Dominic Lawson: Your savings guaranteed? Very nice too

It is hard to imagine any other building society enjoying the same support from this Government
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The Independent Online

I have made plenty of blunders in my journalistic career, but only one could have resulted in my imprisonment. In 1991 I had written a column for the Financial Times about the Barlow Clowes affair, in which 18,000 people lost their investments when that company went bankrupt: I argued that since Barlow Clowes had claimed to be investing only in government securities and yet offered a return way in excess of the standard gilt yield, those who had invested in it had allowed greed to get the better of reason. In effect, I had argued that they were asking to be fleeced.

The trouble was, this article appeared during the trial of Mr Peter Clowes and the judge was quite rightly furious: he did not want a complex fraud case, which had dragged on for months, to be abandoned over a complaint by the defence that the FT had prejudged the guilt of its client. On the morning that I was hauled in front of the judge, the FT's lawyer charmingly advised me to pack a toothbrush and overnight bag: contempt of court is one of the few offences for which one can instantly be thrown into the cells. Fortunately, my only punishment was a stern lecture from the judge to go away and sin no more.

The timing of the article was lousy but, even after 16 years, I would still defend the point it made. If an investment possibility seems too good to be true, then it almost certainly is – and the public should not expect the government automatically to reimburse them when they fail to exercise even the slightest caution.

It is, of course, the Government's guarantee to the depositors of Northern Rock which has made me recall this incident. While a number of commentators have complained that the Bank of England's offer of emergency loans to Northern Rock has wrongly allowed the board of that company to escape the full consequences of their own improvidence, no British newspaper seems to have argued against the limitless guarantee given to depositors by the Chancellor of the Exchequer.

A columnist for the American financial news agency, Bloomberg, did, however – and with some wit: "Dear Customer, congratulations on your new Hokey-Cokey Bank plc deposit account! You'll enjoy substantially higher interest rates than you can get anywhere else, because we'll be betting your life savings in the local casino. Should the roulette ball land on red rather than black, no worries! The UK government guarantees your money!"

In his speech on Sunday to the Labour Party Conference, Alistair Darling sought to counter the objection that any opportunist investor in any British bank or building society was now incapable of losing his money, thanks to the pre-emptive (and unasked-for) generosity of the taxpayer. "We need to separate out ordinary savers' money" said the Chancellor. Unfortunately, he was not willing to say what defines "an ordinary saver". That might be because it is not a concept that exists in law – or even in any dictionary. Either you have deposited funds in a particular bank or you have not.

Perhaps by "ordinary" Mr Darling means "not very big". We can surmise this from unattributable briefings that the Government is considering a scheme which would protect up to £100,000 of all savers' bank deposits. This, of course, is not at all what Mr Darling guaranteed in the case of Northern Rock; it was – and is – limitless in its pledge to all existing depositors.

I can see the political attraction of the £100,000 limit, however: because not many people will have accounts of more than that amount, any queues of anxious £100,000-plus creditors outside the next wobbly bank will not thread round the block in the way they did so very photogenically outside the 76 branches of Northern Rock.

Moreover, it is hard to imagine any other bank or building society enjoying quite the same degree of political support from this Government. Northern Rock is not just the biggest employer in the Labour stronghold of the North-east. It is the main corporate sponsor of Newcastle United Football Club – and this is a government which regards football as the nation's single most important pursuit. Intriguingly, the Prime Minister's favourite banker, Derek Wanless – commissioned by the then Chancellor Brown to review the financing of the NHS not once but twice – is a director of Northern Rock with specific responsibility for the auditing of risks.

Previously, Mr Wanless had been in charge of NatWest, a job he carried out with such perspicacity that the former banking behemoth ended up being taken over by Royal Bank of Scotland. On the other side of the regulatory divide is Sir John Gieve, the Deputy Governor of the Bank of England and a director of the Financial Services Authority, who in his previous job as Permanent Secretary at the Home Office proved unable to produce accounts which added up to the satisfaction of the Auditor-General.

To be fair to Gordon Brown, he is not a great admirer of Sir John: as Chancellor he had made it clear that he did not want him as Permanent Secretary of the Treasury, a job to which Gieve might have felt entitled, as a former Treasury official of 20 years' standing. Nevertheless, the great public responsibilities given to Wanless and Gieve – even after they had been revealed as second-rate executives – is, to say the least, disturbing.

Even so, I would treat with some caution the general opinion expressed in the press over the past tumultuous week: that it was obvious the Northern Rock business model was much too risky, and that the Bank of England and the Financial Services Authority should have seen this disaster coming a long way back. Northern Rock had been for some time the darling of the financial press – taking their cue uncritically from the City's banking analysts – precisely because of the business model which now is universally stigmatised as unsafe. Until it happened, no one publicly predicted that the wholesale money-lending market, on which Northern Rock depended much more than any other British bank, would suddenly dry up.

Yes, it's true that Northern Rock, in the jargon of the financial commentators, lent "long" and borrowed "short": that is to say, it would finance long-term loans (mortgages) with short-term borrowings. Yet every bank lends long and borrows short – the distinction between Northern Rock and its rivals was one of degree, not of method.

In other words, there is no bank which can survive a run by depositors. The risk that the contagion of fear would spread from Northern Rock to other banks is why the Government had to bully the Bank of England to do what it said it wouldn't – and bail out an improvident lender. The reckoning, however, has only been postponed.