British government attempts to stem Northern Rock panic
Mon Sep 17, 4:39 PM ET
The British government weighed in Monday to stem panic at the crisis-wracked Northern Rock bank, vowing to protect all savings as customers queued for a third straight day to withdraw cash.
The exceptional move was announced by Chancellor of the Exchequer Alistair Darling after another day of turmoil in which shares in the group plunged by more than 40 percent to an all-time low.
Meanwhile, fears that problems could spread led shares in another major British home loans specialist, Alliance and Leicester, to plummet by over 30 percent Monday.
Darling announced the new move after talks with Britain's central bank, the Bank of England, and Financial Services Authority (FSA) regulators over how to deal with the mounting sense of crisis.
"Should it be necessary we and the Bank of England would put in place arrangements that would guarantee all the existing deposits in the Northern Rock bank during the current instability in the financial markets," he said.
"That means that people can continue to take their money out of the Northern Rock bank ... but if they choose to leave their money in the Northern Rock bank it will be guaranteed safe and secure."
Under normal FSA regulations up to 33,000 pounds of deposits are protected, but anything more is not guaranteed. Darling's announcement covers all savings, whatever the amount.
Northern Rock said that Darling's comments made it clear that all savings at its branches were "safe and secure."
"Anybody who is in a queue outside a branch, or who is trying to access an online account can be fully reassured that there is no cause for concern whatsoever," the lender said.
Savers showed up at dawn to pull their money out of Britain's fifth-largest mortgage lender, which last Friday was granted an emergency lending facility by the Bank of England as it struggled to borrow from other banks.
A global credit squeeze has emerged as banks refuse to lend to one another in the aftermath of a sharp downturn in the US subprime housing sector and a wave of defaults by high-risk US borrowers.
The future of the group remains uncertain and the company scotched speculation that it was on the verge of agreeing a rescue takeover deal.
"Northern Rock is not in discussion with any other party at the present time," the company said in a statement late on Monday.
US broker Merrill Lynch said the "game is over for Northern Rock in its present form" and British newspapers The Financial Times and the Daily Telegraph both reported that the company was looking for a takeover deal.
Analysts at Deutsche Bank said a takeover would be the best solution for the shareholders of the beleaguered institution.
The company, based in Newcastle in the north of England, said it was aware of its responsibilities to shareholders and was looking at its options.
"The board is aware of its fiduciary duty and is actively considering all strategic options in the interests of shareholders, customers and other stakeholders," it said.
Northern Rock's share price hit a historic low of 257.25 pence Monday. By the end of the day's trade, it stood at 282.75 pence, down 35.45 percent.
The bank's market value has now slumped by more than half to about 1.1 billion pounds (1.6 billion euros, 2.2 billion dollars) since the close of trading last Thursday.
Northern Rock customers have been withdrawing their savings en masse since Friday.
"My grandfather called me on Saturday and told me to take the money out of Northern Rock," student Jenny Price said Monday as she queued outside a branch in the centre of Liverpool, northwest England.
"But I'm looking at the queue now and wondering if there will be enough cash in the branch to satisfy everyone."
About 2.0 billion pounds was withdrawn over the counter or online by Northern Rock's savers over Friday and Saturday, reports said.
Northern Rock chief executive Adam Applegarth refused to comment on the figure but acknowledged that the bank was facing another "extremely busy" day.
"The way to restore confidence is very simple -- it's business as normal, it's allowing customers to do exactly what they want to do," he told BBC radio.
Northern Rock, which has 1.4 million savers, has yet to confirm whether it has begun borrowing from the BoE's emergency fund.
Northern Rock