Barton watched CNN News, broadcast live from Washington. The votes in House of Representatives on the Bush administration’s seven hundred billion dollar billion plan to save the financial system flashed on the screen. It was unbelievable, 226 nays and 206 yeas. The plan had been rejected and reaction from Wall Street was instantaneous; an hour later the market closed with a 777 point fall, the largest points fall in the Street’s history. In one year, since the onset of the banking crisis, markets had been through bad days, worse days, and now it was heading into a full scale rout.
He remembered the words of Gordon Brown in 1997: I will not allow Britain to be subjected to another Boom or Bust! But it was exactly what had happened during his ten years as chancellor and PM. Whilst he had presided over the economy he had allowed house prices to triple and the national debt to explode, bringing the country to its knees, and with it the collapse of the banking system.
Barton’s bitter consolation came after the August mortgage lending figures were announced, a vertiginous drop of ninety five percent. For the first time Brits were paying back more than they borrowed, an astonishingly sudden reversal of the limitless credit spree of recent years. News which only went to confirm his decision to have gotten out when he did.
With the kind of grim pleasure that only schadenfreud can bring he had watched the Irish Stock Exchange fall from 4500 to just 500 points, winning it the unenviable title of the world’s worst performing stock market. He could not help thinking there was a lot of truth in what his Irish grandfather’s told him when he was a boy, everything’s fine until the cow gets into the garden, and now the proverbial Irish cow was shitting on the carrots.
Barton realized that the world was going to be a poorer place; he was in a position to know having the last couple of weeks juggling his investments to avoid damage. He had gotten off lightly and was on schedule to more than make up for his losses if oil continued to plunge as it was doing. He had gotten out of banking stocks and his move into gold and Euros was beginning to look shrewd. Millions of others were not so lucky. The pendulum had swung from easy money to the opposite extreme as credit became as scarce as hoar frost in the Emerald Pool palms.
He remembered his consternation when in September 2007 the BBC announced in its Ten O’clock News the rumours concerning the Northern Rock’s difficulties in finding cash were true. Barton had rushed to his PC and Googled Northern Rock. The site was down. The following morning had he grabbed a copy of the Financial Times at his local newsagent’s; the news was splashed across its headlines. On the way to Romford Station to catch his commuter train he passed the queues already forming outside of Northern Rock’s High Street branch as anxious savers stoically waited in line to withdraw their savings.
It was the first major run on a British bank in more than a century. The bank’s CEO call for calm was to no avail. The following day the queues were even longer with tellers dishing out cash hand over fist to desperate depositors. Massive withdrawals were threatening to bleed the bank to death.
It was a moment that Barton would never forget. His own clients recounted their hair raising versions of how they pulled their life savings from the deeply troubled bank just in time. The rush started after a profits warning announcing the year’s results could fall short of expectations.
How could a run on the bank happen in Cool Britannia, with its booming economy, riding high on a decade of low inflation and ever growing prosperity? Hadn’t Gordon Brown assured the country that the days of boom and bust were over? And on top of that it had happened in the much hailed City of London, the self-declared financial centre of the world!
Northern Rock had been a model of how old fashioned building societies had transformed themselves into modern banks following demutualization. It had been aggressively reorganized into a dynamic mortgage lender, grabbing twenty percent of the UK mortgage market with its new attractive products, including those that allowed young borrowers to obtain 125% mortgages, lending up to six times annual income.
Trouble started for Northern Rock when the US sub-prime crisis broke and the mortgage lender suddenly found itself forced to borrow money on the open market in the summer of 2007. The writing was on the wall for those who cared to look. It was a disaster for the Northern Rock. Falling liquidities and rising interest rates were the catalysts that provoked the mortgage lenders downfall, preventing it from raising the funds it needed to function, funds that formed the life blood of its very existence.
It was that same Thursday evening, after the BBC anchorman announced that the Northern Rock was to be bailed out by the Bank of England, Barton made his decision to do something else with the rest of his life.
He had barely quit the UK when another of its major mortgage banks, the West Mercian, collapsed. In the course of his business had on occasions formally met West Mercian’s head, Stephen Parkly, a man who avoided publicity. Who was surrounded by a close circle of sycophants who insulated him from markets truths. West Mercian had employed Wall Street techniques securitizing its loans, packaging them and selling them to its investors. It meant cash up front, giving them a much cheaper source of funds than cash deposits plus the added advantage of not having to not have to wait for borrowers monthly mortgage repayments.
It was fine as long as the fiddler fiddled, but when the music stopped, as it did for West Mercian in December 2007, the end was inevitable. The British government, unlike for the Northern Rock, failed to step in and West Mercian came down like a house of cards, at precisely the same moment the City and Wall Street were announcing the worst was over trying to assure frightened investors the fundamentals were sound.
As 2007 near its end, disaster seemed imminent. In spite of the threadbare hype a housing crash was inescapable, businesses were threatened and the risk of unemployment soared. In a worse case scenario sterling would collapse, inflation rocket and stock markets plunge. Barton was not a dyed in the wool contrarian, far from it, he had profited from the boom like so many others, but he recognized a very serious crisis was in the making and things would get much worse before they got better. The mortgage market had flatlined, all kinds of rumours were rampant, the list of troubled banks was growing, it was just a question of time before contagion spiralled out of control.