In a nation that prides itself on respect for the rule of law and property rights, the Bradford & Bingley expropriation was among the most outrageous acts of a British government in peacetime. There seems to be little doubt that the Treasury and the Bank of England conned journalists into magnifying a commercial organisation’s problems, thereby facilitating its theft. The behaviour of Her Majesty’s Government was little better than racketeering. Even today many people believe that in 2008 both Northern Rock and Bradford & Bingley were “ bust”, although their subsequent results and detailed audit information show otherwise. As their managements protested at the time, they were solvent and profitable businesses, but market conditions were such that they could not readily fund their assets. 

Northern Rock and Bradford & Bingley were the salient tip of British banks’ funding iceberg. Over the decade running up to 2008, virtually all of the UK’s top banks had borrowed heavily on the wholesale markets, and used the proceeds to compete aggressively in lending to households and companies. The Labour government and the Bank of England knew full well that the credit boom had not been financed entirely from British retail sources. RBS, Barclays, HBOS and Lloyds had substantial wholesale liabilities, with enormous sums owed to foreign creditors. (HSBC was the exception, because it took a high share of its deposits from its Asian retail branch network.)

If the British government could nationalise Northern Rock and Bradford & Bingley without compensation, what did that mean for four giants of the industry that had also been reliant on wholesale money? They were soon to find out. Early in October 2008 RBS, HBOS and Barclays faced difficulty in rolling over inter-bank lines, while Lloyds was somewhat better placed because of its reputation for avoiding risk. Like the two former building societies that were now in government ownership, RBS, HBOS and Barclays might have to borrow from the Bank of England.

But Mervyn King, the governor of the Bank of England, did not want his institution to lend to them at all. In evidence to the Treasury Committee of the House of Commons on September 11, 2008 he had pronounced, “It is not the central bank’s job to lend to commercial banks on a long-term basis. That is a job only for the private sector or taxpayers, acting via the government.” As I discussed in my article “How Mervyn King got Northern Rock wrong” in the last issue of Standpoint, King had always loathed bankers and the City of London. His evidence to the Treasury Committee repudiated key principles established by Walter Bagehot in his 1873 Lombard Street. To recall Bagehot’s words, not only was it the central bank’s job to lend (at a penalty rate, of course) to solvent banks with a funding problem, but in crisis conditions the central bank should “lend as fast as” it can, because “ready lending cures panics, and non-lending or niggardly lending aggravates them”.

The tension reached its height during the evening and night of October 7. As King was adamant that the Bank of England would not lend on a long-term basis to any British bank, and as the international inter-bank market had been paralysed since August 2007, the only way that RBS, HBOS and Barclays could fund their assets was by raising new equity or bond capital. But their share prices had collapsed. The package proposed to the banks was that, if they wanted further loans from the Bank of England, they would have to accept the government’s money in a major recapitalisation.