Crisis at Northern Rock Comes to a Head

There are dozens of articles about the run at the Northern Rock bank in the UK. Let's take a look at a handful of them.

The Daily Mail is reporting Savers demand their £1.5bn in cash

• Police called in to calm crowds of anxious savers
• Under-siege cashiers dish out chocolates
• Beleaguered Northern Rock boss: 'I'm so sorry'



Asked if he believed his bank - the UK's fifth biggest mortgage lender - would be forced to close, a defiant Mr Applegarth [the CEO of Northern Rock] insisted: "We can go on indefinitely. We have a £100billion mortgage book , so it is not an issue."

[Mish comment: You can go on indefinitely because you have a £100billion mortgage book? What kind of silliness is that? The bigger your mortgage book, the more likely you are to go under when all hell breaks loose.]

Financial expert Justin Urquhart Stewart, of Seven Investment Management, said savers were wrong to panic. He said Northern Rock was "no Barings", it had huge assets and the Bank of England behind it.

[Mish comment: What percent of those assets are marked to market?]

"It is not in anyone's interest for it to go bust. But despite that, some individuals are saying: 'I'm going to take my money out.'"

[Mish comment: Leave your money in because "It is not in anyone's interest for it to go bust." Exactly what kind of financial advice is that?]

Mr Urquhart Stewart added: "I expect that in a year's time Northern Rock will not exist. As a brand it is shot.

[Mish comment: Then why shouldn't both investors and customers pull out?]

"It is a great shame. A perfectly good business will be strangled by circumstances."

[Mish comment: If Northern Rock goes out of business it will have been strangled by stupidity not "circumstances". Borrowing short to lend long on mortgages in the face of a known housing bubble is just plain stupid.]

The Daily Mail is also reporting Bank staring into the abyss if more savers lose their nerve

More than £30billion of taxpayers' money has been pledged to support the bank, and a nervous Chancellor Alistair Darling will be hoping it does the trick of restoring confidence among its 1.4 million depositors.

But with a full-scale run on the bank a distinct possibility, that could seem less like an emergency loan and more like a honeypot, attracting droves of savers fearful for their money.

Should that happen, Northern Rock would be staring into the abyss.

The bank's problems arose because it borrows for short periods in the money markets and uses this cash to make long-term home loans to ordinary people.

It then issues IOUs to the money markets to pay off the borrowing.

Northern Rock has yet to touch the Government cash, but it is expected to start doing so in the next few days as IOUs come up for repayment.

The Independent is reporting Bank customers rush to withdraw savings.

The run on embattled bank Northern Rock continued in Britain yesterday with customers queueing outside their local branches from dawn as they scrambled to withdraw savings.

Here on Friday afternoon, some of the 25,000 Irish customers of Northern Rock were outside the bank's Dublin offices and queued for up to two hours to withdraw deposits.

Northern Rock is Britain's fifth biggest mortgage lender, but customers on both sides of the Irish Sea began to withdraw savings en masse after the Bank of England bailed out the bank. The level of withdrawals was high, with a reported £1 billion taken out.

Shares in the bank lost one-third of their value as customers ignored assurances from the bank's chief executive and financial regulators here and in the UK that their money was safe.

Thousands of Irish depositors looking to access their cash online encountered problems as the bank's website struggled to cope and phone lines came under severe pressure. Irish savers are understood to hold €2.3bn in savings at the bank -- an average of more than €90,000 each.

The JournalNow is reporting British bank run goes on despite government assurances

Emergency-loan request might have triggered the panic

Hundreds of customers lined up to withdraw their savings from a British mortgage bank yesterday, ignoring government assurances that their money was safe despite the bank’s request for an emergency loan.

Police were called in some cities to steer panicked crowds away as Northern Rock bank branches closed for the day.

Fears have spread over the bank’s request earlier in the week for an emergency Bank of England loan amid the worldwide credit crisis. Northern Rock, Britain’s fifth-largest mortgage lender, is the first British bank in 15 years to be bailed out by regulators.

Customers withdrew $2 billion from the bank Friday, The Financial Times reported, citing an unidentified person described as close to the situation. The bank declined to confirm the figure, which represents 4 percent of its deposit base.

The Guardian is reporting Northern Rock brand 'may disappear'.

The future of Northern Rock looks uncertain amid rumours of a likely sell-off prompted by the current crisis.

For a second consecutive day, savers queued at branches throughout the UK on Saturday to drain their accounts, despite assurances from the regulator that their money was safe.

In a report today, the Sunday Telegraph suggests that the bank is already preparing for a sell-off.

The newspaper says that one plan being discussed by City bankers is to break up the company's £100bn mortgage book and distribute it among other lenders.

It also quotes Adam Applegarth, Northern Rock's chief executive, as saying: "Our share price has come off 30%. You have got to be more vulnerable (to a sale) if your share price has come down. It's up to bidders to make a bid."

Paulson Flies to London

The Guardian is reporting Fears grow for British economy as panic over Northern Rock spreads.

Experts warn that a decade-long borrowing binge has left Britain dangerously exposed to the fallout from the global liquidity crisis. US Treasury Secretary Hank Paulson flies in to London tomorrow to discuss the worsening global credit crisis with Chancellor Alistair Darling, as fears intensify that the lending squeeze could be the last straw for Britain's buy-now-pay-later economy.

City economists warned that a decade-long borrowing binge had left the UK economy dangerously exposed to the fallout from the credit crunch. 'I think the UK is extremely vulnerable to this,' said Danny Gabay, director of consultants Fathom. 'The UK has a double vulnerability. We are vulnerable because of our hugely over extended consumer sector, and because of our large financial services sector.

'This is a financial market event; but the longer it goes on, the greater the risk that it becomes a real economy event - and I think we are at a tipping point.'

It emerged this weekend that several financial institutions have run the slide rule over Northern Rock in recent weeks, as its advisers Hoare Govett and Merrill Lynch battled to avert a Bank of England bailout by finding a buyer.

However, most potential bidders have privately ruled themselves out of the frame.

Northern Rock's plight has also raised concern about the prospect of heavy losses among Bradford & Bingley's buy-to-let loans, which account for more than half of its mortgage book. James Hamilton, banking analyst at Numis, thinks the increasing threat that the credit crunch will spread into an economic slowdown means that the housing market will be hit - and buy-to-let is likely to be the first area to suffer rising defaults.

An analysis by Jon Kirk at Redburn Partners shows that B&B has the second highest ratio of loans to deposits after Northern Rock, with loans accounting for 1.8 times its savings and deposits base, compared with 3.1 times for Northern Rock. While B&B was quick to reassure on Friday that it is financially secure, securitisations and wholesale markets account for 42 per cent of its funding.

Let's backtrack and fill in a few pieces.

On September 13 the Guardian headline read Northern Rock bailed out by Bank of England.

That means that in three days flat we went from "Bailed out" to buyout chatter, to the stark realization there simply are no bidders, to an emergency meeting with Paulson (as if he can do any good).

On September 14 MarketWatch was also prematurely talking about bailouts in Northern Rock tossed Bank of England lifeline.

Northern Rock (UK:NRK) said its underlying pretax profit for the year is now expected to be around 500 million pounds to 540 million pounds, compared to the 647 million pounds forecast by analysts. It also said 2008 profits would be affected.

This is the first time the British central bank has stepped in as a so-called lender of last resort since gaining independence in 1997.

The move sparked fear among some customers, with line-ups to withdraw cash reportedly stretching down the street in front of several branches.

Northern Rock CEO Adam Applegarth declined to comment on what rate of interest it's paying the Bank of England for the emergency funding, but he added that "the size of the facility is, quite bluntly, large." The details of the borrowing cannot be disclosed under its agreement with the central bank.

The entire banking sector has been hit by a liquidity squeeze in recent weeks as lenders virtually stopped providing short-term credit to the sector. The cost of borrowing has shot up, with three-month interest rates on loans between banks running more than 1% above the Bank of England's 5.75% base rate.

The problem has been most acute for Northern Rock because it's heavily dependent on capital markets, rather than customer deposits, to raise financing. The bank derived 85% of its net funding flow from capital markets in the first half of the year.

Merrill Lynch analyst John-Paul Crutchley said the main risk the bank faces is that previous sources of funding will lose confidence. "We view the decision of the Bank of England to support Northern Rock as evidence of confidence in the loan-book quality. However, we view the biggest risk to Northern Rock at this point as a loss of confidence from funding sources, both in the retail deposit market and the wholesale market," he said.

So Northern Rock is in a "Secret Agreement" with the Bank of England to not disclose the interest rates it has to pay or the size of the loan. What brilliant mind decided that strategy? It can hardly inspire confidence. And in fact it may have helped fuel panic, with depositors voting with their feet.

What transpired at Northern Rock is quite similar to the Mad Dash for Cash at Countrywide.

Northern Rock is getting what it deserves. Taking on massive amounts of long term mortgage loans financed by short term borrowing in an overheated housing market is begging for trouble. Beg for trouble long enough and eventually it will find you. Expect to see more of these kinds of events on both sides of the Atlantic.

Mish Shedlock /Mish
http://globaleconomicanalysis.blogspot.com/