Silicon Insider: A Banking Crisis and New Cybercriminals

Sept. 20, 2007 — -- I remember as a kid, my parents, both children of the Great Depression, telling me of bank runs. And, of course, like everyone else, I've seen a run on a bank dramatized in "It's a Wonderful Life," but I never expected to see one in the 21st century, and especially just a few blocks away from my apartment.

As I've noted in my last few columns, I'm temporarily living in London working on a book. And so, despite all odds, this Silicon Valley suburban boy found himself in Westminster, first walking through the crowds at Victoria Station trying to crowd onto buses during the subway "tube" strike, and then, against all odds, watching long lines form in front of Northern Rock offices in a classic bank run.

In case you missed the story, a week ago, Northern Rock, one of Britain's biggest mortgage banks, found itself short on funds and forced to go begging at the Bank of England for backup funds. Once word got out, depositors panicked — within hours long lines were queuing up in front of Northern Rock branches all over the United Kingdom.

That night, the TV news led with the story, creating even more hysteria. And, of course, the various media pontificators cast about for a scapegoat — settling, as usual, upon Europe's favorite bete noire, the United States. In this case, poor Northern Rock was yet one more victim of the growing worldwide banking crisis brought on by those greedy Americans and their addiction to subprime loans.

Whatever. You learn very quickly over here that the United States is, in the eyes of much of the world, trapped in a house of mirrors of contradictions from which we can never escape in their eyes: We are both philistines and much too dominant in cultural matters, too conformist but too free, a threat to the world but everyone's last resort as savior, an economic catastrophe but also with too much control over the world's economy.

Blah blah blah…

And, of course, the fact that you probably didn't even hear about the Northern Rock bank run, while they know all about a bus crash in Winnemucca, Nev., makes Brits absolutely crazy.

So, do you need to care about the Northern Rock bank run? Naah, probably not.

It was basically over the next day, when Northern Rock announced that, backed by the Bank of England, it was covering all deposits. By then, an estimated 75,000 depositors, out of a total of 1.5 million depositors, had managed to close their Northern Rock accounts.

Then, three days ago, the chancellor of the Exchequer (the equivalent of our Treasury secretary) announced that the Treasury would cover all accounts reopened at the bank by midnight Wednesday night. With that news, Northern Rock shares, which had been in free fall from the prerun price of 2 pounds, finally leveled off at 1.76 and then quickly climbed back to 1.98.

So everything was looking good … until this morning, when the government announced that while it would still back existing accounts at Northern Rock, it would not offer the same guarantees to new accounts. This is basically the kiss of death.

As the markets opened in England this morning, Northern Rock shares were again plummeting — and there's growing talk of the bank being bought by Lloyd's Bank, assuming the Bank of England gives its OK. The Northern Rock Web site is carrying a brave note from the chairman: "We will prevail!" But nobody believes it.

Banks as Cybercriminals?

So, why is any of this of interest, especially in a column devoted to tech and society? Because, one little item in the middle of this story caught my attention. It was a quote by a Northern Rock depositor who, seeing the long line in front of his local branch, decided to be clever and go online to withdraw his funds. The response: The server was currently busy.

That wasn't surprising. So he tried again. And again. And again. The same reply every time. Forty-eight hours later, he was still getting a "server busy" reply. Needless to say, he had long since come to the conclusion that the system wasn't overloaded at all, but that Northern Rock had simply locked down the system.

For 20 years now, we've all been worried about cybercrime, identity theft and the loss of privacy in regards to banking on the Internet. Some people are so fearful of the Wild West Web that they simply refuse to bank there.

But what never crossed my mind, and I suspect not yours either, is that the banks themselves might pose a threat — that they might, willy-nilly, choose to lock their virtual doors in the same way that they historically have shuttered their real ones.

As that Northern Rock depositor ruefully discovered, online transactions are only frictionless when neither party slams on the breaks. And one can easily imagine that, for every anxious figure waiting in the queue in front of some Northern Rock branch offices, there were 100 sitting at home pounding on their keyboards in frustration.

During the early days of the Web, as with every tech revolution, there was no shortage of prognosticators who announced that the Internet would bring about a better world, our very own online Bedford Falls.

But the lesson from this week's Northern Rock meltdown is that that, even in the 21st century, with the ability to sit in our own homes and move our assets around in microseconds, there is still no Jimmy Stewart out there to save us. And when things go bad, no matter how nice and friendly your online bank was during the good times, it can turn into Potter Bank at computer speed.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the bestselling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNEWS.com Silicon Insider columnist since 2000.