Deserving Bank Shareholders?

The 'rescue' of various banks in the crisis of 2007-9 took various forms; partly depending on how far the crisis had run when the individual firm faced insurmountable difficulties, and partly depending on the perceived degree of blame that was laid at the door of the organisation's management.

I am moved to write this piece today because former shareholders in Northern Rock - a historically worthy building society based in north-east England - got nothing when their firm was taken over and dismembered by the government; while Lloyd's and Royal Bank of Scotland kept their names and their structures, and the shareholders retained some of the equity under Treasury tutelage. The Northern Rock shareholders have retained their organisation, and while some former shareholders have accepted their losses and moved on, a hard core has revived the claim that as the government will make a net 'profit' from selling off parts of the firm, it should now reimburse some of the losses that individuals suffered.

This is a technically complex, legally difficult and morally ambiguous area for debate, and I will just make two basic points.

One is that Northern Rock and the Royal Bank of Scotland were both based away from London, and both had rather buccaneering chief executives who became heroes in their regions. Although RBS had a nationwide shareholder base, largely due to the absorption of other major banks into the group, the board was largely focused in Scotland. It only became apparent how far off the rails RBS was going when a 'takeover too far' collapsed precisely as the liquidity crisis hit all the banks. The urgent need of the bank for a rescue of very large proportions placed it abjectly at the feet of the government, and ad hoc measures were taken, of necessity. It was decided that such a large entity could not be made to vanish, as Northern Rock was allowed to disappear: hence the restructure of the RBS conglomerate is still ongoing.

The principal asset of Northern Rock was a large book of mortgages on residential properties; which has over the succeeding years been sold profitably; largely because the policies of almost-zero interest rates and quantitative easing have resulted in a steady rise in house prices so that the assets of the old building societies have been consolidated in market 'value'.

The key point about the need to 'rescue' Lloyd's is that this was only necessary because Lloyd's board - without an time for consultation with the shareholders - had agreed to rescue Halifax Bank of Scotland, a conglomerate of a massive building society and a Scottish bank that had pursued similar policies to those of RBS. Lloyd's conservatively-managed balance sheet could probably have survived the storm without the HBOS increment of problems: so the Lloyd's shareholders were the least disadvantaged in the restructuring that was judged to be necessary in 2008-9.

The Northern Rock shareholders should have been more vigilant as the company's lending became more reckless: instead they were hubristic. Similar complacency affected the RBS shareholders until it was too late to 'save' the firm. The HBoS merger was dumped on Lloyd's shareholders by a board that was anxious to help the government. Lloyd's wide constituency of shareholders had no say in the decisive action that precipitated near-bankruptcy. RBS shareholders were complacent through a decade of increasingly reckless management. Northern Rock shareholders [mostly] gloated in the national success of their local bank until the truth was borne in on them. These attitudes have more-or-less fairly been rewarded since the crisis.

And, of course, Barclays shareholders are still taking action to challenge the possibly-illicit actions that their firm took to stay technically solvent.

These issues will run and run, but so far I think that rough justice has been done.