King's Handling of Crisis Provokes Renewed Criticism of BOE

By John Fraher

Sept. 19 (Bloomberg) -- Bank of England Governor Mervyn King's handling of the financial-market crisis is drawing renewed criticism from investors and economists.

King waited too long to extend an emergency lending program for banks roiled by worsening market conditions, said Keith Skeoch, chief executive officer of Standard Life Investments Ltd. Former Bank of England policy maker Charles Goodhart wrote in the Financial Times today that it was an ``error'' for the central bank to put a new deadline on the program in the first place.

``King unfortunately must shoulder some of the blame'' for the market turmoil that led to the near-collapse of HBOS Plc this week, Skeoch, whose company manages $256 billion in assets, said on BBC Radio 4's Today program. ``The bank needs to act much more like a central bank than a monetary policy authority.''

King, lauded last year by Alan Greenspan as one of the world's foremost central bankers, has struggled to earn as much praise for his crisis management as he has for fighting inflation. As central banks focus more on their role as backstops to the financial system, King has repeatedly warned that officials shouldn't be too lenient on banks that made bad bets.

A Bank of England official declined to comment today on the remarks by Goodhart and Skeoch.

As recently as Sept. 11, King said the central bank wouldn't extend its ``exceptionally generous'' emergency program after October. He performed a U-turn six days later when the collapse of Lehman Brothers Holdings Inc. derailed financial markets, provoked a loss of confidence among HBOS's investors and led the mortgage lender to agree to a takeover by Lloyds TSB Group Plc.

Investor Criticism

Lloyds TSB denied that it insisted on an extension of the central bank's emergency funding program before agreeing to the HBOS deal, the Daily Telegraph reported today. The newspaper cited an unidentified investor who criticized the central bank for a lack of pragmatism in handling financial institutions.

The central bank hasn't shown ``enough credibility on how they will stand behind the banking entities,'' Neil Dwane, chief investment officer for Europe at Allianz Global Investors' RCM unit, said in an interview. He manages $7 billion in assets.

``The real way to avoid the speculative attack on the banks was to extend the Special Liquidity Scheme facility'' on Sept. 15, Skeoch said today. ``The reason the stocks were being sold was because they thought there was a liquidity problem.''

Goodhart said the program ``should not be given a terminal date until we are out of the woods.'' He told Bloomberg Television yesterday that the banks are in ``real trouble'' and ``in these cases what you do is stuff them, it's like stuffing a goose.''

BOE `Backtracking'

The central bank is ``doing a little bit of backtracking,'' George Magnus, economic adviser at UBS AG in London, said in an interview. ``I didn't understand why they introduced the termination of the SLS in the first place.'' Still, ``if you end up doing the right thing, all is forgiven,'' he said.

Some economists argue that King's decision to extend emergency lending shows he has learned the lessons from last year's collapse of Northern Rock Plc. While he initially refused to follow the European Central Bank and the Federal Reserve in helping markets when they first seized up last year, his response this time has been faster.

The Bank of England has also joined the Fed and other central banks around the world in pledging an additional $180 billion for the financial system in an attempt to unfreeze markets.

``They've been more fleet of foot this time,'' said Brian Hilliard, director of economic research at Societe Generale in London, who used to work at the Bank of England. ``They had a rocky start, but everyone is learning on the job.''

The Bank of England must still avoid giving the impression that it's being too restrictive as the financial crisis persists, Goodhart said.

``Worrying about moral hazard in current circumstances is rather like refusing to sell fire insurance just after the Great Fire of London for fear of adversely affecting future behavior,'' Goodhart wrote today.

To contact the reporter on this story: John Fraher in London at jfraher@bloomberg.net