U.S. Subprime Mess Spurs U.K. Bank Run
For three days now, customers of a British bank - one of the U.K.'s largest mortgage lenders - have been emptying its vaults, taking out their money - more than $4 billion so far, and that number is rising quickly.
At the same time, the value of the bank is crashing on the London stock exchange. Shares of Northern Rock PLC tumbled another 30 percent Monday as customers, driven by fears of insolvency, made a run on the bank.
"If they want their money, they can have it," bank chairman Adam Applegarth said, insisting it's business as usual.
It's not, though. Long lines of customers outside branches clutch their bank books on the way in, and their money on the way out.
Treasury Secretary Alistair Darling sought to assure depositors that their money was safe, even as former U.S. Federal Reserve Board chairman Alan Greenspan warned of difficulties ahead in Britain's booming housing market.
The British government will guarantee all existing deposits at troubled bank Northern Rock, Darling told a Downing Street news conference Monday.
"People can continue to take their money out of the Northern Rock bank, but if they choose to leave their money in the bank it will be guaranteed safe and secure," he said.
Trading in the bank's shares was briefly suspended Monday morning, but not before they tumbled $2.81 to $5.98, on top of a 31 percent fall Friday. By late morning, shares hovered around $6.
Northern Rock, Britain's fifth-largest mortgage lender, disclosed on Friday that it had received emergency funding from the Bank of England after other banks balked at loaning it cash in the wholesale money markets.
The bank, which relies heavily on the wholesale money markets for cash, had been unable to raise money since the money markets choked up last month.
Applegarth said the liquidity problem was likely to continue for the rest of the year as the uncertainty over bad U.S. loans continues to grip the money markets.
CBS News correspondent Larry Miller reports Northern Rock is the first casualty of the U.S. sub prime lending crisis.
The British Broadcasting Corp. reported Sunday that customers had withdrawn nearly 2 billion pounds ($4 billion) from Northern Rock accounts, though Applegarth refused to give a figure.
Speculation about a takeover ran rampant.
"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. in London.
"There is value in Northern Rock for a predator with a strong balance sheet but they would have to move quickly to save whatever is left of Northern Rock's reputation," he added.
Customers lined up outside of Northern Rock branches across the country on Friday. On Monday, dozens of customers waited outside for branches in Birmingham to open, and more than 100 waited in Leeds.
"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.
Darling, like he did Friday, appealed for calm.
"Whatever happens, people can get their money out of the bank, they don't need to worry about that," Darling said in an interview on GMTV.
"The whole reason that we provide support if a bank gets into difficulties, like Northern Rock, is to help it get the money to tide it over these difficulties."
Northern Rock extended its opening hours to accommodate customers.
The lender's problems came against the background of signs of cooling in Britain's booming housing market.
In an interview published Monday in The Daily Telegraph, Greenspan warned that Britain was susceptible to some of the problems now roiling the U.S. real estate market.
"Britain is more exposed than we are - in the sense that you have a good deal more adjustable-rate mortgages," he said.