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Passing the buck: Ringleaders of Northern Rock crisis refuse blame

22 October 2007
The three main participants of the current credit crisis, who were thought to have been in positions to potentially avert the situation, are now pushing the blame onto each other.

The general consensus in the financial world is that Adam Applegarth, Chief Executive of struggling bank Northern Rock, the FSA’s chairman Callum McCarthy, and Mervyn King, the Bank of England’s chairman, are all responsible in one way or another for the first run on a British bank for more than 140 years, and the subsequent credit crisis.

However, they each have a defence for why they shouldn’t bear the brunt of the blame; Applegarth, partially responsible by not recognising Northern Rock’s own weaknesses, blames King, firstly for refusing Lloyds TSB’s offer to save Northern Rock in exchange for £30 billion of low-interest loans, and secondly for turning down the option of an anonymous rescue by bailing out the interbank money market.

Northern Rock did attempt to avoid its impending doom by finding a buyer once it realised it was in trouble, and asked its board members if they would step down in order to allow Lloyds TSB to come in if it would mean keeping its head above water – but King defends himself by saying that he believed lending to one bank to save another would set a bad precedent.

Callum McCarthy, chairman of the Financial Services Authority has also come under fire for not providing Northern Rock with adequate supervision, and not monitoring the levels of debt that it was accumulating. However, they FSA has voiced fears regarding over-regulating banks in response to the credit crisis.

The Commons Treasury Committee will hold a hearing on Thursday that will help to determine where the blame lies – this is expected to bring Chancellor Alistair Darling into the lime light of blame for his delay in taking decisive action to stop the run on Northern Rock deposits. Once news of the crisis went public, £2 billion was withdrawn by panicked customers over two days until Darling guaranteed their deposits.

But it looks as though King will be the main scapegoat; the German and French finance ministers have both expressed their dismay over the laissez-faire approach of the Bank of England and many experts in the UK are predicting that King will shoulder most of the responsibility, with The Sunday Telegraph’s Iain Dey writing yesterday “unless Darling decides to take the blame himself for the Northern Rock debacle, it looks as though King is in line for the lion’s share of the criticism.”

© Fair Investment Company Ltd