The real meaning of prudence

There is a fascinating story to tell about The Nottingham building society's performance in 2008.
At first glance, a 50% drop in operating profits – the true measure of how well a business has traded – seems a bit of a shocker.
It isn't, and here's why.
First things first. This is the worst recession in living memory and no one anywhere in the world has escaped its effects. They savings and homeloans markets The Nottingham operates in have been like a war zone.
Secondly, this is a mutually-owned building society, an organisation that is not meant to engage in a headlong chase after profits on behalf of voracious shareholders.
Third, the wise owls who run The Nottingham knew we were in for a tough time and made sure the one thing they did was stick to their knitting.
Fourthly, The Nottingham has been forced to hand £2.4 million of its profits over to the scheme set up to compensate the customers of failed banks, a rank injustice if ever there was one.
There are two telling insights which illustrate graphically the difference between an organisation that is genuinely prudent and one that couldn't resist the lure of a quick buck.
The first is that several financial services organisations tried to sell The Nottingham big, fat mortgage books which it could buy up and use to inflate its asset base and its profits.
The Nottingham turned down all of them, concluding that the risks involved outweighed the potential rewards. Hence, it bought none of the 'toxic' assets that poisoned lenders like the Bradford and Bingley – which splashed out money on them like a drunk at a stag do.
The second insight – one which has a particular relevance to another Nottingham institution – is this: the society stopped investing in Icelandic banks in 2006 because it considered it was getting too risky.
Its own treasury team – a small, but sharply-focused bunch – decided that their own analysis of what the Icelandic banks were up to, the size of the Icelandic economy and anecdotal economic evidence all pointed to a financial equation which, from their perspective, no longer made sense for a prudently-run mutual organisation.
Nottingham City Council should reflect long and hard on that analysis. It was still putting millions of taxpayers' money into Icelandic banks in 2008 and it is now stuck there.
The City's justification was that ratings agencies said investing in Iceland was still okay, which is another way of saying it had outsourced the oversight into £42m worth of investment.
As one seasoned observer put it to me: "There is ratings agencies and there is what you hear, read and see. Your knowledge of the people you put your money with and what they are doing must be comprehensive and robust."
The Nottingham's was, the City Council's wasn't.
Though it isn't The Nottingham's style (and certainly not that of its chief executive, Ian Rowling, pictured), it can afford to give itself at least a small slap on the back when all around it appear to be losing their shirts.
There was a time in the 1990s and early noughties when it was popular to poke fun at building societies for being old-fashioned and off the pace when everyone else was laughing all the way to the bank.
At a critical moment in economic history, they have proved far more robust businesses than the banks.
So who's laughing now?