Jeremy Warner's Outlook: So is no one to blame for Rock debacle?

Early departure or well timed exit?; Wrong approach on sovereign funds
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So much for the duffing up that MPs had promised for Northern Rock directors. As far as I could see, Adam Applegarth, the chief executive, and his three accompanying non-executive directors, fared rather better before the House of Commons Treasury Committee than either the Bank of England or the Financial Services Authority. To the bemusement of their quarry, MPs were at one point reduced to bickering among themselves and, apparently bored into submission, four of them left before the session had come to a close.

Throughout, Mr Applegarth stuck resolutely to the line that the reason why Northern Rock had failed to stress-test its business model against a freezing up of credit markets, and thereby been prompted into taking evasive action, was because he could not have foreseen the unforseeable.

Well, up to a point, Lord Copper. It is perfectly true that neither the analysts, the press nor the Financial Services Authority had spotted, let alone highlighted, the obvious risks to the Northern Rock method of financing its mortgage book. To the contrary, aggressive wholesale funding of mortgage lending of the type championed by the Rock was widely thought a positive advantage. With the benefit of hindsight, the flaws are now all too apparent. Yet no one saw them at the time.

Even so, you would still have expected a responsible board to have taken heed of the old adage that when something looks too good to be true, it generally is, and done something about it. It would have cost dear to have insured against an upset in credit markets, and as a consequence it would have severely damaged Northern Rock's record of earnings growth, but at least there would still be a business there to report on.

Despite the very best efforts of the committee to get the Northern Rock team to blame the debacle on others, they were not prepared to play ball. The closest Northern Rock came to blaming the Bank of England was in agreeing that approximately 150 banks had availed themselves of the general liquidity facility offered by the European Central Bank without suffering the same dire consequences the Rock has had to deal with.

Had the Bank of England offered more generalised liquidity on acceptable terms to the markets at an earlier stage, Northern Rock might have avoided the stigmatisation of having to apply for lender of last resort assistance and therefore survived the crisis in credit markets. Still, this is all the "what if" version of history and, to his credit, Mr Applegarth stopped short of using it by way of excuse.

Regulators make easy scapegoats, yet in the blame game now being played out, everyone seems to have forgotten that Britain's is a deliberately "light touch" regime designed to encourage innovation, entrepreneurialism and economic progress. You cannot have both light touch and expect there never to be casualties. A completely safe system is also one that stifles enterprise.

As it is, there are certainly strong reasons to suspect that others banks have ganged up on Northern Rock with the deliberate intention of starving the company of credit and thereby putting it out of business. Yet the primary responsibility for what happened lies with Mr Applegarth and his board. Bottom line: they ran an unsafe ship. In the circumstances, MPs failed to land their punches as effectively as they should have done.

Early departure or well timed exit?

Did he jump or was he pushed? To anyone who cared to ask, Mike Turner, chief executive of BAE Systems, would always give the same answer: it was his every intention to stay on at BAE until the age of 65, or even longer given the chance. Now he's going at 60, raising the obvious suggestion that he's met the same fate as his predecessor, John Weston. Mr Weston was ousted in a boardroom coup in March 2002.

Mr Turner is known to have rowed with his chairman, Dick Olver, about who was boss. He's also had some well publicised bust-ups with his biggest customer, the Ministry of Defence. And, of course, there are still the yet to be resolved allegations of corruption in respect of arms sales, in particular the al-Yamamah contract with Saudi Arabia.

All these issues might seem good reason for a change of command, and although Mr Turner insists that the decision to hang up his holster was entirely his, there was self evidently at least a meeting of minds with the board. They plainly didn't want him to stay. With the second phase of the al-Yamamah contract now signed off, Mr Turner can in the round congratulate himself on a job well done.

Both profits and the order book are buoyant, the share price is close to an all-time high, and the strategy of aggressive expansion into the US seems to be secure. By disposing of the group's interest in Airbus, he's also focused the group entirely on defence contracting.

With the terrible lesson of Lord Browne at BP to instruct him on the dangers of outstaying his welcome, Mr Turner is entirely right to think this an opportune mom-ent to go. Why would anyone but a masochist want to stay on long enough to make mistakes and see his reputation wrecked? In City terms, Mr Turner is bowing out on a high note, though the corruption allegations may make public perceptions somewhat different. To change a chief executive when times are good gives the opportunity for renewal. Even with the most accomplished CEOs, there is inevitably decay if he stays in the job too long.

Mr Turner is not in any case going until next August, to allow the board time to test the obvious internal successor, Ian King, currently chief operating officer, against external talent. The £2.4m bonus Mr Turner could get, in part for "achieving an orderly handover", will be controversial in some quarters, though the company insists that this is not a pay-off, but a substitute for other benefits Mr Turner surrenders on retirement.

For his next trick, Mr Turner is said to want a FTSE 100 chairmanship. I'd suggest BP, Mr Olver's old stamping ground, only that position won't become vacant until mid-way through 2009, a year after Mr Turner has left BAE.

Wrong approach on sovereign funds

Several members of the G7 want to do something about sovereign wealth funds. Japan has now joined Germany in wanting them discussed at this week's G7. The US administration, too, has expressed concern over their proliferation and growing influence in investment markets.

Only Britain, sticking religiously to its defence of free and open markets, seems completely unperturbed. This is despite the fact that the UK has been proportionately more a target for the activities of government-controlled investment funds than almost anywhere else. It's easier to buy here than elsewhere. J Sainsbury is about to be bought by the Qataris. P&O has already gone to Dubai. Temasek, a Singaporean sovereign wealth fund, has big share stakes in both Standard Chartered and Barclays. The London Stock Exchange's two biggest shareholders are both Middle Eastern wealth funds. And the Chinese have only just started in this line of business.

In my view, the concern is more than justified. Most of these funds are completely opaque and some of them seem more driven by strategic considerations than commercial ones. They make private equity look like a paragon of virtue by comparison.

Cronyism and political interference is rife. We can only guess at what political purpose lies behind their acquisition-making. Gaining Western knowhow and influence seems certainly to be a part of it. Lack of transparency threatens to introduce potentially corrupt practice into Western business and markets. Payment of irrational prices also promises to play havoc with the investment landscape. Lack of investment reciprocity with many of the countries operating sovereign funds is a further issue.

It would be wrong and probably impractical for Western governments to try to put up the shutters against these funds. Definition is just one of the problems. Yet if they want to avail themselves of the opportunities and benefits of our capital markets, they should be obliged to play by the same rules as the rest of us. Britain should be fully engaged in the G7 debate.

j.warner@independent.co.uk

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