10 Years On: Managing the crisis and its aftermath

When the Northern Rock story broke I thought of that interview and how difficult it is to persuade someone to take you seriously when you are challenging the often scantily clad assumptions behind conventional thinking.

I led an investment firm supervision team at the time the crisis broke and I can remember seeing the queues forming at Northern Rock branches and listening to a lot of nonsense being talked about how people were irrational to queue to get their money out. As things stood at that time, if you had a penny over £2,000 in Northern Rock it was quite rational for you to queue and if you had a few tens of thousands, it was imperative given the limitations of the guarantee system in place then.

As part of the quality control processes for inspection visits we had panels made up of senior supervisors and risk experts at the Financial Services Authority which reviewed the findings of supervisors following inspection visits. I’d chaired one of those for a building society a few months before the crisis broke. I’d asked some awkward questions about ABC Building Society and generally been difficult because I didn’t think the supervisory team had taken the prudential risks seriously. (This was at a time in the Financial Services Authority when the ‘Treating Customers Fairly’ initiative trumped all else and, frankly, life was a little tricky as a supervisor if you happened to believe that some firms were pretty good at treating customers well and that there were other things to worry about such as firms’ business models.)

Eventually, I got the proverbial tap on the shoulder and a polite request if I might like to stop being quite so awkward about ABC Building Society because Mr X down the corridor had developed a model which suggested it was pretty impossible for any British building society to go bust so please could I get back in line and busy myself with fixing a few more dodgy stockbrokers. Being a dutiful sort who was quite keen not to have the senior management team put him at the bottom of the pile at the end-of-year appraisals for managers, I did what I was told.

The danger of group think

I tell this story, not because I was particularly unusual in asking awkward questions at the FSA but because it shows how dangerous group thinking is and how difficult it is, even when the evidence is in front of you, to influence the direction of an organisation from what was, at best, a middle ranking position. I had had similar issues when, (as a former strategy consultant), I used to challenge the business models of some firms I supervised. I was told by both the firms we supervised and then by my own management that all we were allowed to do as regulators was check that the firm had a process for setting strategy. We were not allowed to challenge that strategy because strategy was for the senior financiers sitting in private sector board rooms paid 10 times as much as us. This was, after all, the era in which a some of my fellow regulators were going along with the bizarre proposition that one wasn’t allowed to interview directors of firms but merely to have conversations with them because interviewing might sound overly aggressive to the firms we were regulating. I highlight this background because I think it led, when the crisis broke in late 2007, to some senior managers in the FSA recalling that my earlier rejection of the Orwellian Newspeak so redolent of the New Labour era might mean I would not be shy about asking bankers potentially useful questions without fear or favour.

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