Northern Rock Update

[HenryTo]

The bank - as an independent going concern - is now numbered:

http://news.independent.co.uk/business/news/article2970870.ece

[HenryTo]

Tumbles 34% at the open:

http://www.bloomberg.com/apps/news?pid=20601087&sid=avrOgElXKYSA&refer=home

[HenryTo]

I beg to differ with the E&Y forecast below. By definition, a "worst case scenario" cannot be modeled - and even if it can be - I doubt we will only see a 1% decline in the UK GDP, given that the UK economy is so dependent on the financial sector, the housing sector, and consumer spending.
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Bank's Strife May Shake UK Confidence
Monday September 17, 12:21 pm ET
By Jane Wardell, AP Business Writer
Concerns Arise That British Lender's Problems May Lead to Greater Crisis of Confidence

LONDON (AP) -- The panic engulfing mortgage lender Northern Rock PLC, Britain's fifth largest lender, may mark a watershed in the British economy by undermining the confidence of investors and consumers.

The surprise and rapidity of Northern Rock's plight have raised questions about how the potential impact of the collapse of the U.S. subprime mortgage market on Britain was so underrated.

Pleas for calm from the government and the mortgage lender itself again fell on deaf ears, as Northern Rock customers desperate to withdraw savings rejoined long lines outside its branches in Britain and Ireland.

"With the Wall Street crash in the 1920s, people were frightened and reluctant to put their money into banks so they kept it under their mattresses," said Roy Hornsby, 69, who was part of a line of about 50 people in Newcastle.

"So you can understand why older people are going to want to take money out," he said as he prepared to withdraw some, but not all, of his money from Northern Rock.

Spooked customers have withdrawn 2 billion pounds ($4 billion) since early Friday, when Northern Rock revealed that it had asked the central bank for emergency funds and warned that its profits would take a big hit.

Northern Rock shares tumbled 34 percent to 290 pence ($5.80) after trading in the bank was briefly suspended Monday, extending losses of a similar magnitude on Friday.

Analysts said the panic by both investors and depositors has made it almost certain that Northern Rock will be sold.

"The images of customers queuing up in the high street has done irreparable damage to the franchise," said Nic Clarke, an analyst for Charles Stanley & Co., suggesting that a buyer would have to move quickly to save the bank's reputation.

On a grander scale, the unfolding events may mark the beginning of a self-fulfilling prophesy.

"There is a very real risk that Northern Rock's problems, if not sorted out quickly, will have a significant dampening impact on both consumer and business confidence," said Howard Archer, chief U.K. economist with Global Insight.

"Extensive news coverage of people queuing up to withdraw their savings from Northern Rock could well fuel the fears that other financial institutions will be affected and increase general concern about the economic outlook," he added.

A crisis of confidence could spell the end of Britain's decade of economic growth under former Treasury chief and current Prime Minister Gordon Brown, should consumers reign spending and bring an end to a booming housing market.

Peter Spencer, chief economic adviser to Ernst & Young's ITEM Club, said that a worst-case scenario of the credit crisis could reduce Britain's GDP growth by around 1 percent in 2008 and 2009.

Northern Rock was the first British bank in 15 years to be bailed out by the Bank of England, although it has yet to draw any of the funding it requested from the central bank at an emergency rate last week.

The mortgage lender was particularly susceptible to the global credit squeeze sparked by U.S. banks granting house loans to Americans with poor credit histories -- the debts were then wrapped up in packages sold on to banks in Europe and elsewhere -- because it relies on the wholesale markets for 75 percent of its funding.

Though Northern Rock made loans mostly to people with good credit, investors interested in mortgage-backed securities have grown scarce, as have the short-term loans from other institutions that he bank had relied upon.

Despite reassurances from Treasury chief Alistair Darling that Britain's banking system is in good shape, shares in other mortgage providers also sank Monday.

Shares in Alliance & Leicester PLC dropped more than 15 percent, while another big lender, Bradford & Bingley PLC, fell 11 percent. HBOS PLC fell 5 percent, Royal Bank of Scotland Group PLC was off 4 percent and Barclays Bank PLC down 3 percent.

Opposition Conservative Party leader David Cameron led calls for a fuller explanation from the government.

"We need to know more about the chain of events that led to the bank's intervention," Cameron said, citing the potential need for regulation and transparency.

Analysts have blamed lending practices in Britain that saw some mortgage providers in recent years offering loans of up to 125 percent of a property's value and of as much as six times a borrower's annual salary.

The availability of credit helped prop up property prices as many Britons viewed the real estate ladder as a sure bet to make money.

Former U.S. Federal Reserve Chairman Alan Greenspan said that Britain was always more vulnerable to a credit squeeze than the United States because it has more adjustable rate mortgages, while Bank of England Governor Mervyn King has been urging caution in the housing market for some time.

[HenryTo]

Both the UK government and the Bank of England now guaranteeing all deposits at Northern Rock - something they should have stated over the weekend:

http://www.bloomberg.com/apps/news?pid=20601102&sid=aHEJoWQHjiCY&refer=uk

[HenryTo]

Guarantee widened to all banks in the UK financial system. This is an unprecedented bailout of UK banks. Crisis averted - at least in the UK anyway.

[HenryTo]

Northern Rock plunges again as the Financial Services Authority declared that new accounts won't be protected by the Bank of England guarantee. In other news, Citigroup says that the "maximum" bid value would probably be around 150 pence:

http://www.bloomberg.com/apps/news?pid=20601102&sid=aO_7NQnCOOKM&refer=uk

[HenryTo]

Hedge funds (Chris Flowers, Cerberus, and Citadel to be exact) now circling around Northern Rock:
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Three Hedge Funds Plan Northern Rock Raid -Paper
Mon Sep 24, 2007 8:01 AM BST
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LONDON (Reuters) - Three leading hedge funds are planning a break-up of beleaguered British bank Northern Rock Plc (NRK.L: Quote, Profile , Research), according to a newspaper report on Sunday.

The move could generate hundreds of millions of pounds in profits but would leave shareholders with virtually nothing, the Sunday Telegraph said.

The plan is to acquire the bank's mortgages at below face value and make a big profit by holding them until they mature. The proposed deal would see the funds divide up the mortgage book, worth more than 100 billion pounds ($200 billion),

The paper said Chris Flowers, the former Goldman Sachs banker who made a fortune from the rescue of Japan's Long Term Credit Bank in 2000, was among the group, along with the funds Cerberus and Citadel.

The funds, however, have yet to approach the Northern Rock board. A Northern Rock spokesman declined to comment.

Britain's fifth-largest mortgage lender has been seen as a likely takeover target after being engulfed by a funding and customer confidence crisis, triggering the worst run on a UK bank in living memory.

Rival banks, though, have been slow to show any interest on taking over the troubled business. The Sunday Times reported that at least a dozen of the biggest financial institutions in Britain and Europe had snubbed pleas from the authorities and Northern Bank's adviser Merrill Lynch to rescue it.

Northern Rock shares closed at 185.2 pence on Friday, valuing the business at around 960 million pounds ($1.93 billion), down more than 80 percent since the start of the year.

[HenryTo]

Some popped open the hood and discovered that the Financial Services Compensation Scheme only has US$9 million to bailout Northern Rock, versus US$49 billion for the FDIC:

http://news.independent.co.uk/business/news/article2996169.ece

[rffrydr]

Now on a broad front:

http://ftalphaville.ft.com/blog/2007/09/27/7649/uk-credit-squeeze-to-hit-companies/
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Northern Rock borrows a further £5 billion from the Bank of England in order to stay afloat:

http://www.ft.com/cms/s/0/f1bb99f8-6d42-11dc-ab19-0000779fd2ac.html

[HenryTo]

Northern Rock borrows another £2.9 billion from the Bank of England:

http://business.guardian.co.uk/story/0,,2184142,00.html

[rffrydr]

Live by the sword, die by the sword--reborn by the sword:

http://ftalphaville.ft.com/blog/2008/01/11/10110/how-to-securitise-a-rock/
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

"The Rock" is nationalized as potential bidders fail to find funding:

http://online.wsj.com/article/SB120326502915274181.html?mod=hps_us_whats_news