[NYTr] Booming Economy: The turmoil in global banking hits Brits

[All the News That Doesn't Fit]

The Financial Times - Aep 14, 2007
http://www.ft.com/cms/s/0/5f0aa10c-62f8-11dc-b3ad-0000779fd2ac.html


Scramble to quit UK mortgage lender

By Peter Thal Larsen in London

The turmoil in global banking hit the streets of Britain on Friday as
thousands of Northern Rock customers queued up to withdraw their
savings from the UK mortgage lender after it was rescued by the Bank of
England.

As regulators and politicians called for calm, Northern Rock –
Britain’s fifth-biggest mortgage lender – scrambled to contain the
fallout after it became the first British bank in decades to be bailed
out by regulators. One person close to the situation said customers had
withdrawn about $2bn Friday but Northern Rock declined to comment on
the figure, which would amount to 4 per cent of its deposit base.

The rescue demonstrates the risks from a decade of financial innovation
in the capital markets, which allowed a small regional lender to wield
financial clout far greater than its network of 76 branches would
suggest.

It also shows how the turmoil in the financial system that resulted
from excessive lending to Americans with patchy credit histories
triggered the failure of a bank with no direct links to the US mortgage
market.
Shares in Northern Rock plunged more than 30 per cent as analysts
slashed their earnings forecasts for the bank. The news also dragged
down share prices for other UK banks such as Alliance & Leicester, HBOS
and Barclays.

The FTSE 100 saw sharp falls until US markets opened and helped soften
the bearish tone. As the day wore on, sentiment soured again. The list
of leading UK shares ended 74.6 points lower, almost 1.2 per cent down
at 6,289.3. The FTSE Eurofirst 300 was 16.2 points lower at 1508.1, 1.1
per cent down.

In the US, equity markets pared early losses after economic data showed
retail sales, excluding sales of vehicles, fell sharply in August. The
data cemented investors’ expectations of at least a quarter-point
interest rate cut from the Federal Reserve when policymakers meet on
Tuesday.

The commerce department reported retail sales fell 0.4 per cent in
August, excluding vehicle sales, compared with forecasts of a 0.1 per
cent rise, and a 0.7 per cent increase in retail sales in July. The
S&P500 was down 0.1 per cent to 1,482.45 by midday in New York. The Dow
Jones Industrial Average of blue-chip stocks fell 0.01 per cent to
13,423.66.

Financials were among the worst performers, after Merrill Lynch, the
world’s largest brokerage, warned that shaky credit markets had forced
it to adjust the value of securities linked to risky subprime mortgages.

Concern over Northern Rock and the ability of UK banks to maintain new
mortgage lending at attractive rates added to concerns about the
housing market and the economy in general.

Under the terms of the bail-out, the Bank of England will provide an
open-ended facility to Northern Rock, allowing it to access liquidity
by posting mortgages or mortgage-backed securities as collateral. The
rescue – finalised yesterday after days of negotiations involving the
Financial Services Authority and the UK Treasury – came just two days
after Mervyn King, governor of the Bank, insisted it would not
intervene to bail out the markets.

According to people familiar with the matter, several banks considered
buying Northern Rock. However, a deal was undermined by a shortage of
liquidity and uncertainty about Northern Rock’s value. Adam Applegarth,
Northern Rock’s chief executive, said the bank was not in talks with a
buyer.

Additional reporting by Chris Giles, Lina Saigol, Paul J Davies and
Saskia Scholtes in London

Copyright The Financial Times Limited 2007