Share and Share Alike? Hedge Funds, Human Rights, and Owning Enterprise in Britain

JOURNAL OF LAW AND SOCIETYVOLUME 39, NUMBER 2, JUNE 2012ISSN: 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 theseindividual 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.

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ß 2012 The Author. Journal of Law and Society ß 2012 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 NE17RU, [email protected]@[email protected]

The authors wish to thank Dr. Ann Sinclair for transcribing the interviews, as well as LawSchool staff for making accommodations for our interview subjects. A version of thispaper was presented at the Tipping Points conference on 14 July 2011 hosted by theInstitute of Risk, Hazard, and Resilience at Durham University.

INTRODUCTION

It is unfortunate that the shareholders who acquired shares as part ofdemutualisation and the staff of Northern Rock have suffered significantlyfrom the fall in the value of Northern Rock shares. However, it is not possibleto make a distinction between types of shareholders in the circumstances ofNorthern Rock.1

In fact, however, the circumstances of the different Claimants do differ, bothin relation to the dates of their acquisitions of their shares and thecircumstances of Northern Rock at those dates . . . we have sympathy for thesmall 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 towithdraw their deposits. There, in modern Britain, was an old-fashionedbank-run. Just six months prior, Northern Rock had announced record profitsgenerated by its capacity to securitize and sell loans to investors across theglobe. But fortunes, as it were, quickly changed. By February 2008 the Rockwas broke and the government nationalized the bank. The New Labourgovernment's actions immediately created controversy. Within contem-porary Britain, the `N-word' ± as BBC News called it4 ± is, on the Right,associated with the failures of the welfare state and is equally maligned bymany on the Left. Indeed, Tony Blair and Gordon Brown's New Labour hadlargely distinguished itself from its predecessors by its repudiation of ClauseIV in the Òld Labour' Constitution that called for public ownership ofindustry. But the old spectre of nationalization has returned in a strange newguise. In recent debates about Northern Rock, generally laissez-faire mediasuch as the Financial Times and the Economist advocated temporary publicownership5 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 torenew old debates around the politics of property and the propriety of

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1 House of Commons Treasury Committee, Fifth Report, The Run on the Rock HC(2007±08) 56-I, 19.

2 SRM 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 theExchequer, 23 July 2010.

4 BBC News Online, `What was the last nationalisation?' (18 February 2008) at <http://news.bbc.co.uk/1/hi/magazine/7250668.stm>.

5 A. Brummer, The Crunch: The Scandal of Northern Rock and the Escalating CreditCrisis (2008) 94.

6 Justice Litle, `Macro Musings: Northern Rock Exposure' (26 September 2007) at<http://www.marketoracle.co.uk/Article2263.html>.

ß 2012 The Author. Journal of Law and Society ß 2012 Cardiff University Law School

different ownership forms. The vicissitudes of Northern Rock's ownershipstructure ± from mutual building society to corporate bank, turned publicenterprise, and most recently re-privatized following the Rock plc's sale toVirgin Money on 1 January 2012 ± makes it a particularly compelling casethrough which these conflicts are being resuscitated. Tracing its origins tothe nineteenth century, Northern Rock had operated as a mutual buildingsociety for most of its history. It was òwned' by its customers (depositorsand borrowers) and operated by statute as a non-profit organization on thepremise 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 Rockbecame tradable assets. This permitted business practices based on the sameprinciples: in the decade following demutualization, Northern Rock's totalassets grew from £18 billion to £113.5 billion, primarily via the alchemy ofmaking mortgages into marketable securities.7

The collapse and nationalization of Northern Rock has generated anumber of important consequences in Britain and the North East of England.But one of the more direct and profound pecuniary effects has been felt byshareholders whose ownership rights were extinguished upon national-ization. Angered by what they call `theft' and `confiscation', these investorshave promised to fight for richer recompense despite two judicial findingsagainst their claim by the courts, as well as the rejection of a third hearing infront of the Supreme Court.8 They are now pursuing redress in the EuropeanCourt of Human Rights (ECtHR) on the grounds that the British governmenthas violated their right to `peaceful enjoyment of [their] possessions' pro-tected under Article 1 of Protocol 1 of the European Convention on HumanRights. The case is not expected to be heard until 2013.

The litigants in the case are composed of two types of investors. The leadclaimants are institutional investors who held 75 per cent of the shares inNorthern Rock at the time of nationalization. The largest institutionalinvestors and the two lead plaintiffs are Cayman Island-based RAB SpecialSituation (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 speculativebet they would gain windfall profits either from a rally of Northern Rock'sstock, or a handsome payout from government. Between 14 September 2007and 12 February 2008, SRM became the largest shareholder in Northern

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7 H. Shin, `Reflections on Northern Rock: The Bank Run that Heralded the GlobalFinancial Crisis' (2009) 23 J. of Economic Perspectives 101±19.

8 For instance, Jon Wood, head of SRM, equated nationalization without compensationto `commercial vandalism': L. Armitstead and J. Sibun, `Northern Rock investors firestarting gun on lawsuits' Sunday Telegraph, 2 March 2008.

9 Legal & General, the third largest institutional investor in Northern Rock, joined thecase as an interested party.


Rock, taking control of 48,452,655 shares or 11.5 per cent of the ordinaryequity. During the same period, RAB acquired equity stakes totalling34,444,299 shares, or 8.18 per cent of ordinary share capital.10 Theirlitigation boldly raises the philosophical stakes as to whether, if they arelegally defined persons, hedge funds have human rights.11 The second groupof litigants are composed of some of the 150,000 individuals who held about25 per cent of the shares in Northern Rock at the time of nationalization.Many of these plaintiffs organized themselves through the Northern RockShareholder Action Group, an organization that took shape under theauspices of the UK Shareholders' Association. While some of theseindividuals acquired shares through the stock market, many acquired them atdemutualization or as employees of the company under various pension andemployee share schemes.12

In this article, we do not set out to add to the literature by proposingbanking or shareholder reform. Rather, we explore perceptions and practiceof shareholding among former individual North East-based shareholders inNorthern Rock with the purpose of telling their unique story as a con-tributory insight and contextualization of the debates about regulatory reformand democratizing finance. This story is pertinent as evidence of the growingdissonance between individuals trying to be responsible financial citizens assmall private investors within the context of extreme risk taking by financialelites. The consequences of that dissonance, played out on the broader globalstage by the Òccupy' movement's recent protests, are manifest on a morelocalized scale in the story of the individual North East-based Northern Rockshareholders. An empirical investigation into the rights and responsibilitiespopularly imagined to accrue to shareholders is illuminating for a variety ofreasons. Although the common law and legal statutes are conventionalstandards of reference for such an inquiry, they may be lagging indicatorsbecause they are based on past precedent, and legislation and judicialdecisions frequently emerge only after the `need for law' has crystallized.Indeed, the `necessity' for legal change is itself very often driven by changesin the popular imagination of financial instruments, which then reconstitutesthe 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 òwned' by those

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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 <http://www.uksa.org.uk/>.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 contributingfactors behind the ongoing financial and fiscal crisis. For instance, recent research hasindicated that nearly three-quarters of the British population think they are legalowners of the money in their current account when, in fact, by law they are owned bybanks: see Carr v. Carr (1811) 1 Mer. 541 n.; 35 E.R. 799, Foley v. Hill (1848)H.L. Cas. 28; 9 E.R. 1002; A. Evans et al., Public Attitudes to Banking (2010) at


who held building society shares. Yet, as Mark BoleÂat, former head of theBuilding Societies Association (BSA) observed, shareholders in buildingsocieties generally tended to `regard themselves as depositors rather than theowners of the societies'.14 However, this self-understanding changed in thecourse of the 1990s, largely as the consequence of campaigns by groups whostood to benefit financially from the conversion of mutual companies intocorporations, namely, executive managers and investment banks.15 As a result,there was a widespread re-imagining by shareholders of themselves asòwners' of building societies, and overdue claims on the accumulatedsurpluses of building societies, re-imagined as undistributed profits. As JohnKay observed, this popular re-imagining resulted in `the breaking down of whatwere previously seen as strong historical taboos against the distribution of theseaccumulated assets.'16 Once building society shares were refigured as revenuerights, the demutualization of Northern Rock and other building societiesfollowed suit, creating more new shareholders in the United Kingdom than allother privatizations of British industry in the 1980s and 1990s combined.17

As Northern Rock's history indicates, the continued legitimacy of legalrelations hinges on their possessing some coincidence with the actual cultureof 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 forthis kind of inquiry. It allows us to grasp whether human rights law sees andhears individuals' perceptions of what they believe they are owners of, andhow it weighs those individuals' perceived entitlements as deserving of legalprotection as property rights ± essentially the gap that former Northern Rockshareholders will now need to persuade the ECHR Court in Strasbourg tosuture.

Our article examines the situation of Northern Rock's individual share-holders from a number of different angles and proceeds as follows. In thisfirst section, we briefly recount the shareholders' case, focusing in particularon the distinction drawn by the courts between expropriations on economicgrounds from expropriation on the grounds of political ideology.18 Thefollowing section then examines the claims of shareholders that they have

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<http://www.cobdencentre.org/?dl_id=67>. In other words, most people understandtheir current accounts as custodies rather than contracts. This misperception may haveplayed 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 financial

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.


been expropriated and argues how, from a slightly different angle, they couldthemselves be seen as expropriators. The third section draws on interviewand internet data to understand the meaning of shareholding as it took shapein practice among former Northern Rock investors. The purpose of thisthreefold approach is to examine the different legal, economic, and personalperspectives and perceptions of shareholding and the rights and respon-sibilities of ownership that it provides and, in so doing, to contextualize theunique story of Northern Rock's small individual private investors. Weconclude by offering some historical context in which to situate the recentlitigation.

CONFISCATION, COMPENSATION, AND THE COMMON INTEREST

The first hearing of the shareholders' case occurred between the 13 and 15January 2009. As the court observed, the shareholders did not `challenge thedecision to nationalise Northern Rock itself: their challenge relates to theprovisions of the compensation scheme'.19 When Northern Rock had beennationalized by Parliament on 22 February 2008, Clause 6 of the Compen-sation Scheme Order declared Northern Rock insolvent. Consequently, anycompensation payable to the shareholders had to be calculated from thepremise that Northern Rock was no longer a going concern.20 In addition,under section 5(4) of the Banking (Special Provisions) Act 2008 ± thelegislation which nationalized Northern Rock ± the appraiser appointed bythe government to value Northern Rock shares had to discount all financialsupport given by the Bank of England, and assume that such a `lender of lastresort' did not exist.

In bringing their suit, the shareholders' principal point of contention wasthat these assumptions were ùnlawful, immoral, and unethical'21 becauseNorthern Rock, in fact, was still a going concern. The court endorsedelements of this view. Specifically, the court noted that Northern Rockshould not have been assumed to be in administration because, under thethen applicable test based on the 1986 Insolvency Act, the firm's liabilitiesdid not exceed its assets. Rather, Northern Rock was illiquid, instead ofinsolvent.22 Nevertheless, the court accepted that the government acted notfor its own financial benefit but, as Alistair Darling, then Chancellor of theExchequer, put it, because `there was a genuine threat to the stability of the

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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 (12September 2008) , a t <ht tp: / /www.uksa.org.uk/f i les /press_releases/20080912_nrk_update43.pdf>.

21 UKSA, at <http://www.uksa.org.uk/action/northern_rock>.22 SRM, op. cit., n. 2, para. 30.


financial system and in order to avoid a serious disturbance in the widereconomy'.23

The court reaffirmed this justification for nationalization in hearings heldbetween the 10 and 12 June 2009. On appeal, the shareholders argued thatthe nationalization of Northern Rock represented an instance of unjustenrichment benefitting government. Specifically, the claimants' lawyersinvoked a principle of proportionality from the law of salvage: briefly, thatalthough someone might intervene and save another's property, theintervener (here the government) under common law is ordinarily notentitled to full compensation up to the value of the property saved. Thus, theclaimants argued, à reasonable balance should be struck between what ispaid to the rescuer of the endangered property and what is kept by theproperty's owner.'24 Applying this logic to Northern Rock, the claimantsmade the case that extinguished shareholders should be entitled to some ofthe future profits once the firm is re-sold to the private sector.

But in again finding in favour of the government, the court dismissed thisargument. Lord Justice Laws's view was that there is a critical differencebetween 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 abenefit on the shareholders of Northern Rock. The service which thosemeasures 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 theexercise, which was to prevent damage or further damage to the bankingsystem as a whole.25

In deciding the case, Lord Justice Laws therefore posited a distinctionbetween government èxpropriation on the grounds of political ideology' andexpropriation on the grounds of `protect[ing] the banking system'26 ± as ifthe latter were not shot through with political premises and value judge-ments. Obscured by the Lord Justice's distinction is that politics is at rootmeta-politics: the deciding of what should be open to political debate.Hence, the drawing of the line between those motivated by ideology andone's own position as ideologically neutral and technocratic is politicsplayed at its purest.27 Given that the financial crisis has now transformed intoa fiscal one, partly because of government interventions, in retrospect,protecting the banking system was a political choice with politicalconsequences.

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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. ZÏ izÏek, The Ticklish Subject: The absent centre of political ontology (2000) 192±3.


Even if we grant the shaky distinction between political and economicexpropriation, it is unclear what evidence counts, and why, for categorizinggovernment action on one side of the line rather than the other. In theNorthern Rock case, for example, the key piece of evidence backing thecourt's decision that the nationalization of Northern Rock was a `purelypractical measure'28 was a cost-benefit analysis carried out by GoldmanSachs. However, Goldman Sachs has refused disclosure of the financialmodels it used in advising the Treasury on Northern Rock to the NationalAudit Office.29 We therefore do not have the key piece of evidence whichestablishes the government's (and Goldman Sachs's) reasons fornationalization.

In any case, with nationalization and the share valuation method legallyvalidated, the government-appointed appraiser announced in October 2010that Northern Rock shares were worthless and no compensation would bepaid to extinguished shareholders. Subsequently, the Northern Rock smallshareholders have filed a suit against the government in the ECtHR underArticle 1 of Protocol 1 of the European Convention for the Protection ofHuman Rights and Fundamental Freedom which states:

Every natural or legal person is entitled to the peaceful enjoyment of hispossessions. No one shall be deprived of his possessions except in the publicinterest and subject to the conditions provided for by law and by the generalprinciples of international law.The preceding provisions shall, not however, in any way impair the right of aState to enforce such laws as it deems necessary to control the use of propertyin accordance with the general interest or to secure the payment of taxes orother contributions or penalties.

The broad discretionary scope given to governments under the EuropeanConvention to expropriate private property suggests that the small share-holders have a weak legal case should they try to challenge the government'sdecision to nationalize Northern Rock.30 Given these circumstances, the besttactic available to Northern Rock small shareholders might be to take a cue

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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 <http://www.guardian.co.uk/politics/2009/mar/20/northern-rock-mandelson>.

30 But, arguably, governments' wide-ranging right to expropriate private property in thename of the `public interest' is precisely what today needs to be debated, withparticular urgency in the financial sector, where there is an incipient push for `macro-prudential' regulation to ride roughshod over `micro-legal' relations: J. Gray, `Whatis Systemic Risk and what can be done about it? A Legal Perspective', EUI WorkingPapers, RSCAS 2011/55 (2011). Indeed the two court decisions on Northern Rockmanifest a worrying prioritization of the `system' over and against its constituentsubjects, in violation of the liberal concept of rule of law, that `government' ± broadlyconstrued as either specific persons, or the `system' itself ± should not possess rightsricher than its constituent citizens: see R. Epstein, Takings: Private Property and thePower of Eminent Domain (1985) 331.


from Lord Justice Laws's argument and assert that a distinction needs to bedrawn between, on the one hand, institutional investors, who actively tradedthese shares as part of a diversified portfolio subject to various different (andoften short-term) trading strategies, and, on the other hand, individualinvestors who held these shares passively since demutualization, perhaps as aresult of having acquired them through employment at Northern Rock, wherethey were subsequently held in trust as part of the various employee savings,share option, and bonus incentive schemes. Although there is no precedentfor this distinction in the common law, courts in the United Kingdom havesignalled openness toward distinguishing between different types ofshareholders:

The Claimants presented a united front before us. Although the representativesmall 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 inrelation to the dates of their acquisitions of their shares and the circumstancesof Northern Rock at those dates. With regard to those whose share acquisitionspreceded 13 September 2007, it is sufficient to refer to the situation of Mr.Dennis Grainger, the first named Claimant in the claim brought by theindividual shareholders, who explained movingly in his witness statement theproblems caused for him as a former Northern Rock employee by the statutoryassumptions of the Compensation Scheme.31

Still, we have some reservations that intent or the circumstances surroundingthe acquisition and subsequent custodial arrangements for shares is sufficientreason to draw such distinctions. Indeed orthodox company and property lawtheory would see this distinction as lacking proper conceptual foundation,and possessing the potential to sow havoc and uncertainty on settledproprietary arrangements and records of legal and equitable title. However,the distinction surely seems sound when viewed from the standpoint of theindividual employee shareholder, who has diligently responded to incentivesfrom both Northern Rock and government ± in the form of generous andpersistent income, national insurance, and capital gains tax incentives whichsurrounded the various employee share schemes run by Northern Rock upuntil nationalization ± in order to build up financial wealth as a good andresponsible modern `financial citizen'.32

TAKINGS THROUGH SHARING

However, one of the ironies with the shareholders' claims to being victims ofeconomic expropriation is that, viewed from a longer historical and criticalangle, they can alternatively be seen as its perpetrators. Suffice to recall that

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31 SRM, op. cit., n. 2, paras. 99±100.32 J. Gray and J. Hamilton, Implementing Financial Regulation: Theory and Practice

(2006) ch. 6.


the corporate share has a hotly contested legal and political lineage inEngland. Historically, much of the critique of corporate shareholding derivedfrom the fact that incorporation depended on government approval, eithercrown charter or, after the Glorious Revolution in 1688, parliamentary con-sent.33 Government privilege was uncontroversial as long as incorporationwas applied to `publicly-spirited' bodies such as churches and universities.But once corporate charters were extended to private profiteers in thesixteenth century, conferring on them monopoly privileges in colonial terri-tories, corporations and corporate shareholders became objects of popularcriticism 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 otherpeople's money than of their own, it cannot well be expected that they shouldwatch over it with the same anxious vigilance with which the partners in aprivate copartnery frequently watch over their own. Like the stewards of a richman, they are apt to consider attention to small matters as not for their master'shonour, and very easily give themselves a dispensation from having it.Negligence and profusion, therefore, must always prevail, more or less, in themanagement of the affairs of such a company.

Particular scepticism surrounded the appropriateness and applicability ofthe corporate form to banking. As Bagehot tells us, well into the nineteenthcentury à great number of thinking persons feared that the joint stock bankswould fast ruin themselves, and then cause a collapse and panic in thecountry.'35 The sources of this scepticism reach back to the collapse of theSouth Sea Company in 1719±1720.36 The South Sea Company had beenformed in 1711 as a subsidiary of the Sword Blade Bank syndicate.37 TheEnglish government authorized the company, in an effort to reduce theburden of its national debt accrued principally in the course of the War ofSpanish Succession (1701±1714). In order to reduce the size of the nationaldebt, the government encouraged a debt-for-equity swap: fixed-interestgovernment bonds were exchanged for variable-yield but liquid stakes in the

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33 B. Carruthers, City of Capital: Politics and Markets in the English FinancialRevolution (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 GlobalEconomy from Tulips to Today: Contagion and Consequences' (2001), at <http://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 ofCommons: Ì 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: amajor historical event when a speculative bubble in financial markets burst.' V. CableMP, 469 H.C. Debs. col. 371 (12 December 2007).

37 C. Kindleberger, A Financial History of Western Europe (1984) 76.


South Sea Company,38 whose value was underpinned by the corporation'sexclusive 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 SwordBlake Bank for that purpose. However, when in 1720, these loans were notrolled over, the stock price of the South Sea Company dropped, taking therest of the market with it.40 In Britain, the event created a long-lastingprejudice against corporations generally, and banking incorporation inparticular.41

Still, the efficacy of popular prejudice should not be overstated. Morerelevant was opposition to the corporate form and limited liability fromwithin the banking industry itself. Observe that following the collapse of theSouth Sea Company, the Bank of England was the only corporate bank inEngland for over a century, as part of the privileges extended to it formonetizing the national debt.42 Although the banking crisis of 1825±26generated legislative reform (the Joint Stock Bank Act 1826 and the BankingCharter Act 1833) which made incorporation possible for other banks, it isnotable that fully three-fourths of banks remained private partnerships intothe 1850s.43 The pre-eminence of partnership in the banking sector helpsexplain the fact that fourteen of the seventeen banking witnesses calledbefore the Royal Commission convened to debate the Joint Stock CompaniesActs in the 1850s opposed the extension of limited liability to corporatebanks. As James Taylor has noted, it was simply not in the financial interestsof most banks to support limited liability legislation which would bolster thecapital of competition.44

Extension of limited liability to banks and corporations enabled share-holders, in the words of one contemporary, `to speculate for profits withoutbeing liable for losses', to holding shares in multiple companies, and so to be

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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 thechartering of corporations.

42 S. Quinn and W. Roberds, Àre On-Line Currencies Virtual Banknotes?' (2003) Q2Federal Reserve Bank of Atlanta Economic Rev. 1±15, at 8. The Bank of Englandreceived this privilege on a short-term basis in 1697 and then permanently in the Actof 1707. All other banks in England and Wales were restricted to a maximum of sixpartners: 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 thefailure of many of the new ones after the aforementioned crises of the late 1830s. TheJoint-Stock Bank Act of 1844 imposed higher capital restrictions for the formation ofcorporate banks and this remained a formidable barrier to entry until their removal in1857: id., pp. 72±3.

44 J. Taylor, Creating Capitalism: Joint Stock Enterprise in British Politics and Culture,1800±1870 (2006) 151.


ìn the market' rather than ìn the company'.45 As Paddy Ireland has argued,ìn the changing language of the statutes of the time, people no longer`̀ formed themselves into'' companies but `̀ formed'' companies, objectsexternal to them.'46 The new form of property:

had ceased to be a `personality-rich' phenomenon in which it fundamentallymattered who the parties to the relationship were and had instead become a`personality poor' phenomenon in which `the personalities of the parties to therelationship determined nothing of its nature'.47

Criticism of corporate shareholding in Britain remained vigorous into thetwentieth century. Keynes, for instance, complained that nominal corporateowners of enterprise are `concerned, not with what an investment is reallyworth to a man who buys it `̀ for keeps'', but with what the market will valueit at.'48 At root, Keynes's criticism appears to have been motivated byrevulsion with the character of the corporate share many find most attractive± its transferability, liquidity, and alienability. The prioritization ofdisposition over use and possession as the incidents most meaningful toòwners' of financial `property' offended Keynes because it seemed tocontravene the positive role liberal theory ascribed to property in actualizingindividuality and civilizing citizens.49 On the contrary, Keynes likened thestock 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 . . . [butrather] what average opinion expects the average opinion to be.50

Corporate shareholding became a problem for Keynes against the backdropof a liberal cultural context, where the meaningful measure of individualaction is partly determined by its degree of self-determination.51

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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 LegalStudies 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 inorder to pay dividends, obscuring the deeper truth that `there is no such thing asliquidity of investment for the community as a whole': J.M. Keynes, The GeneralTheory 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 indetermining the profitable work available for individuals in market societies: F.Nietzsche, Beyond Good and Evil (1886), compare L. von Mises, Liberty andProperty (1958).


But the most acerbic attack on corporate shareholders in the twentiethcentury came from Thorstein Veblen. Veblen denounced corporateshareholders as àbsentee owners' abstracted from the process of production.Although shareholders self-identified as èntrepreneurs' and ìnvestors',Veblen observed that because most shareholders acquired stock in secondarymarkets, their monetary ìnvestments' gave money to their sellers but not tothe companies whose revenue rights these titles represented.52 Thus, Veblenconcluded, corporate shares allowed the `kept classes' to earn a `freeincome' in perpetuity as long as the company existed, while employees whodid take èntrepreneurial risk' by making time-intensive and skill-specificinvestments in firms could be sacrificed on a financial quarter-by-quarterbasis.53

It hardly comes as a surprise to note that Veblen's views would havefound few friends at Northern Rock before the financial crisis. As the formerChairman of the Board, Sir John Riddell, once quipped:

I have no time for the argument that concentration on shareholder valueconflicts with the interests of other stakeholders. A single-minded drive toincrease 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

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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 structurallyinduced the `sabotage' of production itself. This followed from Veblen's critique ofmarginal utility theory at the core of much modern microeconomics: T. Veblen, `TheLimitations of Marginal Utility' (1909) 17 J. of Political Economy 620±36. Whilstproducing up to the point where marginal revenue equals marginal cost is efficient interms of maximizing net profits for the corporation, Veblen argued that profitmaximization constricted output and employment. Veblen further argued in TheTheory of Business Enterprise (1904) that speculation in the stock market distortedthe organization of industrial production through an expectations-reinforcingdynamic. Specifically, rising market capitalization of a firm based on its prospectivefuture earnings facilitated acquisitions and organic growth. This in turn increased thefirm's collateral for acquiring more funds, as well as its market capitalization incumulative 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 physicalassets of the firm might be liquidated, even though nothing in their productivity hadchanged through the cycle. The way the stock market acts as a conduit for productivedispossession has evolved. Consider leveraged buy-outs. In a leveraged buy-out,investors (often private equity firms) borrow money (often from banks) in order toacquire a controlling share in a corporation ± but do so using the assets of thecompany targeted for acquisition as collateral for the loan. In order to then repay theloan, assets of the company are often sold off and employees laid off in order toincrease cash-flow.

54 Northern Rock. Annual Reports and Accounts 2000 (2001) 4.


This was a viewpoint that Riddell's successor, Dr. Matt Ridley, echoed:`There is therefore no conflict between creating shareholder value and beingsocially responsible.'55

In terms of delivering `shareholder value' Northern Rock did well. Thefirm regularly produced an average 20 per cent return on equity (the ratio ofannual net income to average shareholders' equity), one of the key indicatorsinvestors use to evaluate companies. Indeed, Northern Rock outperformedthe FTSE 100 Index every year save one in total shareholder return, ameasure which aggregates the dividend per share of stock and their marketvalue (see Figure 1). As Figure 2 indicates, dividend per share tripledbetween 1999 and 2006. Not surprisingly, as earnings per share increased, sotoo did the market capitalization of the firm (Figure 3). In fact, in 2005 and2006, just before its crisis, Northern Rock's share price increased 59 percent, on the basis of balance sheet leverage of assets 57 times equity. Boththese leverage and share price figures were the highest among banks inEurope.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 andAccounts (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) overviewis provided by W. Lazonick and M. O'Sullivan, `Maximizing shareholder value: a newideology 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.


199

Figure 2. Northern Rock dividend per share

Source: Authors' calculations based on Northern Rock, Annual Reports andAccounts (2000±2007).

Figure 3. Earnings per share andmarket 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).


shareholders ± were both the primary beneficiaries and principal rationale forthe risky business model Northern Rock developed, and the transitory,ultimately illusory, profits the firm generated (see Figure 4). From thestandpoint of orthodox corporate theory, Northern Rock small shareholdersfailed 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 suchbecause of the structural position they occupy is crude. The shareholdersenvisioned by Keynes, Veblen, and other twentieth-century critics of thecorporation were investors who actively traded these revenue rights infinancial markets, thus creating market volatility which adversely impactedon the productive activities of the firm. While some former investors inNorthern Rock fit this description, others do not, particularly those share-holders who were long in the firm's equity. Like other objects, the meaningof shares depends not only on the potentialities intrinsic to them, but on whatis done with them by people in practice.57 The next section thereforeexamines shareholding from the angle through which these shareholdersperceived it.

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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'sbiggest 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 Colonialismin the Pacific (1991).


FOILED WEDDINGS AND A FUNERAL

In order to understand the phenomenology and practices of former NorthEast-based Northern Rock shareholders, we collected evidence from anumber of written sources, including user generated content located on theUKSA'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 formerNorthern Rock shareholders and spoke informally with a handful of others tocapture their own-word texture and tone (see Box 1 for a summary of thequestionnaire results).

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Box 1. Summary survey results

Fourteen questionnaires were distributed and completed prior to the focusgroups (June 2011) and individual interviews (July±August 2011).

All respondents acquired their shares when Northern Rock demutualizedin 1997 either having held a savings account (36 per cent) with the Rock orboth a savings and mortgage account (57 per cent). Over a quarter ofrespondents acquired additional shares through Employee Share and/orPension Schemes, with a minor group (14 per cent) acquiring NorthernRock shares through the stock market. The majority of respondents heldfewer than 750 shares (57 per cent), but a small percentage had a significantholding of up to 18,000 shares when the Northern Rock was nationalized.Before acquiring their Northern Rock shares, 71 per cent of respondentsheld no other stock market shares in other companies, and a decade later atnationalization, almost two thirds of respondents (64 per cent) continued tohold no other shares in other companies directly. Nearly all the respondents(93 per cent) had earmarked their Northern Rock shares for a specificpurpose, principally as part of their long-term retirement planning (36 percent) 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 alsoheld other types of investments, such as ISAs/Unit Trusts/OEICS (14 percent), cash ISAs (57 per cent), self-select Equity ISAs (7 per cent), PEPs (14per 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 onwhether Northern Rock should become a bank or remain a building society,with the majority of that group voting for demutualization (67 per cent). Interms of shareholder activity, over one third of respondents (36 per cent)had never voted in Northern Rock elections for executive directors andequal 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 asthe Annual General Meeting (14 per cent) with by far the majority neverattending such meetings (79 per cent).


On the whole, interviews were conducted in groups rather than indivi-dually. Our methodological presupposition was that a focus-group approachwas more conducive for generating meaningful responses, since collectivediscussion of topics can sometimes yield new insights which may not havedeveloped in isolated reflection. We felt this to be a particular concern giventhe topic and subjects of research. Since we suspected that shareholding andcorporate governance are issues rather peripheral to the everyday con-sciousness of our informants, we feared individuals might find themselves ata loss for words in one-on-one interviews with a trio of academics withoutcues 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 weresparked by the comments of other persons ± as occurs in real life.58 Groupinterviews thus allowed us to bring to the surface ideological underpinningsof otherwise fuzzy feelings of being let down or outrage. At the same time,`groupthink'59 was minimized by repeatedly emphasizing to the groups thatwe were interested in hearing competing perspectives, and establishingground rules to ensure different voices were heard.

Participants for the focus groups were primarily recruited through anarticle written up in the local Newcastle Journal newspaper.60 Before theinterviews took place, a survey and script were composed and pilot tested oncolleagues working in the Centre for Urban and Regional DevelopmentStudies at Newcastle University. The survey results appear on the followingpages. It should be noted that although the interview script provided the basison which we asked questions in the focus groups, it did not structure theseinterviews rigidly, since we wanted to foster free-flowing conversation. Thefocus groups themselves were conducted at the university, and participantsreimbursed for their travel expenditure, as well as offered variousrefreshments. 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 inNorthern Rock differently from when they held mutual shares in NorthernRock building society. For the most part, former shareholders did notexercise any of the new rights afforded them as òwners' ± no evidence wasfound of shareholder àctivism', and less than half of respondents reportedexercising their voting rights in annual executive director elections. Ofcourse, there is a voluminous interdisciplinary literature comparing andcontrasting mutual shares versus corporate shares in terms of their intrinsicinstitutional mechanisms for aligning the interests of managers with those of

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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.


owners.61 Evaluated within this rubric, scholars have debated the structuralmerits of corporations and mutual companies in terms of which form ofenterprise induces their giving greater regard to owners.62

But one of the taken-for-granted assumptions on which this body ofscholarship proceeds is that equity holders understand themselves, and are tobe understood, as òwners' of enterprise. The empirical evidence we

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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 versusmutual ownership structures: The Risk Implications' (1993) 66 J. of Business 29±46;T. Clarke, Ìn Defence of Mutuality' (1998) 7 Corporate Governance: A EuropeanRev. 97±102; R. Lewin, Ìnvestigating the benefits of mutuality: A discussion of thedemutualisation trend' (2002) 7 J. of Pension Management 313±36; S. Letza, X. Sun,and J. Kirkbride, `Shareholding versus stakeholding: a critical review of corporategovernance' (2004) 12 Corporate Governance 242±62; B. Howcroft, `Mutualityversus public company ± the debate in Europe and the USA' (1999) 7 CorporateGovernance: An International Rev. 167±77.

62 One issue that is debated are the advantages and disadvantages of concentrated versusdispersed 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 tobecome active in internal governance because of the difficulty of putting togethercoalition of voters and the risk that other individuals' free ride on the action ofothers attempting to do so.

(J. Cook, S. Deakin, and A. Hughes, `Mutuality and Corporate Governance: TheEvolution of UK Building Societies following Deregulation' (2002) 2 J. Of CorporateLaw Studies 110±38, at 120.) By contrast, it is argued that the control of large blocksof corporate shares by institutional investors in modern equity markets mean thatmanagers will be made more accountable because `shareholder activism will be moreeffective': N. O'Sullivan, Òwnership and Governance in the Insurance Industry: AReview of the Theory and Evidence' (1998) 18(4) Service Industries J. 145±61, at145. Defenders of mutual companies have countered that although blocks of sharesowned by institutional investors might amplify the `voice' of owners inside a firm, theèxit' option available to mutual shareholders is more potent than the comparableoption in corporations: L. Drake, `The Economics of Mutuality', BSA project paperno. 3 (1997). So, for instance, building society shareholders retain the option towithdraw 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 Profitabilityin Banking' (2004) 36 J. of Money, Credit, and Banking 1069±90, at 1074. Bycontrast, in order to èxit' a corporation, an owner must first find a buyer, and the sale,while impacting the price of shares in secondary markets, does not affect theoperating capital of the firm itself: D. Llewellyn and M. Holmes, Ìn Defence ofMutuality: A Redress to an Emerging Conventional Wisdom' (1991) 62 Annals ofPublic and Co-operative Economics 319±54, at 325. In addition, defenders of themutual model for financial institutions note that since mutual companies do not needto distribute dividends to external equity holders, they can theoretically use theretained earnings to offer more competitive rates to both depositors and borrowers.One study based on data from eight building societies in the United Kingdom thatconverted between 1995 and 2000 found managers at converted societies raisedproduct prices to improve profits for shareholders but at the expense of depositors andmortgagees: S. Heffernan, `The effect of UK building society conversion on pricingbehaviour' (2005) 29 J. of Banking and Finance 779±97.


collected calls into question this theoretical presumption. The conversion ofNorthern Rock into a corporation did not appear to generate any heightenedstewardship over the firm. More broadly, the experience of holding equitystakes in Northern Rock appeared to have little impact on small share-holders' self-conception as financial citizens. Rather, the experience ofhaving had their Northern Rock shares extinguished has hardened andaffirmed their scepticism of stock market shareholding. `Well I would neverbuy any shares at all,' said one respondent. Ì'd rather save it and knowwhere my money is. I would never speculate.' Similarly, another respondentdeclared, Ì have not touched shares since.' Other respondents describedthemselves 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 ofhis 89-year-old father and spend money rather than save it.

In general, our respondents placed blame for the Northern Rock run onparticular persons rather than practices such as balance-sheet leverage.Although some criticized the former CEO, Adam Applegarth, equal orgreater blame was placed on government regulators such as the FSA,departments such as the Treasury, and politicians like Gordon Brown. On theNorthern Rock Small Shareholders' blog, Angelique Hunt's comments sumup a sentiment expressed by many of our respondents: `We lost roughlytwenty thousand shares, and we're discusted [sic] with the way the govern-ment handled the whole situation.'63 `The reality is that the Government hasstolen £30,000 from us,' said Malcolm Todd, a former Northern Rockshareholder, to the local newspaper. `The whole financial sector collapse ofthe country is down to Government competence.'64 Another person oftenindicted was the BBC reporter Robert Peston who broke the news about theBank of England loan to Northern Rock ± illustrative of finding fault withthe messenger rather than the message. Here the tendency amongrespondents to place blame politically and personally is probably a functionof the essentially ex post reporting of Northern Rock's problems. By the timethese problems belatedly received wider, public recognition, political andregulatory authorities had assumed a more prominent role, obscuring the factthat their interventions occurred only after problems had been produced bythe private sector.

A concretistic concept of abstract economic processes in agentive andpersonal terms65 also characterized respondent understandings of the businessin which they were invested. Northern Rock was understood ratherstraightforwardly as a `Northern' firm because the bulk of its employment

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63 At <http://nrssg.blogspot.com/search?updated-max=2008-09-09T17%3A23%3A00%2B01%3A00&max-results=5>.

64 K. Simpson, `Government has stolen our £30,000' Newcastle Evening Chronicle, 14February 2009.

65 M. Postone, `History and Helplessness: Mass Mobilization and Contemporary Formsof Anticapitalism' (2006) 18 Public Culture 93±110, at 96.


and head office are located in the North East. In this spirit, a group of formershareholders and other North East stakeholders continue to maintain a Facebookpage with 241 members titled `Keep the Northern Rock Northern'.66 Similarly,in our focus groups, many respondents cited the fact that Northern Rock was alocal company as a key reason why they had continued to hold shares in thefirm, even after their price plummeted following the run on the Rock.

The connection of Northern Rock with the North was also stated as a factorfor the firm's purportedly unfair treatment by politicians and regulators. Ìwonder if a bank based in the Home Counties would have been allowed to goto the wall in the way we have seen with the `̀ Rock''?' exhorted onecommentator on the Northern Rock Small Shareholders' blog.67 Anotherelderly pensioner on the site lamented that she was a `lifelong Laboursupporter' and had believed that à labour [sic] government would look afterour welfare but they have also robbed me of the few Northern rock shares thatI had. Where will it all end?'68 A lack of sympathy to the plight of NorthernRock small shareholders from local Labour MPs came as a surprise to at leastone of our respondents: `He was a pit man; you would think he would supportyou, he was from the North East.' Likewise, another respondent in our groupinterview observed that `Northern Rock wasn't doing anything different tothe other banks,' but was treated differentially; authorities nationalizedNorthern Rock, whilst RBS and Lloyds received covert aid and capitalizationbecause these were Scottish and London banks, respectively. A furtherrespondent, in an echo of banking witnesses before the Royal Commission inthe 1850s, made the following suggestion:

I am very suspicious that the other banks were jealous of the success ofNorthern Rock. Northern Rock was punching well above its weight in themortgage market and I am sure that the City, the Big Four Banks, would lookat this whippersnapper based in the North East, who was carving a muchbigger share of the mortgage market than it was entitled to and I am sure thatthey put pressure on the Government. They wanted Northern Rock curbed.69

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66 Keep the Northern Rock Northern, at <www.facebook.com/group.php?gid=24819530256&refurl=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 <http://nrssg.blogspot.com/search/label/Members%27%20Commentary>.

68 Northern Rock Small Shareholders' blog, posted 13 October 2008, at <http://nrssg.blogspot.com/search/label/Members%27%20Commentary>.

69 One of the more entertaining moments occurred during the focus groups when DavidBholat (an American) asked the participants who they blamed for the failure ofNorthern Rock:

DB: . . . the million pound question is what do you think were the main factors thatcaused [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 anddumping them on the market without the liquidity problem ± it all started in America.


Ironically, the counterpart to the North East view that Northern Rock hasbeen punished because it was Northern and part of the `forgotten region,' is apopular belief in the City that the firm was given special privileges by theBrown government because of its location in a Labour Party stronghold.However, the deficiency with both viewpoints is the perception of NorthernRock in primarily spatial and antagonistic (North versus South) terms. Inpractice, the `Northern' in the Rock business was strongly diluted. Theliabilities of the company were global, and its main mortgage assets at thetime of the run on the Rock were, ironically, Southern English mortgages(see Figure 5).

Yet, regardless of the balance sheet, the company was still highlyregarded in the North East for its contributions to charity and employment inthe region. Dennis Grainger, a former employee at Northern Rock who heldshares worth £114,000 at the time of nationalization, and a key organizer inthe Northern Rock Small Shareholders' campaign orchestrated by UKSA,estimates he has spoken with 1,500 people in the region, and offered thesereflections:

It's been quite heartbreaking. I've had people crying at the stands. I've hadpensioners telling me that they can't now provide for their funeralarrangements. The strange thing is a lot of people in the North East regard

206

Figure 5. Geographical spread of Northern Rock gross residentiallending

Source: Northern Rock, Annual Reports and Accounts (2006±2009).


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 evengot one person who paid 40 per cent capital gains tax upon taking over shareswhen their parents died, paid the tax immediately, and then discovered theshares were worth nothing.70

Sombre stories about the negative downstream effects inflicted by theexpropriation of Northern Rock shares are now quite commonplace in theNorth East. One North East resident told the BBC that he had invested hissavings in Northern Rock shares right before the crisis to pay for hismarriage: `the Northern Rock fiasco wrecked our wedding.'71 In this vein,one interviewed respondent told us that she was friendly with an elderlywoman who had lost £100,000 worth of shares. `Shares are gamble aren'tthey? But she was soon to retire and she was going to sell them as part of herpension.'

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] . . . youdon't know they're going to keep falling . . .R2: and then they go back up againR3: [inaudible] shares go up and down. It's gambling. It's gambling basicallyisn't it?R2: Well it is.R3: You take a chance whether it makes you money or not andR4: Well I didn't think it was gambling buying Northern Rock sharesR5: 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 gamblessome of them have paid off; some of them haven't; some I have bought as aninvestment never dreaming, never dreaming, that Northern Rock would gobust. 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 stockmarket . . . if you like with my pension and my money but I looked upon theNorthern Rock as solid. It was a local company; been here for 150 years; it wasbasically well managed; it was a Northern company.R3: It appeared to be.R4: A NorthernDavid Bholat: What inspired that confidence in Northern Rock . . . because asyou mentioned some of the most stalwart industries here in the North withinthe last fifty years ± mining and coal and all these things ± had gone,apparently dramatically; but you kinda [sic], pretty pointedly are saying youknow that Northern [Rock], you thought, was solid . . .R4: The banks were a safe bet . . .

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70 BBC News Online, `Northern Rock ± Your Stories', at <http://www.bbc.co.uk/tyne/content/articles/2008/08/11/northern_rock_stories_feature.shtml>.

71 id.


DB: So the banks were a safe betR4: . . . 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 NorthernRock firm. As one respondent stated:

I found out quite soon it was absolutely pointless voting if you wanted tochange any of the Board because it was all done by block voting by the bigcompanies. 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 inthe people they wanted to keep in. It was all a big club.

Another person interviewed said that, às a shareholder I felt I had very littleinfluence whatsoever on how the company operated. I felt the Directors plusthe FSA were my safeguard.' A former employee at the company noted thatshe saw her shares as a `staff benefit: I didn't really think about it in terms ofmy 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 casualattitude toward them. Though some of our respondents reported following theshare price of Northern Rock in the newspaper, 79 per cent of those inter-viewed reported never attending an annual general meeting. One respondenttold us that although he thumbed through the annual report ìt was verycomplicated. I didn't understand it, but I knew they were making a profit.'

The lack of active involvement of individual shareholders in monitoringNorthern Rock coincided with a view that this was the role that should beplayed 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 individualshareholders to those whose shareholding was held in trust, either throughemployee share schemes or through pension plans which, as one respondentexplained, èven if you don't own them yourself they are owned on yourbehalf'. In both cases there was a very clear sense from the respondents thatshareholders and trust beneficiaries are the objects of others' stewardship, to beprotected, limiting their obligation to ensure the proper running of the companyor of any monitoring of those whom they held as their custodians. Here thenwas a double disadvantage perceived by some of the shareholders who tookpart in our focus groups: it was `pointless' to vote because of the power of theinstitutional shareholders, but equally their interests should have been, butwere not, safeguarded by those whom the respondents saw as responsible forensuring the running of the Rock, that is, the Board of Directors or theregulator. The association of shareholding equally with feelings of powerless-ness and protection indicates the complex and conflicting conceptions ofownership and obligations held by the shareholders interviewed. In spite offeeling undeserving of `free' shares received during demutualization, theynevertheless expressed the view that `we want our money back'.

208


Although there was a general view of shareholding as a speculative betgoverned by mysterious market forces, shareholders still drew distinctionsbetween different classes of shareholders dependent on the scope of theirspeculative intent.72 One person interviewed observed that while everyone inthe 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'slost the lot. And to me that serves him right. He was just hoping they would goup; 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 basedon the scale of shareholding. One respondent who held few equity stakes inthe firm described herself as ìrritated' by the Northern Rock nationalization,but quickly deflected concern to those disproportionately impacted: Ì feel sosad for the people that badly went wrong and their life savings gone.'

By the same token, persons interviewed were more inclined to sympathizewith those who received shares through Northern Rock's various employeeand pension shareholding schemes, compared to those who had receivedshares as `freebies' during demutualization. `Should we be compensated forsomething we got for nothing?' reflected one respondent, in a voice echoingVeblen. Ì 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 ourdiscussion groups that monetary reward should be linked to merit, thoughwith no thought of a comparable position on inheritance. To the point, onerespondent 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 afunny kind of way I didn't feel I was entitled to [the shares].'

In sum, the shareholders interviewed often articulated a more sober senseof their just deserts than the institutional interest groups and lawyers arguingthe case on their behalf. There seemed broad consensus that holding shareswas by itself insufficient grounds for receiving compensation from thegovernment, particularly in individual instances where those shares had beengained simply by beneficence and arbitrary windfall, or intended for merespeculation, 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 shareholderbecause, 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 keepthe shares or funds for old age or whatever, but you had the opportunity to sellthem.R2: Oh you did.

209

72 Compare V. Zelizer, The Social Meaning of Money: Pin Money, Paychecks, PoorRelief, and Other Currencies (1994).


R1: At a very good price and even when the price started to drop you couldhave 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 andresponsibilities of ownership and enterprise, both bound up in the broadercontext of family, employment or regional ties as well as in an ultimatelymisplaced and oft misconstrued faith in the company structure andregulatory framework to protect their interests.

CONCLUSION: LATTER DAY WIDOWS AND ORPHANS?

This article has given voice to what may have been otherwise unheard storiesof small shareholder loss following the run on Northern Rock. On a finalnote, it is worth taking a retrospective view of earlier narratives around suchloss, for commentaries on Northern Rock often observe that it was the firstrun on a British bank since the failure of Overend, Gurney and Company in1866.73 As a historical fact, this observation is demonstrably false. Itcompletely obscures, for example, the run on so-called `secondary' banks inthe early 1970s, when the Bank of England arranged a bailout estimated at£2 billion74 or £12.5 billion in 2009 terms.75 But beyond the empiricalinaccuracy of the observation, there is, in addition, something false behindits intended rhetorical effect.76 The observation seems to position NorthernRock as a historical exception which could not have been foreseen byregulators, executives, and investors in the firm. Comments made by RichardLambert, CBI Director General, during the run on the Rock, sum up ageneral misperception:

Outside the movies, a run on the bank is something that happens in a bananarepublic. That one should have happened under our noses, in a mature andprosperous country, such as the UK, is almost unimaginable.77

Such claims are, unfortunately, contrary to the actual record; since 1945, theUnited Kingdom is tied with Argentina in having more banking crises thansixty 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 <www.measuringworth.com/ukcompare/result.php>.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

Working Paper 14587 (2008) 14±15, at <www.aeaweb.org/assa/2009/retrieve.php?pdfid=245>.


However, the comparison between Northern Rock and Overend, Gurneyand Company is instructive in other ways. As is now widely known,Overend, Gurney and Company had been a prominent London bankinghouse until its collapse on `Black Friday', 14 May 1866.79 Following itsfailure, the Bank Charter Act, allowing banks to take corporate form, wassuspended. For one of the last times, the propriety of the corporate form andgeneral limited liability was debated in Parliament. But the select committeethen convened to decide the matter concluded (in a refrain now familiar) thatextraordinary speculation ± rather than everyday legal structures ± wereresponsible. As James Taylor points out, the rejection of legal reform infavour of moral invectives in part rested on the belief that small share-holders, whom committee members called ìgnorant and foolish',80 were theauthors of their own misfortune. As the Times observed, anticipating theHouse of Commons Treasury Committee Report on Northern Rock by over acentury:

Who are really at the bottom of this huge mischief? The true authors are theywho are bringing down their own houses over their head ± the publicthemselves. Such is the universal rivalry, and such the habit of expenditure allabout 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 totrade is to lose caste, and, for the means of living, to lose life itself. So theuniversal wish is, with a little cleverness and a happy audacity, to reap the richharvest 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: thesewere the chief victims of the company failures . . . Distinctions were beginningto be drawn between speculative shareholders who deserved little pity andsteady shareholders who looked upon their shares as permanent investmentsand whose losses were to be regretted. Yet compassion for the latter wascurtailed by a conviction that they `have no more right to speculate than achild has to play with razors'.82

The problem in the present has been the tendency of employers, policymakers, and financial advisers to promote the practice of shareholdingthrough tax incentives and the myth of shareholder òwnership', withouthonest discussion of the real risks associated with this form of remuneration

211

79 See P. Barnes, À Victorian financial crisis: the scandalous implications of the case ofOverend Gurney' in Criminal Conversations: Victorian crimes, social panic, andmoral 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.


and investment. At Northern Rock, 95 per cent of eligible employees wereenrolled in one of the Employee Share Option Schemes.83 As one formeremployee interviewed reflected, the company's marketing of Save as YouEarn 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 shareholdersbound to Northern Rock by family and regional ties, it is clear from thisresearch that `playing with razors' and `speculation' were far from beingseen as fair and accurate descriptors of how they responded to the myriad ofincentives to assume the status of shareholder in Northern Rock. Instead,these feelings of being let down by a financial and legal system that appearsto serve the interests of elites and to exacerbate wealth and regionalinequalities should be foremost in the minds of those charged with regulatoryredesign and resilience-building measures in 2012.

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83 Northern Rock, Annual Report and Accounts 2006 (2007) 46.


Documents

Share and Share Alike? Hedge Funds, Human Rights, and Owning Enterprise in Britain