Tuesday, 16 October 2007

Northern Rock, the Beeb and the Black Swan

There's a very interesting report on the BBC website of the grilling of Northern Rock's executive team by the Treasury Select Committee. There are two things that I like about the report. The first is the fantastic attempt by the Northern Rock team to blame the run on the bank on the BBC. Get a load of this:

[Chief exec Adam Applegarth] told the Treasury Select Committee that the BBC was partly to blame for last month's run on the bank.

He blamed it for revealing the Bank of England's emergency loan to the bank.

"What severely hammered us was the retail run," said Mr Applegarth.

He said the BBC's exclusive report on 13 September, that the bank would need to seek emergency funding from the Bank of England, had scared his customers.

"It caused us immense difficulties," he said.

He revealed that the bank and the authorities had planned to announce the emergency loan the following Monday, which they hoped would have led to less panic.

The implication here is that the punters wouldn't have panicked if the info that NR had to go to the Bank of England as lender of last resort had been disclosed by the company, rather than the BBC, and at a time of its choosing. Whilst there might be a grain of truth in the idea that 'leaked' info seems more powerful than 'official' info, this leads down the path of imposing an almost war-time sense of responsibility on the reporting of financial stories. And in any case, if the execs can't predict the future - see below - how can a financial journo expect to know the impact of their story? In my own experience, stories I expected to get followed up sometimes got ignored, whereas reports I considered pretty dull (or at least 'obvious') sometimes made a splash.

Update: Robert Peston (who broke the story) has defended his decision on his blog on the Beeb site here.

The second point about the report is more interesting. Applegarth & crew argue that what happened was unprecedented (ie the freezing up of the credit markets) and that they had no way of knowing it would happen. As such they don't think they could have done anything any differently.

[The execs] explained that they had planned how to cope with certain possible problems, such as a 40% fall in house prices, but had not planned how to respond if its ability to borrow in the financial markets dried up.

"What wasn't stress-tested was the event deemed implausible - of the global markets freezing up overnight," said Mr Applegarth.

"The rapid and long-lasting closure of the global markets was not stress-tested," he added.

He said the bank had in fact started in March to slow down its lending.

But asked if he could have taken any action to mitigate the fundamental risk of the Northern Rock's business model, he replied, "No."

Well, bloody hell, isn't this a classic example of Nassim Nicholas Taleb's Black Swan theory in practice? The Wiki definition could have been written about NR! And Taleb's argument that you should plan for the unexpected high-impact events rings very true.

Although there might be problems in the regulatory/oversight regime applying to banks (ie split of functions between FSA & BoE etc) it seems pretty clear that the NR board are the ones at fault. The didn't plan for the unexpected.

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