost of a bank. The mess will almost certainly put paid to the career of Alistair Darling and may also fell the Labour Government by reinforcing an image of incompetence.

And all this from a former building society which played a bit fast and loose with funding lines during a housing boom.

The odds must be on a regulatory overreaction and that is perhaps the threat from all of this. Regulatory or legal changes are in danger of regulating against the last crisis rather than spotting a future one.An overreaction can do untold damage toa sector and puts pressure on other parts of the regulatory system. This arguably happened with the pension review where advisers, not providers, paid the price and the compensation scheme was massively overburdened. In the problems with endowments, some policyholders effectively paid out to others. With Equitable Life,I would argue the FSA was less concerned than it should have been over forced selling at the bottom of the market – a price was paid in policyholders’ money to ensure no repeat of the Equitable headlines. In not having to deal with a bust Equitable, the regulator may also have missed the hidden crisis – the disgrace-ful performance of many closed funds.

I am pointing out downsides with the benefit of hindsight and no doubt other courses of action have unintended consequences too. But in the case of this former building society, I would argue that regulation-wise the seeds lie quite far back.

The 1980s’ liberalisation of the City of London is probably the most significant economic achievement in what is otherwisea mixed bag from the Thatcher and Major years. But there was perhaps a naivety about what would happen when those mutuals came to compete for the affections of the City. In the case of the life sector, the change in behaviour was immediate.

In the case of Northern Rock, I would reiterate one important point – its behaviour was arguably reckless because its funding sources were limited while it also held money on deposit. A little bit of it was still a building society. A lender using a model without savers could have been allowed to go bust, withits mortgage book picked up by others.

It is the relationship between savers, borrowers and funding that is key in assessinga lender’s strengths and weaknesses to hits such as a credit crunch. Any solution requires a look at practice in plcs but also in mutuals which may have been caught up in the prevailing climate. But the risk of overreaction and of equipping regulation to fight the last crisis is high, regardless of whatever political party is in government at the time.

John Lappin is editor of Money Marketing

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