It has been on the cards for months, if not since the run on Northern Rock, the over-extended, securitisation-dependent lender cannot go on alone. The announcement of £26 million of losses by the buy-to-let lender on August 29 cemented the downward spiral for the once respected building society.

The solution, as reported across the full spectrum of media, comes in the form of banking, Government style. Nationalisation.

One thing the media isn’t mentioning, just as it didn’t bother to point it out when the run on Northern Rock occurred, is that these banks based their business models on the one which the Government was keen on Building Societies emulating.

On July 11th 2007 H. M. Treasury issued a press notice - http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2007/press_76_07.cfm - concerning mortgages.

Following on from statements made by Prime Minister Gordon Brown, Chancellor Alistair Darling, admittedly not long in the job, announced a number of initiatives to improve the way that the mortgage markets works.

Whilst still pushing the 20 and 25-year mortgage mantra, as well as some form of UK version of Fannie Mae, “yes really”, it was the content lower down which should have had media types calling for Government heads on spikes when Northern Rock happened, let alone with Bradford & Bingley today.

Whilst the real meat is in the “Notes to Editors”, particularly points 3 and 4, this part of the release should have been worth the sacrifice of at least one Government scapegoat.

There is a statutory requirement on building societies to raise at least 50 per cent of their funds in the form of shares held by individual members of building societies. The Government is supporting a Private Members Bill currently before Parliament, which proposes to increase the proportion of funds which may be raised from sources other than individual’s shares up to 75 per cent. This will give building societies greater flexibility to raise funds in wholesale markets, if they wish to do so.

That actually means reducing the level of deposits from 50% to 25%. Put that another way, debt:deposits goes from 1:1 to 3:1.

So, it would appear they wanted Building Societies to:

  • Treble their debt
  • Rely on the wholesale money markets
  • Borrow short and lend long

Instead of a 50% loss on bad debts wiping out savers, the Government proposals of 11th July 2007 would have only required a 25% loss to leave all those depositor-owners of the mutual building society with nothing, except for the £35,000 the Government guarantees. Though at the time the old 100% of the first £2,000 and 90% of the next £33,000 applied.

Just focus on the key proposals the Government was making to the boring, and not-heavily-indebted, Building Societies . . .

  • Borrowings to Deposits of 3-to-1 . . . Like Northern Rock
  • Rely on the money markets and not deposits for funding . . . Like Northern Rock
  • Borrow short and lend long . . . Like Northern Rock

Which begs the question, how many more Northern Rocks are there?

After all, here we are about a year on from the run on Northern Rock and Bradford & BIngley is apparently being nationalised. Cheshire and Derbyshire building societies announced a couple of weeks ago that they were being subsumed into Nationwide. Then we have the headline grabbing takeover of HBoS by LTSB, which is still subject to wrangling.

Are there building societies out there who did what Alistair and Gordon wanted? Who borrowed heavily in the wholesale money markets? Who borrowed short and lent long? Who are now in possible trouble as a result? Who will end up being swallowed up by a competitor or the State?

Which brings me back to the title of this post and the ‘Government Style Banking’ bit. Is Nationalisation the Government’s style of banking? Or, is a highly indebted, securitising, borrow-short-lend-long approach the Government style?