Guarantees fail to halt run on big British lender

Promises fail to halt run on British lender

September 18, 2007|By New York Times News Service

LONDON -- Terry Mays and his wife, both British retirees, decided during the weekend that a promise by the Bank of England to provide emergency financing for Northern Rock, the troubled British mortgage lender that has most of their savings, was not sufficient to calm their nerves.

The couple joined hundreds of other Northern Rock customers yesterday as lines formed for a third day in front of branches where people waited to withdraw their savings.

"I don't think the bank will collapse - but we just don't have the nerves," Terry Mays said, surrounded by a group of depositors who had traveled with him to the central London branch from a southern one after being told that the wait there would be at least six hours.

"I took some financial advice over the weekend, and I'm taking the money out to get peace of mind. We're relying on this money for our pension."

Panicky customers have withdrawn an estimated 2 billion pounds, or $4 billion, since the bank acknowledged Friday that it no longer could raise funds because of the credit crunch that has squeezed global markets after a meltdown in the market for subprime loans in the United States.

Unlike other banks that have been bailed out because of direct exposure to subprime mortgages, Northern Rock was the first to directly fall victim to the global credit squeeze, because it relied heavily on raising funds in the capital markets.

Shares in Northern Rock slumped 36 percent yesterday to a seven-year low, dragging European banking stocks lower across the board as jittery investors began scrutinizing banks to determine which ones might have a similar business model.

Alliance & Leicester and Bradford & Bingley, two Northern Rock rivals that also tap the capital markets, fell 31 percent and 15 percent, respectively.

Large financial institutions, including HSBC Holdings PLC, Societe Generale of France and Deutsche Bank AG of Germany also declined, leading a 1.5 percent drop of the European Dow Jones Stoxx 600 index.

Northern's woes ricocheted back to the United States, where Citigroup fell 61 cents, to $46.03. The S&P 500 fell 0.51 percent.

The overnight rate British banks charge to lend pounds to one another soared 60 basis points to 6.47 percent yesterday, the highest level in more than a month, according to the British Bankers' Association.

Citigroup, Credit Suisse Group and Merrill Lynch & Co. Inc. cut their earnings estimates for several European banks yesterday, including Northern Rock. Credit Suisse and Merrill said the bank was likely to be bought.

"We think the game is over for Northern Rock in its present form," a Merrill analyst, John-Paul Crutchley, wrote in a note to investors.

The specter of hundreds of Britons lining up to make withdrawals after the unexpected and speedy decline of Northern Rock has also sparked a raft of questions about whether the robust British economy - supported in large part by a heated housing market - would suffer in the aftermath of the subprime mortgage crisis in the United States. The pound fell below $2 for the first time in nearly three weeks.

Some economists said that the Northern Rock experience could dent consumer confidence and eventually have an effect on British economic growth.

Members of Britain's opposition Conservative Party yesterday blamed Prime Minister Gordon Brown for ignoring warnings of a "looming debt crisis" for the past four years and for encouraging consumers to take on record debt when he was chancellor of the exchequer during this period.

In recent years, British mortgage lenders began offering loans exceeding the value of the properties on which they were based. The easy availability of credit helped prop up property prices and fueled speculation in the real estate market.

Mervyn A. King, the head of the Bank of England, also came under pressure to explain why the bank bailed out Northern Rock only days after refusing to inject liquidity into cash-starved financial markets on the basis that such action encouraged "excessive risk-taking."

So far, assurances from Northern Rock chief executive Adam J. Applegarth and Chancellor of the Exchequer Alistair Darling that the Bank of England was backing deposits have failed to impress depositors.

In a bid to shore up confidence, Darling announced yesterday that the government would guarantee all deposits in Northern Rock - even if the bank should collapse - and would extend similar guarantees to any other troubled financial institution that approached the government. No other bank or institution had done so, he added.

Some of those waiting in line to retrieve their savings yesterday blamed what they called lax standards at both U.S. and British mortgage lenders for the shortage of funds at Northern Rock.

Northern Rock opened at 8 a.m. yesterday, an hour earlier than usual, to deal with the expected wave of withdrawals. It had to increase the bandwidth on its Web site, which had struggled with the volume of people trying to access it.

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