Share and Share Alike? Hedge Funds, Human Rights, and Owning Enterprise in Britain
| Author | Joanna Gray,David Bholat,Alison Dunn |
| Date | 01 June 2012 |
| DOI | http://doi.org/10.1111/j.1467-6478.2012.00578.x |
| Published date | 01 June 2012 |
JOURNAL OF LAW AND SOCIETY
VOLUME 39, NUMBER 2, JUNE 2012
ISSN: 0263-323X, pp. 185±212
Share and Share Alike? Hedge Funds, Human Rights,
and Owning Enterprise in Britain
David Bholat,* Alison Dunn,* and Joanna Gray*
This article explores the meanings of ownership and shareholding in
the context of the 2007 run on Northern Rock, its subsequent national-
ization in 2008, and the resulting legal challenge brought by former
shareholders. Drawing on evidence from a range of sources outside
traditional legal and official doctrine, and from original empirical
research, it focuses on the perspective and voices of local small
individual shareholders in relation to shareholding, bank failure, and
government responses to financial crisis. It tells the story of these
individual shareholders against differing conceptions of share owner-
ship rights and responsibilities, and from various angles, to show the
many different subjectivities of corporate shareholding and ownership
of enterprise of which orthodox legal and economic models take scant
account. It concludes on a note of historic persistence in demand for
proprietary shares in banking institutions, despite the differing levels
of understanding and tolerance of equity risk among shareholders that
our research reveals.
185
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School. Published by Blackwell Publishing
Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
*Newcastle Law School, Newcastle University, Newcastle upon Tyne NE1
7RU, England
david.bholat@ncl.ac.uk
alison.dunn@ncl.ac.uk
joanna.gray@ncl.ac.uk
The authors wish to thank Dr. Ann Sinclair for transcribing the interviews, as well as Law
School staff for making accommodations for our interview subjects. A version of this
paper was presented at the Tipping Points conference on 14 July 2011 hosted by the
Institute of Risk, Hazard, and Resilience at Durham University.
INTRODUCTION
It is unfortunate that the shareholders who acquired shares as part of
demutualisation and the staff of Northern Rock have suffered significantly
from the fall in the value of Northern Rock shares. However, it is not possible
to make a distinction between types of shareholders in the circumstances of
Northern Rock.
1
In fact, however, the circumstances of the different Claimants do differ, both
in relation to the dates of their a cquisitions of their shares and th e
circumstances of Northern Rock at those dates . . . we have sympathy for the
small shareholders of Northern Rock.
2
In our view `Confiscation' without `Compensation' is THEFT.
3
On 14 September, 2007 customers of Northern Rock bank queued up to
withdraw their deposits. There, in modern Britain, was an old-fashioned
bank-run. Just six months prior, Northern Rock had announced record profits
generated by its capacity to securitize and sell loans to investors across the
globe. But fortunes, as it were, quickly changed. By February 2008 the Rock
was broke and the government nationalized the bank. The New Labour
government's actions immediately created controversy. Within contem-
porary Britain, the `N-word' ± as BBC News called it
4
± is, on the Right,
associated with the failures of the welfare state and is equally maligned by
many on the Left. Indeed, Tony Blair and Gordon Brown's New Labour had
largely distinguished itself from its predecessors by its repudiation of Clause
IV in the `Old Labour' Constitution that called for public ownership of
industry. But the old spectre of nationalization has returned in a strange new
guise. In recent debates about Northern Rock, generally laissez-faire media
such as the Financial Times and the Economist advocated temporary public
ownership
5
to howls from the Left that the bank's bailout constituted
`socialism for the rich'.
6
The nationalization of Northern Rock and other banks has done much to
renew old debates around the politics of property and the propriety of
186
1 House of Commons Treasury Committee, Fifth Report, The Run on the Rock HC
(2007±08) 56-I, 19.
2SRM Global Master Fund LP v. Treasury Commissioners [2009] EWHC 227, [2009]
BCC 251, Burnton LJ, paras. 100, 103.
3 UK Shareholders' Association, Letter to Rt. Hon. George Osborne, Chancellor of the
Exchequer, 23 July 2010.
4 BBC News Online, `What was the last nationalisation?' (18 February 2008) at .
news.bbc.co.uk/1/hi/magazine/7250668.stm>.
5 A. Brummer, The Crunch: The Scandal of Northern Rock and the Escalating Credit
Crisis (2008) 94.
6 Justice Litle, `Macro Musings: Northern Rock Exposure' (26 September 2007) at
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
different ownership forms. The vicissitudes of Northern Rock's ownership
structure ± from mutual building society to corporate bank, turned public
enterprise, and most recently re-privatized following the Rock plc's sale to
Virgin Money on 1 January 2012 ± makes it a particularly compelling case
through which these conflicts are being resuscitated. Tracing its origins to
the nineteenth century, Northern Rock had operated as a mutual building
society for most of its history. It was `owned' by its customers (depositors
and borrowers) and operated by statute as a non-profit organization on the
premise of increasing owner occupancy in Britain. But in 1997 Newcastle-
based Northern Rock joined a number of other building societies in con-
verting to a corporation. As a result, ownership stakes in Northern Rock
became tradable assets. This permitted business practices based on the same
principles: in the decade following demutualization, Northern Rock's total
assets grew from £18 billion to £113.5 billion, primarily via the alchemy of
making mortgages into marketable securities.
7
The collapse and nationalization of Northern Rock has generated a
number of important consequences in Britain and the North East of England.
But one of the more direct and profound pecuniary effects has been felt by
shareholders whose ownership rights were extinguished upon national-
ization. Angered by what they call `theft' and `confiscation', these investors
have promised to fight for richer recompense despite two judicial findings
against their claim by the courts, as well as the rejection of a third hearing in
front of the Supreme Court.
8
They are now pursuing redress in the European
Court of Human Rights (ECtHR) on the grounds that the British government
has violated their right to `peaceful enjoyment of [their] possessions' pro-
tected under Article 1 of Protocol 1 of the European Convention on Human
Rights. The case is not expected to be heard until 2013.
The litigants in the case are composed of two types of investors. The lead
claimants are institutional investors who held 75 per cent of the shares in
Northern Rock at the time of nationalization. The largest institutional
investors and the two lead plaintiffs are Cayman Island-based RAB Special
Situation (RAB) and Monaco-based SRM Master Global Fund (SRM).
9
These funds largely purchased shares in Northern Rock starting in Sep-
tember 2007 after the run on Northern Rock had unfolded, in a speculative
bet they would gain windfall profits either from a rally of Northern Rock's
stock, or a handsome payout from government. Between 14 September 2007
and 12 February 2008, SRM became the largest shareholder in Northern
187
7 H. Shin, `Reflections on Northern Rock: The Bank Run that Heralded the Global
Financial Crisis' (2009) 23 J. of Economic Perspectives 101±19.
8 For instance, Jon Wood, head of SRM, equated nationalization without compensation
to `commercial vandalism': L. Armitstead and J. Sibun, `Northern Rock investors fire
starting gun on lawsuits' Sunday Telegraph, 2 March 2008.
9 Legal & General, the third largest institutional investor in Northern Rock, joined the
case as an interested party.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
Rock, taking control of 48,452,655 shares or 11.5 per cent of the ordinary
equity. During the same period, RAB acquired equity stakes totalling
34,444,299 shares, or 8.18 per cent of ordinary share capital.
10
Their
litigation boldly raises the philosophical stakes as to whether, if they are
legally defined persons, hedge funds have human rights.
11
The second group
of litigants are composed of some of the 150,000 individuals who held about
25 per cent of the shares in Northern Rock at the time of nationalization.
Many of these plaintiffs organized themselves through the Northern Rock
Shareholder Action Group, an organization that took shape under the
auspices of the UK Shareholders' Association. While some of these
individuals acquired shares through the stock market, many acquired them at
demutualization or as employees of the company under various pension and
employee share schemes.
12
In this article, we do not set out to add to the literature by proposing
banking or shareholder reform. Rather, we explore perceptions and practice
of shareholding among former individual North East-based shareholders in
Northern Rock with the purpose of telling their unique story as a con-
tributory insight and contextualization of the debates about regulatory reform
and democratizing finance. This story is pertinent as evidence of the growing
dissonance between individuals trying to be responsible financial citizens as
small private investors within the context of extreme risk taking by financial
elites. The consequences of that dissonance, played out on the broader global
stage by the `Occupy' movement's recent protests, are manifest on a more
localized scale in the story of the individual North East-based Northern Rock
shareholders. An empirical investigation into the rights and responsibilities
popularly imagined to accrue to shareholders is illuminating for a variety of
reasons. Although the common law and legal statutes are conventional
standards of reference for such an inquiry, they may be lagging indicators
because they are based on past precedent, and legislation and judicial
decisions frequently emerge only after the `need for law' has crystallized.
Indeed, the `necessity' for legal change is itself very often driven by changes
in the popular imagination of financial instruments, which then reconstitutes
the law surrounding them.
Northern Rock offers a case in point.
13
As noted, for most of its history,
Northern Rock operated as a member cooperative nominally `owned' by those
188
10 SRM, op. cit., n. 2, para. 7.
11 A. Hirsch, `Do hedge funds have human rights?' Guardian, 28 January 2009.
12 See UK Shareholders' Association (UKSA) website at
13 Another reason for focusing on ordinary interpretations of financial relations and their
interpretation at law is that the gap between them is arguably one of the contributing
factors behind the ongoing financial and fiscal crisis. For instance, recent research has
indicated that nearly three-quarters of the British population think they are legal
owners of the money in their current account when, in fact, by law they are owned by
banks: see Carr v. Carr (1811) 1 Mer. 541 n.; 35 E.R. 799, Foley v. Hill (1848)
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
who held building society shares. Yet, as Mark BoleÂat, former head of the
Building Societies Association (BSA) observed, shareholders in building
societies generally tended to `regard themselves as depositors rather than the
owners of the societies'.
14
However, this self-understanding changed in the
course of the 1990s, largely as the consequence of campaigns by groups who
stood to benefit financially from the conversion of mutual companies into
corporations, namely, executive managers and investment banks.
15
As a result,
there was a widespread re-imagining by shareholders of themselves as
`owners' of building societies, and overdue claims on the accumulated
surpluses of building societies, re-imagined as undistributed profits. As John
Kay observed, this popular re-imagining resulted in `the breaking down of what
were previously seen as strong historical taboos against the distribution of these
accumulated assets.'
16
Once building society shares were refigured as revenue
rights, the demutualization of Northern Rock and other building societies
followed suit, creating more new shareholders in the United Kingdom than all
other privatizations of British industry in the 1980s and 1990s combined.
17
As Northern Rock's history indicates, the continued legitimacy of legal
relations hinges on their possessing some coincidence with the actual culture
of the people whose normative order the law ought to codify and represent ±
hence the `common' in the law. The way human rights law affords or over-
looks recognition and protection to property is an especially apposite area for
this kind of inquiry. It allows us to grasp whether human rights law sees and
hears individuals' perceptions of what they believe they are owners of, and
how it weighs those individuals' perceived entitlements as deserving of legal
protection as property rights ± essentially the gap that former Northern Rock
shareholders will now need to persuade the ECHR Court in Strasbourg to
suture.
Our article examines the situation of Northern Rock's individual share-
holders from a number of different angles and proceeds as follows. In this
first section, we briefly recount the shareholders' case, focusing in particular
on the distinction drawn by the courts between expropriations on economic
grounds from expropriation on the grounds of political ideology.
18
The
following section then examines the claims of shareholders that they have
189
their current accounts as custodies rather than contracts. This misperception may have
played a role in the run on Northern Rock.
14 M. BoleÂat, The Building Society Industry (1986) 53.
15 J.N. Marshall et al., `Placing the Run on Northern Rock' (2011) 11 J. of Economic
Geography 1±25.
16 J. Kay, `The Economics of Mutuality' (1991) 62 Annals of Public and Cooperative
Economics 309±18, at 314.
17 R. Martin and D. Turner, `Demutualisation and the remapping of fin ancial
landscapes' (2000) 25 Trans. of the Institute of Brit. Geographers 221±41, at 229.
18 SRM Global Master Fund LP v. Treasury Commissioners [2009] EWCA Civ 708,
[2010] BCC 558, paras. 74±75.
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been expropriated and argues how, from a slightly different angle, they could
themselves be seen as expropriators. The third section draws on interview
and internet data to understand the meaning of shareholding as it took shape
in practice among former Northern Rock investors. The purpose of this
threefold approach is to examine the different legal, economic, and personal
perspectives and perceptions of shareholding and the rights and respon-
sibilities of ownership that it provides and, in so doing, to contextualize the
unique story of Northern Rock's small individual private investors. We
conclude by offering some historical context in which to situate the recent
litigation.
CONFISCATION, COMPENSATION, AND THE COMMON INTEREST
The first hearing of the shareholders' case occurred between the 13 and 15
January 2009. As the court observed, the shareholders did not `challenge the
decision to nationalise Northern Rock itself: their challenge relates to the
provisions of the compensation scheme'.
19
When Northern Rock had been
nationalized by Parliament on 22 February 2008, Clause 6 of the Compen-
sation Scheme Order declared Northern Rock insolvent. Consequently, any
compensation payable to the shareholders had to be calculated from the
premise that Northern Rock was no longer a going concern.
20
In addition,
under section 5(4) of the Banking (Special Provisions) Act 2008 ± the
legislation which nationalized Northern Rock ± the appraiser appointed by
the government to value Northern Rock shares had to discount all financial
support given by the Bank of England, and assume that such a `lender of last
resort' did not exist.
In bringing their suit, the shareholders' principal point of contention was
that these assumptions were `unlawful, immoral, and unethical'
21
because
Northern Rock, in fact, was still a going concern. The court endorsed
elements of this view. Specifically, the court noted that Northern Rock
should not have been assumed to be in administration because, under the
then applicable test based on the 1986 Insolvency Act, the firm's liabilities
did not exceed its assets. Rather, Northern Rock was illiquid, instead of
insolvent.
22
Nevertheless, the court accepted that the government acted not
for its own financial benefit but, as Alistair Darling, then Chancellor of the
Exchequer, put it, because `there was a genuine threat to the stability of the
190
19 SRM, op. cit., n. 2, para. 4.
20 These assumptions change the accounting measures used normally to value a
company. UKSA, Northern Rock Shareholder Action Group-Update No. 43 (12
Se p te m b er 2 0 08 ) , a t t tp : / /w w w .u k sa . o rg . uk / f il e s/ p r es s _ re l ea s e s/
20080912_nrk_update43.pdf>.
21 UKSA, at .
22 SRM, op. cit., n. 2, para. 30.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
financial system and in order to avoid a serious disturbance in the wider
economy'.
23
The court reaffirmed this justification for nationalization in hearings held
between the 10 and 12 June 2009. On appeal, the shareholders argued that
the nationalization of Northern Rock represented an instance of unjust
enrichment benefitting government. Specifically, the claimants' lawyers
invoked a principle of proportionality from the law of salvage: briefly, that
although someone mi ght intervene and s ave another's pro perty, the
intervener (here the government) under common law is ordinarily not
entitled to full compensation up to the value of the property saved. Thus, the
claimants argued, `a reasonable balance should be struck between what is
paid to the rescuer of the endangered property and what is kept by the
property's owner.'
24
Applying this logic to Northern Rock, the claimants
made the case that extinguished shareholders should be entitled to some of
the future profits once the firm is re-sold to the private sector.
But in again finding in favour of the government, the court dismissed this
argument. Lord Justice Laws's view was that there is a critical difference
between the law of salvage and the Northern Rock case. Specifically,
whereas:
the locksmith and the salvor do their work as a service to the property owner,
from whom they expect a reward [for salvage] . . . the underlying purpose of
. . . the nationalisation of the company, was categorically not to confer a
benefit on the shareholders of Northern Rock. The service which those
measures provided was a service to the national economy, and nothing else.
The `rescue' of Northern Rock's shares was not of itself the purpose of the
exercise, which was to prevent damage or further damage to the banking
system as a whole.
25
In deciding the case, Lord Justice Laws therefore posited a distinction
between government `expropriation on the grounds of political ideology' and
expropriation on the grounds of `protect[ing] the banking system'
26
± as if
the latter were not shot through with political premises and value judge-
ments. Obscured by the Lord Justice's distinction is that politics is at root
meta-politics: the deciding of what should be open to political debate.
Hence, the drawing of the line between those motivated by ideology and
one's own position as ideologically neutral and technocratic is politics
played at its purest.
27
Given that the financial crisis has now transformed into
a fiscal one, partly because of government interventions, in retrospect,
protecting the bank ing system was a poli tical choice with po litical
consequences.
191
23 A. Darling MP, 464 H.C. Debs., col. 463 (11 October 2007).
24 SRM, op. cit., n. 18, para. 65.
25 id., para. 66.
26 id., para. 75.
27 S. Z
Ïiz
Ïek, The Ticklish Subject: The absent centre of political ontology (2000) 192±3.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
Even if we grant the shaky distinction between political and economic
expropriation, it is unclear what evidence counts, and why, for categorizing
government action on one side of the line rather than the other. In the
Northern Rock case, for example, the key piece of evidence backing the
court's decision that the nationalization of Northern Rock was a `purely
practical measure'
28
was a cost-benefit analysis carried out by Goldman
Sachs. However, Goldman Sachs has refused disclosure of the financial
models it used in advising the Treasury on Northern Rock to the National
Audit Office.
29
We therefore do not have the key piece of evidence which
esta blis hes t he gov ernm ent 's (an d Gold man S achs 's) re aso ns for
nationalization.
In any case, with nationalization and the share valuation method legally
validated, the government-appointed appraiser announced in October 2010
that Northern Rock shares were worthless and no compensation would be
paid to extinguished shareholders. Subsequently, the Northern Rock small
shareholders have filed a suit against the government in the ECtHR under
Article 1 of Protocol 1 of the European Convention for the Protection of
Human Rights and Fundamental Freedom which states:
Every natural or legal person is entitled to the peaceful enjoyment of his
possessions. No one shall be deprived of his possessions except in the public
interest and subject to the conditions provided for by law and by the general
principles of international law.
The preceding provisions shall, not however, in any way impair the right of a
State to enforce such laws as it deems necessary to control the use of property
in accordance with the general interest or to secure the payment of taxes or
other contributions or penalties.
The broad discretionary scope given to governments under the European
Convention to expropriate private property suggests that the small share-
holders have a weak legal case should they try to challenge the government's
decision to nationalize Northern Rock.
30
Given these circumstances, the best
tactic available to Northern Rock small shareholders might be to take a cue
192
28 SRM, op. cit., n. 18, para. 74.
29 D. Hencke and A. Sparrow, `Gordon Brown defends rescue of Northern Rock after
NAO report' Guardian, 20 March 2009, at
mar/20/northern-rock-mandelson>.
30 But, arguably, governments' wide-ranging right to expropriate private property in the
name of the `public interest' is precisely what today needs to be debated, with
particular urgency in the financial sector, where there is an incipient push for `macro-
prudential' regulation to ride roughshod over `micro-legal' relations: J. Gray, `What
is Systemic Risk and what can be done about it? A Legal Perspective', EUI Working
Papers, RSCAS 2011/55 (2011). Indeed the two court decisions on Northern Rock
manifest a worrying prioritization of the `system' over and against its constituent
subjects, in violation of the liberal concept of rule of law, that `government' ± broadly
construed as either specific persons, or the `system' itself ± should not possess rights
richer than its constituent citizens: see R. Epstein, Takings: Private Property and the
Power of Eminent Domain (1985) 331.
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from Lord Justice Laws's argument and assert that a distinction needs to be
drawn between, on the one hand, institutional investors, who actively traded
these shares as part of a diversified portfolio subject to various different (and
often short-term) trading strategies, and, on the other hand, individual
investors who held these shares passively since demutualization, perhaps as a
result of having acquired them through employment at Northern Rock, where
they were subsequently held in trust as part of the various employee savings,
share option, and bonus incentive schemes. Although there is no precedent
for this distinction in the common law, courts in the United Kingdom have
signalled open ness toward dis tinguishing b etween differ ent types of
shareholders:
The Claimants presented a united front before us. Although the representative
small shareholders were separately represented, they did not seek to distin-
guish their individual cases from those of the Other Claimants . . . In fact,
however, the circumstances of the different Claimants do differ, both in
relation to the dates of their acquisitions of their shares and the circumstances
of Northern Rock at those dates. With regard to those whose share acquisitions
preceded 13 September 2007, it is sufficient to refer to the situation of Mr.
Dennis Grainger, the first named Claimant in the claim brought by the
individual shareholders, who explained movingly in his witness statement the
problems caused for him as a former Northern Rock employee by the statutory
assumptions of the Compensation Scheme.
31
Still, we have some reservations that intent or the circumstances surrounding
the acquisition and subsequent custodial arrangements for shares is sufficient
reason to draw such distinctions. Indeed orthodox company and property law
theory would see this distinction as lacking proper conceptual foundation,
and possessing the potential to sow havoc and uncertainty on settled
proprietary arrangements and records of legal and equitable title. However,
the distinction surely seems sound when viewed from the standpoint of the
individual employee shareholder, who has diligently responded to incentives
from both Northern Rock and government ± in the form of generous and
persistent income, national insurance, and capital gains tax incentives which
surrounded the various employee share schemes run by Northern Rock up
until nationalization ± in order to build up financial wealth as a good and
responsible modern `financial citizen'.
32
TAKINGS THROUGH SHARING
However, one of the ironies with the shareholders' claims to being victims of
economic expropriation is that, viewed from a longer historical and critical
angle, they can alternatively be seen as its perpetrators. Suffice to recall that
193
31 SRM, op. cit., n. 2, paras. 99±100.
32 J. Gray and J. Hamilton, Implementing Financial Regulation: Theory and Practice
(2006) ch. 6.
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the corporate share has a hotly contested legal and political lineage in
England. Historically, much of the critique of corporate shareholding derived
from the fact that incorporation depended on government approval, either
crown charter or, after the Glorious Revolution in 1688, parliamentary con-
sent.
33
Government privilege was uncontroversial as long as incorporation
was applied to `publicly-spirited' bodies such as churches and universities.
But once corporate charters were extended to private profiteers in the
sixteenth century, conferring on them monopoly privileges in colonial terri-
tories, corporations and corporate shareholders became objects of popular
criticism and suspected of corruption and cronyism. Adam Smith encap-
sulated a general eighteenth-century antipathy to the joint stock company:
34
The directors of such companies, however, being the managers rather of other
people's money than of their own, it cannot well be expected that they should
watch over it with the same anxious vigilance with which the partners in a
private copartnery frequently watch over their own. Like the stewards of a rich
man, they are apt to consider attention to small matters as not for their master's
honour, and very easily give themselves a dispensation from having it.
Negligence and profusion, therefore, must always prevail, more or less, in the
management of the affairs of such a company.
Particular scepticism surrounded the appropriateness and applicability of
the corporate form to banking. As Bagehot tells us, well into the nineteenth
century `a great number of thinking persons feared that the joint stock banks
would fast ruin themselves, and then cause a collapse and panic in the
country.'
35
The sources of this scepticism reach back to the collapse of the
South Sea Company in 1719±1720.
36
The South Sea Company had been
formed in 1711 as a subsidiary of the Sword Blade Bank syndicate.
37
The
English government authorized the company, in an effort to reduce the
burden of its national debt accrued principally in the course of the War of
Spanish Succession (1701±1714). In order to reduce the size of the national
debt, the government encouraged a debt-for-equity swap: fixed-interest
government bonds were exchanged for variable-yield but liquid stakes in the
194
33 B. Carruthers, City of Capital: Politics and Markets in the English Financial
Revolution (1996) 132.
34 A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Vol. 1
(1976/1776) 264±5.
35 W. Bagehot, Lombard Street: A Description of the Money Market (2005/1873) 99.
36 The parallels between Northern Rock and the South Sea Company crisis has been
recently noted by scholars (L. Neal and M. Weidenmier, `Crises in the Global
Economy from Tulips to Today: Contagion and Consequences' (2001), at
ideas.repec.org/p/nbr/nberwo/9147.html>) as well as politicians. Hence Vince Cable,
current Business Secretary for the coalition government, stated before the House of
Commons: `I suspect that when the dust has settled on the Northern Rock affair,
future generations will think of it much as people think of the South Sea bubble: a
major historical event when a speculative bubble in financial markets burst.' V. Cable
MP, 469 H.C. Debs. col. 371 (12 December 2007).
37 C. Kindleberger, A Financial History of Western Europe (1984) 76.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
South Sea Company,
38
whose value was underpinned by the corporation's
exclusive trading rights in South America.
39
At the same time, other inves-
tors were lured into buying South Sea stock by loans made by the Sword
Blake Bank for that purpose. However, when in 1720, these loans were not
rolled over, the stock price of the South Sea Company dropped, taking the
rest of the market with it.
40
In Britain, the event created a long-lasting
prejudice against corporations generally, and banking incorporation in
particular.
41
Still, the efficacy of popular prejudice should not be overstated. More
relevant was opposition to the corporate form and limited liability from
within the banking industry itself. Observe that following the collapse of the
South Sea Company, the Bank of England was the only corporate bank in
England for over a century, as part of the privileges extended to it for
monetizing the national debt.
42
Although the banking crisis of 1825±26
generated legislative reform (the Joint Stock Bank Act 1826 and the Banking
Charter Act 1833) which made incorporation possible for other banks, it is
notable that fully three-fourths of banks remained private partnerships into
the 1850s.
43
The pre-eminence of partnership in the banking sector helps
explain the fact that fourteen of the seventeen banking witnesses called
before the Royal Commission convened to debate the Joint Stock Companies
Acts in the 1850s opposed the extension of limited liability to corporate
banks. As James Taylor has noted, it was simply not in the financial interests
of most banks to support limited liability legislation which would bolster the
capital of competition.
44
Extension of limited liability to banks and corporations enabled share-
holders, in the words of one contemporary, `to speculate for profits without
being liable for losses', to holding shares in multiple companies, and so to be
195
38 L. Neal, The Rise of Financial Capitalism (1991) 13.
39 Carruthers, op. cit., n. 33, p. 79.
40 S. Quinn, `Money, finance, and capital markets' in The Cambridge Economic History
of Modern Britain Vol.1: Industrialization, 1700±1860, eds. R. Floud and P. Johnson
(2004) 169.
41 The resulting Bubble Act (1720) reaffirmed the government's hegemony in the
chartering of corporations.
42 S. Quinn and W. Roberds, `Are On-Line Currencies Virtual Banknotes?' (2003) Q2
Federal Reserve Bank of Atlanta Economic Rev. 1±15, at 8. The Bank of England
received this privilege on a short-term basis in 1697 and then permanently in the Act
of 1707. All other banks in England and Wales were restricted to a maximum of six
partners: M. Collins, Money and Banking in the UK: A History (1988) 10.
43 Collins, id., p. 54. One reason why corporate banks were slow to develop was the
failure of many of the new ones after the aforementioned crises of the late 1830s. The
Joint-Stock Bank Act of 1844 imposed higher capital restrictions for the formation of
corporate banks and this remained a formidable barrier to entry until their removal in
1857: id., pp. 72±3.
44 J. Taylor, Creating Capitalism: Joint Stock Enterprise in British Politics and Culture,
1800±1870 (2006) 151.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
`in the market' rather than `in the company'.
45
As Paddy Ireland has argued,
`in the changing language of the statutes of the time, people no longer
``formed themselves into'' companies but ``formed'' companies, objects
external to them.'
46
The new form of property:
had ceased to be a `personality-rich' phenomenon in which it fundamentally
mattered who the parties to the relationship were and had instead become a
`personality poor' phenomenon in which `the personalities of the parties to the
relationship determined nothing of its nature'.
47
Criticism of corporate shareholding in Britain remained vigorous into the
twentieth century. Keynes, for instance, complained that nominal corporate
owners of enterprise are `concerned, not with what an investment is really
worth to a man who buys it ``for keeps'', but with what the market will value
it at.'
48
At root, Keynes's criticism appears to have been motivated by
revulsion with the character of the corporate share many find most attractive
± its transferabi lity, liquidity, a nd alienability . The prioritizat ion of
disposition over use and possession as the incidents most meaningful to
`owners' of financial `property' offended Keynes because it seemed to
contravene the positive role liberal theory ascribed to property in actualizing
individuality and civilizing citizens.
49
On the contrary, Keynes likened the
stock market to a game in which:
each competitor has to pick, not those faces which he himself finds prettiest . ..
nor even those which average opinion genuinely thinks the prettiest . . . [but
rather] what average opinion expects the average opinion to be.
50
Corporate shareholding became a problem for Keynes against the backdrop
of a liberal cultural context, where the meaningful measure of individual
action is partly determined by its degree of self-determination.
51
196
45 E. Cox, The Law and Practice of Joint Stock Companies (1856) i±ii, quoted in P.
Ireland, `Property and contract in contemporary corporate theory' (2003) 23 Legal
Studies 453±509, at 464.
46 id., pp. 462±3.
47 J. Penner, `The ``Bundles of Rights'' Picture of Property' (1996) 43 UCLA Law Rev.
711±820, at 802, quoted in Ireland, id., p. 469.
48 Keynes also argued that this `wrongheaded propensity' for short-term speculation
meant industrial firms had to keep a higher portion of their assets in `liquid' form in
order to pay dividends, obscuring the deeper truth that `there is no such thing as
liquidity of investment for the community as a whole': J.M. Keynes, The General
Theory of Employment, Interest and Money (1936) 154±5.
49 See J. Waldron, The Right to Private Property (1988).
50 Keynes, op. cit., n. 48, p. 156.
51 Keynes's aversion to this behaviour echoes Nietzsche's disgust with modern
individuals for striving to be `normal' rather than excellent ± a `mass vulgarization'
which might hypothetically be linked to the sovereignty of mass consumer needs in
determining the profitable work available for individuals in market societies: F.
Nietzsche, Beyond Good and Evil (1886), compare L. von Mises, Liberty and
Property (1958).
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
But the most acerbic attack on corporate shareholders in the twentieth
century c ame from Th orstein V eblen. Ve blen den ounced co rporate
shareholders as `absentee owners' abstracted from the process of production.
Although shareholders self-identified as `entrepreneurs' and `investors',
Veblen observed that because most shareholders acquired stock in secondary
markets, their monetary `investments' gave money to their sellers but not to
the companies whose revenue rights these titles represented.
52
Thus, Veblen
concluded, corporate shares allowed the `kept classes' to earn a `free
income' in perpetuity as long as the company existed, while employees who
did take `entrepreneurial risk' by making time-intensive and skill-specific
investments in firms could be sacrificed on a financial quarter-by-quarter
basis.
53
It hardly comes as a surprise to note that Veblen's views would have
found few friends at Northern Rock before the financial crisis. As the former
Chairman of the Board, Sir John Riddell, once quipped:
I have no time for the argument that concentration on shareholder value
conflicts with the interests of other stakeholders. A single-minded drive to
increase shareholder value carries with it, necessarily, the primacy of first-
class service to the customer, and support for our workforce and for the North-
East.
54
197
52 Ireland, op. cit., n. 45, p. 481.
53 T. Veblen, Absentee Ownership and Business Enterprise in Recent Times: the case of
America (1923). Most originally, Veblen claimed corporate shareholding structurally
induced the `sabotage' of production itself. This followed from Veblen's critique of
marginal utility theory at the core of much modern microeconomics: T. Veblen, `The
Limitations of Marginal Utility' (1909) 17 J. of Political Economy 620±36. Whilst
producing up to the point where marginal revenue equals marginal cost is efficient in
terms of maximizing net profits for the corporation, Veblen argued that profit
maximization constricted output and employment. Veblen further argued in The
Theory of Business Enterprise (1904) that speculation in the stock market distorted
the organization of in dustrial product ion through an expect ations-reinforc ing
dynamic. Specifically, rising market capitalization of a firm based on its prospective
future earnings facilitated acquisitions and organic growth. This in turn increased the
firm's collateral for acquiring more funds, as well as its market capitalization in
cumulative fashion, until a critical threshold is reached when the market capital-
ization of the firm is viewed as out of proportion with its future earnings potential.
This recognition prompts sell-offs of the stock. In this reversal, the actual physical
assets of the firm might be liquidated, even though nothing in their productivity had
changed through the cycle. The way the stock market acts as a conduit for productive
dispossession has evolved. Consider leveraged buy-outs. In a leveraged buy-out,
investors (often private equity firms) borrow money (often from banks) in order to
acquire a controlling share in a corporation ± but do so using the assets of the
company targeted for acquisition as collateral for the loan. In order to then repay the
loan, assets of the company are often sold off and employees laid off in order to
increase cash-flow.
54 Northern Rock. Annual Reports and Accounts 2000 (2001) 4.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
This was a viewpoint that Riddell's successor, Dr. Matt Ridley, echoed:
`There is therefore no conflict between creating shareholder value and being
socially responsible.'
55
In terms of delivering `shareholder value' Northern Rock did well. The
firm regularly produced an average 20 per cent return on equity (the ratio of
annual net income to average shareholders' equity), one of the key indicators
investors use to evaluate companies. Indeed, Northern Rock outperformed
the FTSE 100 Index every year save one in total shareholder return, a
measure which aggregates the dividend per share of stock and their market
value (see Figure 1). As Figure 2 indicates, dividend per share tripled
between 1999 and 2006. Not surprisingly, as earnings per share increased, so
too did the market capitalization of the firm (Figure 3). In fact, in 2005 and
2006, just before its crisis, Northern Rock's share price increased 59 per
cent, on the basis of balance sheet leverage of assets 57 times equity. Both
these leverage and share price figures were the highest among banks in
Europe.
56
In retrospect then, shareholders ± including Northern Rock small
198
Figure 1. Total shareholder return: Northern Rock versus FTSE 100
Source: Authors' calculations based on Northern Rock, Annual Reports and
Accounts (2003, 2006, 2007).
55
Northern Rock, Annual Reports and Accounts 2005 (2006) 5. The literature on share-
holder value as a corporate governance paradigm is vast. A (somewhat dated) overview
is provided by W. Lazonick and M. O'Sullivan, `Maximizing shareholder value: a new
ideology for corporate governance' (2000) 29 Economy and Society 13±35.
56 J. Sheridan and J. Napier, `Northern Rock: Margin decline to drive de-rating;
downgrade to Sell'(24 April 2007) 4.
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199
Figure 2. Northern Rock dividend per share
Source: Authors' calculations based on Northern Rock, Annual Reports and
Accounts (2000±2007).
Figure 3. Earnings per share and market capitalization of Northern Rock
Source: Authors' calculations, Deutsche Bank, and J. Sheridan and J. Napier,
`Northern Rock: Continuing to deliver; Raising Target Price' (11 January 2006).
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
shareholders ± were both the primary beneficiaries and principal rationale for
the risky business model Northern Rock developed, and the transitory,
ultimately illusory, profits the firm generated (see Figure 4). From the
standpoint of orthodox corporate theory, Northern Rock small shareholders
failed to perform their duties of exercising oversight over the bank's board,
and benefited handsomely from their negligence.
Nevertheless, the moral indictment of corporate shareholders as such
because of the structural position they occupy is crude. The shareholders
envisioned by Keynes, Veblen, and other twentieth-century critics of the
corporation were investors who actively traded these revenue rights in
financial markets, thus creating market volatility which adversely impacted
on the productive activities of the firm. While some former investors in
Northern Rock fit this description, others do not, particularly those share-
holders who were long in the firm's equity. Like other objects, the meaning
of shares depends not only on the potentialities intrinsic to them, but on what
is done with them by people in practice.
57
The next section therefore
examines shareholding from the angle through which these shareholders
perceived it.
200
Figure 4: Northern Rock's nominal share price in pounds sterling, 1998±
2008.
Source: B. Walters, The Fall of Northern Rock: An insider's story of Britain's
biggest banking disaster (2008) 161.
57 A. Appadurai, The Social Life of Things: Commodities in Cultural Perspective
(1986); N. Thomas, Entangled Objects: Exchange, Material Culture, and Colonialism
in the Pacific (1991).
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
FOILED WEDDINGS AND A FUNERAL
In order to understand the phenomenology and practices of former North
East-based Northern Rock shareholders, we collected evidence from a
number of written sources, including user generated content located on the
UKSA's Northern Rock web page, the Northern Rock Small Shareholders'
blog, and online newspaper stories, including comments made in the readers'
section. In addition, we surveyed and formally interviewed fourteen former
Northern Rock shareholders and spoke informally with a handful of others to
capture their own-word texture and tone (see Box 1 for a summary of the
questionnaire results).
201
Box 1. Summary survey results
Fourteen questionnaires were distributed and completed prior to the focus
groups (June 2011) and individual interviews (July±August 2011).
All respondents acquired their shares when Northern Rock demutualized
in 1997 either having held a savings account (36 per cent) with the Rock or
both a savings and mortgage account (57 per cent). Over a quarter of
respondents acquired additional shares through Employee Share and/or
Pension Schemes, with a minor group (14 per cent) acquiring Northern
Rock shares through the stock market. The majority of respondents held
fewer than 750 shares (57 per cent), but a small percentage had a significant
holding of up to 18,000 shares when the Northern Rock was nationalized.
Before acquiring their Northern Rock shares, 71 per cent of respondents
held no other stock market shares in other companies, and a decade later at
nationalization, almost two thirds of respondents (64 per cent) continued to
hold no other shares in other companies directly. Nearly all the respondents
(93 per cent) had earmarked their Northern Rock shares for a specific
purpose, principally as part of their long-term retirement planning (36 per
cent) or as specific savings to pay off their mortgage or provide a `rainy-
day' fund (36 per cent).
Aside from their Northern Rock shares, the majority of respondents also
held other types of investments, such as ISAs/Unit Trusts/OEICS (14 per
cent), cash ISAs (57 per cent), self-select Equity ISAs (7 per cent), PEPs (14
per cent), personal pension (29 per cent), venture capital trusts (7 per cent),
and other investments such as ordinary Unit Trust savings (7 per cent).
Almost two thirds of respondents (64 per cent) had cast a vote in 1997 on
whether Northern Rock should become a bank or remain a building society,
with the majority of that group voting for demutualization (67 per cent). In
terms of shareholder activity, over one third of respondents (36 per cent)
had never voted in Northern Rock elections for executive directors and
equal proportions of 21 per cent had voted 1±2, 3±5 or more than 5 times.
Only a very small percentage had attended meetings of the company such as
the Annual General Meeting (14 per cent) with by far the majority never
attending such meetings (79 per cent).
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
On the whole, interviews were conducted in groups rather than indivi-
dually. Our methodological presupposition was that a focus-group approach
was more conducive for generating meaningful responses, since collective
discussion of topics can sometimes yield new insights which may not have
developed in isolated reflection. We felt this to be a particular concern given
the topic and subjects of research. Since we suspected that shareholding and
corporate governance are issues rather peripheral to the everyday con-
sciousness of our informants, we feared individuals might find themselves at
a loss for words in one-on-one interviews with a trio of academics without
cues from other participants to open up their own thinking on the topic.
Thus, the idea behind focus groups was to replicate a classroom seminar,
with the hope that individual reflections might improve as participants were
sparked by the comments of other persons ± as occurs in real life.
58
Group
interviews thus allowed us to bring to the surface ideological underpinnings
of otherwise fuzzy feelings of being let down or outrage. At the same time,
`groupthink'
59
was minimized by repeatedly emphasizing to the groups that
we were interested in hearing competing perspectives, and establishing
ground rules to ensure different voices were heard.
Participants for the focus groups were primarily recruited through an
article written up in the local Newcastle Journal newspaper.
60
Before the
interviews took place, a survey and script were composed and pilot tested on
colleagues working in the Centre for Urban and Regional Development
Studies at Newcastle University. The survey results appear on the following
pages. It should be noted that although the interview script provided the basis
on which we asked questions in the focus groups, it did not structure these
interviews rigidly, since we wanted to foster free-flowing conversation. The
focus groups themselves were conducted at the university, and participants
reimbursed f or their trav el expenditu re, as well as of fered vario us
refreshments. The conversations were tape-recorded and transcribed.
One of the motivating points of departure for this article was to under-
stand the extent to which small shareholders treated their corporate shares in
Northern Rock differently from when they held mutual shares in Northern
Rock building society. For the most part, former shareholders did not
exercise any of the new rights afforded them as `owners' ± no evidence was
found of shareholder `activism', and less than half of respondents reported
exercising their voting rights in annual executive director elections. Of
course, there is a voluminous interdisciplinary literature comparing and
contrasting mutual shares versus corporate shares in terms of their intrinsic
institutional mechanisms for aligning the interests of managers with those of
202
58 R. Krueger and M.A. Casey, Focus Groups: A Practical Guide for Applied Research
(2009, 4th edn.) 7.
59 D. Morgan, Focus Groups as Qualitative Research, (1997, 2nd edn.) 50.
60 T. Henderson, `Plea for Rock shareholders to tell their story' Newcastle Journal, 27
May 2011, 17.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
owners.
61
Evaluated within this rubric, scholars have debated the structural
merits of corporations and mutual companies in terms of which form of
enterprise induces their giving greater regard to owners.
62
But one of the taken-for-granted assumptions on which this body of
scholarship proceeds is that equity holders understand themselves, and are to
be understood, as `owners' of enterprise. The empirical evidence we
203
61 For example, E. Fama and M. Jensen, `Separation of Ownership and Control' (1983)
26 J. of Law and Economics 301±26; J. Lamm-Tennant and L.T. Starks, `Stock versus
mutual ownership structures: The Risk Implications' (1993) 66 J. of Business 29±46;
T. Clarke, `In Defence of Mutuality' (1998) 7 Corporate Governance: A European
Rev. 97±102; R. Lewin, `Investigating the benefits of mutuality: A discussion of the
demutualisation trend' (2002) 7 J. of Pension Management 313±36; S. Letza, X. Sun,
and J. Kirkbride, `Shareholding versus stakeholding: a critical review of corporate
governance' (2004) 12 Corporate Governance 242±62; B. Howcroft, `Mutuality
versus public company ± the debate in Europe and the USA' (1999) 7 Corporate
Governance: An International Rev. 167±77.
62 One issue that is debated are the advantages and disadvantages of concentrated versus
dispersed ownership. For instance, as has been noted:
The traditional rule within building societies has been one member, one vote.
According to rational choice theory, members therefore have little incentive to
become active in internal governance because of the difficulty of putting together
coalition of voters and the risk that other individuals' free ride on the action of
others attempting to do so.
(J. Cook, S. Deakin, and A. Hughes, `Mutuality and Corporate Governance: The
Evolution of UK Building Societies following Deregulation' (2002) 2 J. Of Corporate
Law Studies 110±38, at 120.) By contrast, it is argued that the control of large blocks
of corporate shares by institutional investors in modern equity markets mean that
managers will be made more accountable because `shareholder activism will be more
effective': N. O'Sullivan, `Ownership and Governance in the Insurance Industry: A
Review of the Theory and Evidence' (1998) 18(4) Service Industries J. 145±61, at
145. Defenders of mutual companies have countered that although blocks of shares
owned by institutional investors might amplify the `voice' of owners inside a firm, the
`exit' option available to mutual shareholders is more potent than the comparable
option in corporations: L. Drake, `The Economics of Mutuality', BSA project paper
no. 3 (1997). So, for instance, building society shareholders retain the option to
withdraw funds instantaneously and, if they do so, the capital of the firm is imme-
diately reduced: P. Molyneux and J. Wilson, `Dynamics of Growth and Profitability
in Banking' (2004) 36 J. of Money, Credit, and Banking 1069±90, at 1074. By
contrast, in order to `exit' a corporation, an owner must first find a buyer, and the sale,
while impacting the price of shares in secondary markets, does not affect the
operating capital of the firm itself: D. Llewellyn and M. Holmes, `In Defence of
Mutuality: A Redress to an Emerging Conventional Wisdom' (1991) 62 Annals of
Public and Co-operative Economics 319±54, at 325. In addition, defenders of the
mutual model for financial institutions note that since mutual companies do not need
to distribute dividends to external equity holders, they can theoretically use the
retained earnings to offer more competitive rates to both depositors and borrowers.
One study based on data from eight building societies in the United Kingdom that
converted between 1995 and 2000 found managers at converted societies raised
product prices to improve profits for shareholders but at the expense of depositors and
mortgagees: S. Heffernan, `The effect of UK building society conversion on pricing
behaviour' (2005) 29 J. of Banking and Finance 779±97.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
collected calls into question this theoretical presumption. The conversion of
Northern Rock into a corporation did not appear to generate any heightened
stewardship over the firm. More broadly, the experience of holding equity
stakes in Northern Rock appeared to have little impact on small share-
holders' self-conception as financial citizens. Rather, the experience of
having had their Northern Rock shares extinguished has hardened and
affirmed their scepticism of stock market shareholding. `Well I would never
buy any shares at all,' said one respondent. `I'd rather save it and know
where my money is. I would never speculate.' Similarly, another respondent
declared, `I have not touched shares since.' Other respondents described
themselves as `cynical,' and that they now preferred to put their money in a
`box or under the mattress' because they `never seem to win.' `Why bother?'
one respondent reflected, telling us he was now inclined to take the advice of
his 89-year-old father and spend money rather than save it.
In general, our respondents placed blame for the Northern Rock run on
particular persons rather than practices such as balance-sheet leverage.
Although some criticized the former CEO, Adam Applegarth, equal or
greater blame was placed on government regulators such as the FSA,
departments such as the Treasury, and politicians like Gordon Brown. On the
Northern Rock Small Shareholders' blog, Angelique Hunt's comments sum
up a sentiment expressed by many of our respondents: `We lost roughly
twenty thousand shares, and we're discusted [sic] with the way the govern-
ment handled the whole situation.'
63
`The reality is that the Government has
stolen £30,000 from us,' said Malcolm Todd, a former Northern Rock
shareholder, to the local newspaper. `The whole financial sector collapse of
the country is down to Government competence.'
64
Another person often
indicted was the BBC reporter Robert Peston who broke the news about the
Bank of England loan to Northern Rock ± illustrative of finding fault with
the messen ger rather t han the mess age. Here t he tendenc y among
respondents to place blame politically and personally is probably a function
of the essentially ex post reporting of Northern Rock's problems. By the time
these problems belatedly received wider, public recognition, political and
regulatory authorities had assumed a more prominent role, obscuring the fact
that their interventions occurred only after problems had been produced by
the private sector.
A concretistic concept of abstract economic processes in agentive and
personal terms
65
also characterized respondent understandings of the business
in whic h they we re inve sted . North ern Roc k was und erst ood rat her
straightforwardly as a `Northern' firm because the bulk of its employment
204
63 At
2B01%3A00&max-results=5>.
64 K. Simpson, `Government has stolen our £30,000' Newcastle Evening Chronicle, 14
February 2009.
65 M. Postone, `History and Helplessness: Mass Mobilization and Contemporary Forms
of Anticapitalism' (2006) 18 Public Culture 93±110, at 96.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
and head office are located in the North East. In this spirit, a group of former
shareholders and other North East stakeholders continue to maintain a Facebook
page with 241 members titled `Keep the Northern Rock Northern'.
66
Similarly,
in our focus groups, many respondents cited the fact that Northern Rock was a
local company as a key reason why they had continued to hold shares in the
firm, even after their price plummeted following the run on the Rock.
The connection of Northern Rock with the North was also stated as a factor
for the firm's purportedly unfair treatment by politicians and regulators. `I
wonder if a bank based in the Home Counties would have been allowed to go
to the wall in the way we have seen with the ``Rock''?' exhorted one
commentator on the Northern Rock Small Shareholders' blog.
67
Another
elderly pensioner on the site lamented that she was a `lifelong Labour
supporter' and had believed that `a labour [sic] government would look after
our welfare but they have also robbed me of the few Northern rock shares that
I had. Where will it all end?'
68
A lack of sympathy to the plight of Northern
Rock small shareholders from local Labour MPs came as a surprise to at least
one of our respondents: `He was a pit man; you would think he would support
you, he was from the North East.' Likewise, another respondent in our group
interview observed that `Northern Rock wasn't doing anything different to
the other banks,' but was treated differentially; authorities nationalized
Northern Rock, whilst RBS and Lloyds received covert aid and capitalization
because these were Scottish and London banks, respectively. A further
respondent, in an echo of banking witnesses before the Royal Commission in
the 1850s, made the following suggestion:
I am very suspicious that the other banks were jealous of the success of
Northern Rock. Northern Rock was punching well above its weight in the
mortgage market and I am sure that the City, the Big Four Banks, would look
at this whippersnapper based in the North East, who was carving a much
bigger share of the mortgage market than it was entitled to and I am sure that
they put pressure on the Government. They wanted Northern Rock curbed.
69
205
66 Keep the No rthern R ock North ern, at ww.fac ebook. com/gro up.php ?gid=
24819530256&re furl=http%3A% 2F%2Fwww.new. facebook.com% 2Fs.php%3Fini -
t%3Dq%26sf%3Dt%26n%3D-1%26q%3Dnorthern%2Brock%26k%3D200000010>.
67 Northern Rock Small Shareholders' blog, posted 16 October 2008, at
nrssg.blogspot.com/search/label/Members%27%20Commentary>.
68 Northern Rock Small Shareholders' blog, posted 13 October 2008, at
nrssg.blogspot.com/search/label/Members%27%20Commentary>.
69 One of the more entertaining moments occurred during the focus groups when David
Bholat (an American) asked the participants who they blamed for the failure of
Northern Rock:
DB: . .. the million pound question is what do you think were the main factors that
caused [the troubles at Northern Rock]
R1: America! We blame you [pointing at DB]
[Laughter, comments inaudible]
R1:
It started in America. Lehman Brothers were lending money on shacks;
thousands and thousands of pounds on wooden shacks and bundling them up and
dumping them on the market without the liquidity problem ± it all started in America.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
Ironically, the counterpart to the North East view that Northern Rock has
been punished because it was Northern and part of the `forgotten region,' is a
popular belief in the City that the firm was given special privileges by the
Brown government because of its location in a Labour Party stronghold.
However, the deficiency with both viewpoints is the perception of Northern
Rock in primarily spatial and antagonistic (North versus South) terms. In
practice, the `Northern' in the Rock business was strongly diluted. The
liabilities of the company were global, and its main mortgage assets at the
time of the run on the Rock were, ironically, Southern English mortgages
(see Figure 5).
Yet, regardless of the balance sheet, the company was still highly
regarded in the North East for its contributions to charity and employment in
the region. Dennis Grainger, a former employee at Northern Rock who held
shares worth £114,000 at the time of nationalization, and a key organizer in
the Northern Rock Small Shareholders' campaign orchestrated by UKSA,
estimates he has spoken with 1,500 people in the region, and offered these
reflections:
It's been quite heartbreaking. I've had people crying at the stands. I've had
pensioners t elling me th at they can't now provide f or their fune ral
arrangements. The strange thing is a lot of people in the North East regard
206
Figure 5. Geographical spread of Northern Rock gross residential
lending
Source: Northern Rock, Annual Reports and Accounts (2006±2009).
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
Northern Rock as part of their heritage. In this area, it is part of their psyche.
Northern Rock is unique in the heart of the people here . .. It's almost a North-
South thing to be honest. A lot of people are angry at the government. We even
got one person who paid 40 per cent capital gains tax upon taking over shares
when their parents died, paid the tax immediately, and then discovered the
shares were worth nothing.
70
Sombre stories about the negative downstream effects inflicted by the
expropriation of Northern Rock shares are now quite commonplace in the
North East. One North East resident told the BBC that he had invested his
savings in Northern Rock shares right before the crisis to pay for his
marriage: `the Northern Rock fiasco wrecked our wedding.'
71
In this vein,
one interviewed respondent told us that she was friendly with an elderly
woman who had lost £100,000 worth of shares. `Shares are gamble aren't
they? But she was soon to retire and she was going to sell them as part of her
pension.'
The view of shares as speculative bets and, in particular, the analogy to
`gambling' thematically recurred in our interviews:
R1: but not having any experience in shares prior to [Northern Rock] . .. you
don't know they're going to keep falling . . .
R2: and then they go back up again
R3: [inaudible] shares go up and down. It's gambling. It's gambling basically
isn't it?
R2: Well it is.
R3: You take a chance whether it makes you money or not and
R4: Well I didn't think it was gambling buying Northern Rock shares
R5: Well that was . . .
R6: Sell them.
RS: We all thought [they were] safe shares . . .
R4: I bought shares over a period of years some of them have been gambles
some of them have paid off; some of them haven't; some I have bought as an
investment never dreaming, never dreaming, that Northern Rock would go
bust. I've seen motor shares go; I've seen all sorts of shares over a period.
We've had shipyards go bankrupt; we've had shipping companies go bankrupt.
So a lot of these are; some of these are gambles. I've gambled on the stock
market . . . if you like with my pension and my money but I looked upon the
Northern Rock as solid. It was a local company; been here for 150 years; it was
basically well managed; it was a Northern company.
R3: It appeared to be.
R4: A Northern
David Bholat: What inspired that confidence in Northern Rock . .. because as
you mentioned some of the most stalwart industries here in the North within
the last fifty years ± mining and coal and all these things ± had gone,
apparently dramatically; but you kinda [sic], pretty pointedly are saying you
know that Northern [Rock], you thought, was solid . . .
R4: The banks were a safe bet . . .
207
70 BBC News Online, `Northern Rock ± Your Stories', at
content/articles/2008/08/11/northern_rock_stories_feature.shtml>.
71 id.
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DB: So the banks were a safe bet
R4: . . . failure . . .
R5: We thought it was.
The equation of shareholding to gambling flows from the fact share-
holders felt they had little capacity to impact on the fate of the Northern
Rock firm. As one respondent stated:
I found out quite soon it was absolutely pointless voting if you wanted to
change any of the Board because it was all done by block voting by the big
companies. So I became disillusioned a long time ago that, like a lot of things,
they pretend you have a voice [but] the big companies with block votes kept in
the people they wanted to keep in. It was all a big club.
Another person interviewed said that, `as a shareholder I felt I had very little
influence whatsoever on how the company operated. I felt the Directors plus
the FSA were my safeguard.' A former employee at the company noted that
she saw her shares as a `staff benefit: I didn't really think about it in terms of
my obligation to the company or them to me. It was just a bit of a perk really.'
The perception of shares as `presents' and `bonuses' contributed to a casual
attitude toward them. Though some of our respondents reported following the
share price of Northern Rock in the newspaper, 79 per cent of those inter-
viewed reported never attending an annual general meeting. One respondent
told us that although he thumbed through the annual report `it was very
complicated. I didn't understand it, but I knew they were making a profit.'
The lack of active involvement of individual shareholders in monitoring
Northern Rock coincided with a view that this was the role that should be
played by others, such as Northern Rock's Board of Directors and the FSA:
`they were there to ensure the bank was well run' said one former shareholder.
The decoupling of right from responsibility carried through from individual
shareholders to those whose shareholding was held in trust, either through
employee share schemes or through pension plans which, as one respondent
explained, `even if you don't own them yourself they are owned on your
behalf'. In both cases there was a very clear sense from the respondents that
shareholders and trust beneficiaries are the objects of others' stewardship, to be
protected, limiting their obligation to ensure the proper running of the company
or of any monitoring of those whom they held as their custodians. Here then
was a double disadvantage perceived by some of the shareholders who took
part in our focus groups: it was `pointless' to vote because of the power of the
institutional shareholders, but equally their interests should have been, but
were not, safeguarded by those whom the respondents saw as responsible for
ensuring the running of the Rock, that is, the Board of Directors or the
regulator. The association of shareholding equally with feelings of powerless-
ness and protection indicates the complex and conflicting conceptions of
ownership and obligations held by the shareholders interviewed. In spite of
feeling undeserving of `free' shares received during demutualization, they
nevertheless expressed the view that `we want our money back'.
208
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Although there was a general view of shareholding as a speculative bet
governed by mysterious market forces, shareholders still drew distinctions
between different classes of shareholders dependent on the scope of their
speculative intent.
72
One person interviewed observed that while everyone in
the room held `shares in a genuine way', that is, held them before the crisis,
he was familiar with someone:
who bought half a million shares in money when they were a pound and he's
lost the lot. And to me that serves him right. He was just hoping they would go
up; but for us genuine people that's [sic] the people who you've got to feel for.
Shareholders also frequently expressed different degrees of sympathy based
on the scale of shareholding. One respondent who held few equity stakes in
the firm described herself as `irritated' by the Northern Rock nationalization,
but quickly deflected concern to those disproportionately impacted: `I feel so
sad for the people that badly went wrong and their life savings gone.'
By the same token, persons interviewed were more inclined to sympathize
with those who received shares through Northern Rock's various employee
and pension shareholding schemes, compared to those who had received
shares as `freebies' during demutualization. `Should we be compensated for
something we got for nothing?' reflected one respondent, in a voice echoing
Veblen. `I don't have a lot of sympathy [for those] who got shares for free',
echoed another respondent. Very broadly, there was a strong sense in our
discussion groups that monetary reward should be linked to merit, though
with no thought of a comparable position on inheritance. To the point, one
respondent described a `sense of guilt' after initially gaining her lot of shares
`because I didn't really earn it, so I left them floating with the bank. In a
funny kind of way I didn't feel I was entitled to [the shares].'
In sum, the shareholders interviewed often articulated a more sober sense
of their just deserts than the institutional interest groups and lawyers arguing
the case on their behalf. There seemed broad consensus that holding shares
was by itself insufficient grounds for receiving compensation from the
government, particularly in individual instances where those shares had been
gained simply by beneficence and arbitrary windfall, or intended for mere
speculation, and unrelated to labour or going long in the stock. Even then,
former shareholders interviewed expressed little sense of entitlement:
R1: I think the media has sometimes misrepresented the small shareholder
because, as I've said before, you got them for nothing you can't [complain]
about losing something you got for nothing.
R2: No. That's it.
R1: You had the small shareholder and I can appreciate people want to keep
the shares or funds for old age or whatever, but you had the opportunity to sell
them.
R2: Oh you did.
209
72 Compare V. Zelizer, The Social Meaning of Money: Pin Money, Paychecks, Poor
Relief, and Other Currencies (1994).
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
R1: At a very good price and even when the price started to drop you could
have still sold them then.
R2: Exactly.
Overall, the views of individual North East-based Northern Rock share-
holders reveal a complex layering of levels of understanding of the rights and
responsibilities of ownership and enterprise, both bound up in the broader
context of family, employment or regional ties as well as in an ultimately
misplaced and oft miscons trued faith in the company structure and
regulatory framework to protect their interests.
CONCLUSION: LATTER DAY WIDOWS AND ORPHANS?
This article has given voice to what may have been otherwise unheard stories
of small shareholder loss following the run on Northern Rock. On a final
note, it is worth taking a retrospective view of earlier narratives around such
loss, for commentaries on Northern Rock often observe that it was the first
run on a British bank since the failure of Overend, Gurney and Company in
1866.
73
As a historical fact, this observation is demonstrably false. It
completely obscures, for example, the run on so-called `secondary' banks in
the early 1970s, when the Bank of England arranged a bailout estimated at
£2 billion
74
or £12.5 billion in 2009 terms.
75
But beyond the empirical
inaccuracy of the observation, there is, in addition, something false behind
its intended rhetorical effect.
76
The observation seems to position Northern
Rock as a historical exception which could not have been foreseen by
regulators, executives, and investors in the firm. Comments made by Richard
Lambert, CBI Director General, during the run on the Rock, sum up a
general misperception:
Outside the movies, a run on the bank is something that happens in a banana
republic. That one should have happened under our noses, in a mature and
prosperous country, such as the UK, is almost unimaginable.
77
Such claims are, unfortunately, contrary to the actual record; since 1945, the
United Kingdom is tied with Argentina in having more banking crises than
sixty six other major states in the global system.
78
210
73 Treasury Committee, op. cit., n. 1.
74 M. Reid, The Secondary Banking Crisis 1973±75 (1982).
75 Calculated using .
76 T. Eagleton, Ideology: An Introduction (1991) 16.
77 Quoted in B. Walters, The Fall of Northern Rock: An insider's story of Britain's
biggest banking disaster (2008) 78.
78 C. Reinhart and K. Rogoff, `Banking Crises: An Equal Opportunity Menace', NBER
Wor ki ng P ap er 14 58 7 (2 008 ) 14 ±1 5, a t ww. ae aw eb .or g/ as sa /20 09 /
retrieve.php?pdfid=245>.
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However, the comparison between Northern Rock and Overend, Gurney
and Company is instructive in other ways. As is now widely known,
Overend, Gurney and Company had been a prominent London banking
house until its collapse on `Black Friday', 14 May 1866.
79
Following its
failure, the Bank Charter Act, allowing banks to take corporate form, was
suspended. For one of the last times, the propriety of the corporate form and
general limited liability was debated in Parliament. But the select committee
then convened to decide the matter concluded (in a refrain now familiar) that
extraordinary speculation ± rather than everyday legal structures ± were
responsible. As James Taylor points out, the rejection of legal reform in
favour of moral invectives in part rested on the belief that small share-
holders, whom committee members called `ignorant and foolish',
80
were the
authors of their own misfortune. As the Times observed, anticipating the
House of Commons Treasury Committee Report on Northern Rock by over a
century:
Who are really at the bottom of this huge mischief? The true authors are they
who are bringing down their own houses over their head ± the public
themselves. Such is the universal rivalry, and such the habit of expenditure all
about us, that people will not be contented with the tedious three per cent . . .
their souls crave for the more solid and savoury profits of the trader. But to
trade is to lose caste, and, for the means of living, to lose life itself. So the
universal wish is, with a little cleverness and a happy audacity, to reap the rich
harvest of trade without undergoing the primeval sweat of the brow.
81
As Taylor points out, small shareholders had a different interpretation,
believing that `their very inactivity proved their innocence':
Shareholders tried to win public sympathy by drawing attention to the widows,
orphans, and spinsters who filled the columns of shareholder registers: these
were the chief victims of the company failures . .. Distinctions were beginning
to be drawn between speculative shareholders who deserved little pity and
steady shareholders who looked upon their shares as permanent investments
and whose losses were to be regretted. Yet compassion for the latter was
curtailed by a conviction that they `have no more right to speculate than a
child has to play with razors'.
82
The problem in the present has been the tendency of employers, policy
makers, and financial advisers to promote the practice of shareholding
through tax incentives and the myth of shareholder `ownership', without
honest discussion of the real risks associated with this form of remuneration
211
79 See P. Barnes, `A Victorian financial crisis: the scandalous implications of the case of
Overend Gurney' in Criminal Conversations: Victorian crimes, social panic, and
moral outrage, eds. J. Rowbotham and K. Stevenson (2005) 69. In England alone,
there were major bank crises in 1837, 1839, 1847, 1857, 1866, 1878, and 1890:
Collins, op. cit., n. 42, p. 81.
80 Taylor, op. cit., n. 44, p. 197.
81 Quoted in id., p. 200.
82 id., pp. 200, 202±3.
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and investment. At Northern Rock, 95 per cent of eligible employees were
enrolled in one of the Employee Share Option Schemes.
83
As one former
employee interviewed reflected, the company's marketing of Save as You
Earn and bonus schemes was so aggressive that staff felt as if they were
`having shares pumped into them'.
For individual employee shareholders or for individual shareholders
bound to Northern Rock by family and regional ties, it is clear from this
research that `playing with razors' and `speculation' were far from being
seen as fair and accurate descriptors of how they responded to the myriad of
incentives to assume the status of shareholder in Northern Rock. Instead,
these feelings of being let down by a financial and legal system that appears
to serve the interests of elites and to exacerbate wealth and regional
inequalities should be foremost in the minds of those charged with regulatory
redesign and resilience-building measures in 2012.
212
83 Northern Rock, Annual Report and Accounts 2006 (2007) 46.
ß2012 The Author. Journal of Law and Society ß2012 Cardiff University Law School
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