History > 2007 > UK > Economy (III)

The Economist - North America Edition

Sep 22nd 2007

Northern Rock

still lending ‘recklessly’

September 23, 2007
From The Sunday Times
Robert Winnett and Roger Waite

Northern Rock stands accused of “reckless” lending after it emerged this weekend that the beleaguered bank is still offering mortgages of six times salary to potential borrowers.

Despite provoking the worst banking crisis for decades, the bank last week offered a reporter posing as a first-time buyer a £180,000 mortgage even though he had a salary of only £30,000.

The loan was at least £30,000 more than other leading lenders were prepared to offer. Repayments for the loan would have accounted for more than 60% of the fictional buyer’s take-home salary.

The reporter, posing as another potential customer, was also offered a so-called “negative equity mortgage” worth 117% of the value of the property he claimed to be interested in buying. The mortgages offered by other banks to the same potential borrower were significantly lower.

Financial experts were this weekend stunned that Northern Rock is offering such loans a week after it was forced to turn to the Bank of England for emergency funding. Yesterday it emerged that Northern Rock has been forced to borrow about £3 billion from the Bank in the past week.

Northern Rock is to court further controversy by pushing ahead with a plan to pay a £59m dividend to shareholders and executives this week. The Financial Services Authority gave special dispensation to the bank in July to dip into its assets to pay out the dividend – which is 30% higher than last year’s payout.

Politicians yesterday expressed dismay that the government and its regulators had not stepped in to supervise Northern Rock’s business practices following the government bail-out. George Osborne, shadow chancellor, said: “One week Alistair Darling [the chancellor] is attacking the lending culture in this country, the next he is issuing emergency guarantees for people’s mortgages and savings.”

George Mudie, a Labour member of the Treasury select committee said: “Of all the people, have Northern Rock learnt nothing? It is reckless.”

When the Sunday Times reporter posing as a 24-year-old first-time buyer approached Northern Rock last week he was offered a range of huge mortgages. The bank’s mortgage adviser provisionally told the reporter after he revealed his salary was £30,000 that he could borrow £180,000 towards the cost of a £200,000 home. One option offered was for a fixed two-year rate at 6.29% with a “product fee” of £1,995. The deal offered is not market leading but compares favourably with competitors.

Of other mortgage providers approached using the same salary figure, Bradford & Bingley said the maximum it could lend was £127,500, Alliance & Leicester offered £149,000 and Abbey £138,000.

Northern Rock still lending ‘recklessly’, STs, 23.9.2007,
http://business.timesonline.co.uk/tol/business/
industry_sectors/banking_and_finance/article2512384.ece

The politics of a bank run

Labour's moment of peril

Sep 20th 2007
From The Economist print edition

Gordon Brown may still suffer
from a week of financial and political panic

SINCE Labour swept into power in 1997, there has been only one brief moment when the government looked really vulnerable. That was when road hauliers blockaded refineries in the autumn of 2000 and the nation seemed about to grind to a halt. But this week's run on Northern Rock has been just as perilous.

As so often in modern politics, it was the pictures that shocked. Britain had not experienced a bank run since Victorian times; it had avoided the bank failures that blighted the American and German economies in the early 1930s. Yet that did not stop long lines from forming outside the branches of Northern Rock once it became known that Britain's fifth-largest mortgage lender, unable to raise the short-term cash it needed from the gummed-up money markets, had requested emergency help from the Bank of England.

The bank run was unexpected and perplexing, since by then Northern Rock could rely on the Bank for support. But the rush to withdraw money was not as irrational as it looked. Many in the queues knew the limits of Britain's niggardly deposit-compensation arrangements.

These offer full cover to a depositor with any one bank for the first £2,000 ($4,000) and then 90% of the next £33,000. The protection is less generous than that in America, where deposits are fully protected up to $100,000 under a federal scheme created in 1933. Furthermore, American depositors get their money back within days whereas compensation in Britain may take up to six months.

As the run on Northern Rock persisted, there was a growing danger that the public might lose confidence in other banks. Stopping the run became imperative. On September 17th Alistair Darling, the chancellor of the exchequer, played the taxpayers' card: he guaranteed all the existing deposits in the bank for as long as the financial system remained in turmoil.

That did the trick. The queues disappeared. The financial panic was over. So, too, was the political panic that had gripped Gordon Brown and his ministers as the bank run persisted. In a further fillip for Mr Brown, a poll taken by Populus on September 17th indicated that the public was more inclined to blame risky mortgage-lending in America than the government in Britain for Northern Rock's woes. Another survey suggested that Labour's lead over the Conservatives had widened.

Mr Brown is not yet off the hook, however, for his reputation rests on being good at running the economy. His much-touted master stroke when he first became chancellor was giving the Bank of England independence to set interest rates, which helped keep inflation low and economic growth stable. But part of the deal was that the Bank stopped supervising banks.

Now Mr Brown will face awkward questions about how a bank run occurred on his watch, when it was he who designed the regulatory arrangements. And the government now has the difficult task of trying to limit Mr Darling's guarantee, which is supposed to apply only during the current exceptional circumstances.

But it is the longer-term economic impact of the bank run that could prove most damaging to Mr Brown. There have been good solid reasons why the economy has done well in the past decade, notably a labour market that has remained flexible and an increasing openness to immigration. But the long expansion has also had a flakier side. In particular, consumer spending has been sustained by rising borrowing backed by the long house-price boom.

Now lenders will become more reluctant to lend, another blow for a housing market that is looking ever more vulnerable. This week Alan Greenspan, a former chairman of America's central bank, suggested that Britain was more exposed to the credit crunch than America because a higher proportion of its mortgage borrowers had taken out loans at variable rates. What's more, British households are more indebted, in relation to their disposable income, than Americans are.

The damage that a flagging housing market can inflict was made clear in 2005, when stalling house prices prompted a slowdown in consumer spending and a slackening in GDP growth. Both have recovered since then, but house prices have become even more unaffordable and consumers yet more indebted.

While Mr Brown disappeared from sight (an old trick), Conservatives and Liberal Democrats chastised him for permitting these structural weaknesses to emerge. David Cameron, the Tory leader, warned that “an economy built on debt puts economic stability at risk”. Vince Cable, the Lib Dems' Treasury spokesman, said that he himself had warned of a looming debt crisis four years ago.

So far the public seems to have turned a deaf ear to these warnings. Mr Cameron's attempt to link the troubles at Northern Rock with Labour's record on debt may even have backfired by appearing opportunistic. But the message could get traction if the economy deteriorates or would-be home-buyers find it notably harder to borrow money.

Lower official interest rates are almost certainly on the way. Encouraging inflation figures—consumer-price inflation dropped a bit further below the government's 2.0% target in August—will help make the case for a cut in the base rate from 5.75% later this year. But it may not be enough to stop a wrenching slowdown after the financial shocks that have battered the economy. Mr Brown appears to have escaped this week's events unscathed, though his room for manoeuvre in calling the next election has been reduced. He is likely to pay a heavier political price in the months to come.

Labour's moment of peril, E, 20.9.2007,
http://www.economist.com/world/britain/displaystory.cfm?story_id=9833550

New Northern Rock savers

left out in the cold

The saver's shares slide
as Alistair Darling, the Chancellor,
refuses to guarantee
any new customer accounts

September 20, 2007
From Times Online
Miles Costello

Shares in Northern Rock slid almost a third as the Government threw an obstacle in the way of a Northern Rock recovery this morning by refusing to stand behind any new accounts opened from today.

The move by the Treasury - which at the same time guaranteed the rights of existing borrowers - left the Tyneside lender isolated and was seen as making a rescue takeover significantly less likely

The Treasury also ensured that the bulk of Northern Rock's securities issued to the wholesale markets were ring-fenced from the sovereign's gilt-edged guarantee on savings.

Northern shares plunged through the 200p barrier to as low as 176p, although they came back to 198.5p.

The move by the Treasury, issued in a formal statement to the stock market this morning, is a massive setback to any hopes Northern Rock might have of building its customer base and developing a recovery strategy.

Staff union Unite has been busy trying to encourage Newcastle-based savers and borrowers to set up accounts at Northern Rock to boost the standing of the UK's ailing mortgage lender. They were not immediately available for comment this morming.

Banking sources said the limited guarantee will act as a disincentive for new account-holders. The Treasury was not immediately able to elaborate on the reasons for its decision.

Northern Rock was this morning preparing a response. A source close to the lender said: "It's an obstacle; but not an insurmountable one."

The mortgage bank, in freefall since being forced to go to the Bank of England for emergency funding last week, has been prioritising winning back existing account-holders.

After panic-stricken savers formed massive queues to withdraw their money, it is thought that Northern has stemmed the flow of departures. Less than 75,000, or below 5 per cent of the bank's 1.5 million customers are thought to have shut down their account over the past week.

Lloyds TSB and Northern were in talks over an agreed takeover before the facility, although a deal is thought to have been spiked by the Bank of England.

Three days ago, Alistair Darling, the Chancellor, agreed to guarantee deposits at Northern Rock, and the Treasury confirmed today that all accounts existing as at midnight last night would be covered.

"This guarantee covers future interest payments, movements of funds between existing accounts, and new deposits into existing accounts. The guarantee will also cover accounts re-opened in the future by those who closed them between Thursday September 13 and Wednesday September 19, inclusive," the Treasury said.

But it added: "Since it would otherwise be unfair to other banks and building societies, the arrangements would not cover any new accounts set up after September 19, other than re-opened accounts."

For the wholesale markets, the Treasury said it will stand behind wholesale borrowing and lending that is not collateralised. This appears to underwrite liquidity for the Rock in the short-term money markets.

However, the department added that its guarantee will not cover other debt instruments, including Northern Rock's "Granite" securitisation programme.

Mortgage lenders regularly package up mortgage assets of varying qualities and issue securities backed by their repayments.

New Northern Rock savers left out in the cold, Ts, 20.9.2007,
http://business.timesonline.co.uk/tol/
business/industry_sectors/banking_and_finance/article2495180.ece

Editorial comment

U-turn erodes Bank’s credibility

Last updated: September 19 2007 18:53
Published: September 19 2007 18:53
The Financial Times

Why, after weeks of refusing to intervene in the money markets, after declaring again and again that such action would cause moral hazard, and after the run at Northern Rock appeared to be stabilised, has the Bank of England done a U-turn? Its decision to inject funds into the three-month market, against a wider range of collateral, raises the suspicion that the Bank has been overruled by the Treasury.

Since the Northern Rock rescue began last Friday, official handling of the crisis has been marked by muddle, indecision and disunity. Poor communication when the rescue was launched, the delay in guaranteeing Northern Rock deposits, and now this belated liquidity operation add up to an incoherent response to the crisis.

It is not clear what the latest intervention is meant to achieve. The Bank will offer three-month liquidity at a penalty of at least 1 per cent above its base rate, an offer that will only appeal to banks in difficulties. Northern Rock could have used this a week ago, but Northern Rock has now been dealt with. The move would only make sense to the extent that it protects banks similar to Northern Rock, but it risks creating the fear that another such case is out there. Circumstances may have changed fundamentally but the authorities will need to show that at some point.

Since the credit squeeze began the Bank has insisted that it will only intervene in the overnight market and will only lend against the collateral of AAA government and agency bonds. It has held to that position for two reasons.

First, the Bank has argued that to offer longer-term liquidity would be to bail out those banks that have not financed themselves prudently, and so encourage them to be equally careless in future.

Second, the Bank has implied that high rates in the money markets represent a repricing of risk rather than any shortage of central bank money, so liquidity injections might not have much effect. Sound banks would snap up the funding on offer, but would not necessarily lend it on to institutions they suspected were in trouble, such as Northern Rock. The European Central Bank has intervened at three-month maturities with limited results.

The Bank of England’s principle – a determination to avoid moral hazard – was right. But its forced capitulation suggests that taking so pure and so aloof an intellectual position was unwise. Of course central banks must avert moral hazard, but in a crisis they need to be helpful.

The wider handling of Northern Rock suggests that there has been a breakdown in the relationship between the Bank, the Financial Services Authority and the Treasury, which are jointly responsible for financial crises. The principals at each organisation: Mervyn King of the Bank, Sir Callum McCarthy of the FSA, and Alistair Darling, chancellor of the exchequer, share responsibility for that failure.

The entire tripartite system, in which the FSA supervises individual banks, but the Bank of England has the balance sheet and acts as lender of last resort, is now in doubt. When the FSA was created in 1997 many said that split would prove unworkable in a crisis and so it has proved. The Bank is isolated from the lenders that it may be called upon to rescue. The FSA has no power to intervene in the markets. And rather than smooth co-operation, the two organisations have started sniping.

The man who created this system of banking regulation is Gordon Brown, Britain’s chancellor in 1997 and now its prime minister. His responsibility for the mess, and that of his government, is considerable.

The tripartite approach will have to be reconsidered as will banking supervision more generally. If the Bank is to turn illiquid assets and lower grade collateral into liquid central bank money, regulation will have to be tightened to reduce the resulting moral hazard.

By far the most serious consequence, however, is the damage done to the Bank of England. In a statement released last week, Mr King was careful not to rule out money market intervention or acting as a lender of last resort, but as a whole that statement implies money market action would be ineffective and wrong.

When Mr King goes before a parliamentary committee on Thursday he will face the near impossible task of justifying what the Bank has done. He will either have to concede that he was wrong not to intervene earlier or that he has been forced to intervene now. Either way the harm to the Bank is immense. The Treasury and the FSA have also suffered blows to their reputations and have questions to answer. But because of its public statements, it is the Bank and its governor that have lost most credibility. The position of Mr King is now very difficult.

    U-turn erodes Bank’s credibility, FT, 19.9.2007, http://www.ft.com/cms/s/0/5812ed6c-66d8-11dc-a218-0000779fd2ac.html

Bank of England in money market U-turn

Last updated: September 19 2007 12:30
Published: September 19 2007 12:30
The Financial Times
By Chris Giles, Economics Editor

British banks will be able to borrow from the Bank of England for three months using mortgages as collateral, the central bank announced in an extraordinary U-turn.

The humiliating move for Mervyn King, Bank governor was announced on Wednesday morning when the Bank said that next week, it would be willing to swap £10bn of cash for a wider range of commercial bank assets “including mortgage collateral”.

Up to now, Mr King has insisted that such action would be tantamount to bailing out banks that had made risky lending decisions and would sow “the seeds of a future financial crisis” because it provides after the event insurance for risky behaviour.

The Bank always insisted it had the option of such action, but was unwilling to take the plunge because, as Mr King wrote to members of Parliament last week, “central banks cannot sensibly entertain such operations merely to restore the status quo” before the market turmoil began.

He added that the only circumstances in which such action would be warranted would be when failure to act “would lead to economic costs on a scale sufficient to ignore the moral hazard in the future”.

The move clearly shows that while equity markets have been buoyed by the US Federal Reserve’s decision to slash interest rates by half a percentage point, the Bank knows that turmoil still stalks the money and credit markets and that this painful action, something the Bank was desperate to avoid, has become necessary.

Schadenfreude – the pleasure in someone else’s misfortune – is guaranteed at the Financial Services Authority, which has wanted the Bank to take this action for some time and in other central banks. The latter felt the Bank of England was free-riding on actions they have taken similar to those launched in the UK on Wednesday.

The Bank said it took the decision to “to alleviate the strains in longer-maturity money markets” where interest rates have remained far above the Bank’s official 5.75 per cent rate. On Wednesday, the London interbank three-month rate stood at 6.75 per cent and it fell to 6.55 per cent after the Bank’s action.

Mr King’s position will be very difficult after this announcement, since he has been so public in criticising similar moves.

To defend the action he will point to some of the conditions underlying the new loans the Bank is now offering. The interest rate on the loans will be higher than the 6.75 per cent rate banks can always borrow from the Bank in exchange for high-grade collateral and they will not receive £100 in cash for every £100 of mortgage assets they deposit at the Bank.

Even so, Northern Rock and other banks and politicians will ask Mr King why the Bank delayed such action if it is now deemed necessary. Had the Bank taken this step a week ago, the run on Northern Rock would have been avoided as it could have swapped mortgages for cash in a normal and confidential operation, but without the full glare of publicity that greeted it when it went cap in hand to the bank last Thursday seeking money under the Bank’s lender of last resort facilities.

The Bank said it would announce details of the terms of the loans on Friday.

    Bank of England in money market U-turn, FT, 19.9.2007, http://www.ft.com/cms/s/0/43a7b3ac-66a2-11dc-a218-0000779fd2ac.html

11.15am update

Northern Rock crumbles again
 

Wednesday September 19, 2007
Guardian Unlimited
Graeme Wearden

Shares in Northern Rock slumped this morning as rumours swept through the market that it could be taken over at a knockdown price.

The bank's shares suddenly plunged 20% to 246.25p shortly after 10am amid high volumes of trading. By 11am they had recovered slightly to 280p, an 8.5% drop.


This wiped out the recovery the stock price had seen since the government stepped in to guarantee that depositors' savings were secure.


There was talk in the market that Lloyds TSB was preparing a bid of 200p a share for the company.


Martin Slaney, head of spread betting at GFT Global Markets, predicted further volatility in the stock.


"The longer we go without a bid, the lower that bid is likely to be," he said.


Northern Rock's largest shareholder, Baillie Gifford, confirmed this morning that it had sold some of its 6% holding. Deutsche Bank later announced that it had bought over 3% of the stock.

    Northern Rock crumbles again, G, 19.9.2007, http://business.guardian.co.uk/markets/story/0,,2172453,00.html

Brown defends economic policy

Tue Sep 18, 2007
5:44pm BST
Reuters

LONDON (Reuters) - Everything is being done to maintain the stability of the British economy after a bank crisis, Prime Minister Gordon Brown said on Tuesday.

"What I want to assure people of is that everything that can be done will be done -- and is being done -- to maintain the stability of the economy," Brown told the BBC after a government promise to guarantee deposits at Northern Rock bank appeared to ease a run on the bank.

"We are an economy that will continue to grow and continue to create jobs and continue to have low inflation and low interest rates and everything that has been put in place ... is designed to ensure that," he said.

Brown argued that Northern Rock's problems were the result of international events that were "bound to have an effect on every industrial country", but he said the British economy was strong enough to deal with them.

"This is a set of financial problems that have happened in America, spread to Germany and Europe and now we're seeing some instances of that in Northern Rock in the UK," he said.

"But we are an economy that has taken the measures that have been necessary to keep a stable economy, so inflation is coming down, and at the same time we could embrace regulatory measures to ensure that when incidents like this happen they are properly dealt with," said Brown, who was attending a discussion on the future of the health service in Birmingham.

    Brown defends economic policy, R, 18.9.2007, http://uk.reuters.com/article/businessNews/idUKL1875060920070918

5.30pm update

Banking shares rebound

Tuesday September 18, 2007
Guardian Unlimited
Staff and agencies


Chancellor Alistair Darling was holding talks with representatives from the Bank of England and the Financial Services Authority today amid relief among investors after his pledge to guarantee savings at stricken mortgage lender Northern Rock.

Downing Street today also insisted prime minister Gordon Brown retained "full confidence" in Bank of England governor Mervyn King, who has been criticised for his handling of the crisis. He is due to face questions on Thursday from MPs on the Treasury select committee over his handling of the current financial turmoil and the Northern Rock crisis.

Gordon Brown later claimed the government's intervention to guarantee savings at Northern Rock, which could cost the taxpayer up to £28bn, was a sign of strength.

"It's because of the strength of our economy we've been able to take this decisive action," he said. "I want to reassure people that everything that can be done to maintain the stability of the economy [is being done]."

The prime minister added: "With this decision we've shown in Britain we're strong enough to deal with financial instability."


Although the mood in the market remained nervous, the government's unprecedented intervention looks to have halted the run on the Britain's fifth-largest mortgage lender, although some customers still arrived at Northern Rock branches in the early hours of this morning to withdraw their cash.


Shares rebounded across the banking sector with Northern Rock, whose shares have halved in value since Friday, climbing 11% in early trading. By the close the shares were 23.25p or 8.22% higher at 306p. At their peak this year, they were changing hands at more than £12.


Alliance & Leicester, which plunged more than 30% in late trading yesterday, rebounded 32.17% to 753p and there were also gains for HBOS.


Bradford & Bingley had a rough ride - its shares initially gained 6% in early trading, reversed to a 5% loss by lunchtime, then closed up 6% at 297.75p.

In an attempt to stem the panic sweeping through the British banking system, Mr Darling last night pledged to guarantee savings at Northern Rock.


Amid fears that the bank would collapse, panicked savers have besieged its branches since last Friday, withdrawing an estimated £3bn.


They were still queueing this morning, with some arriving outside branches as early as 1.30am, although the numbers were well down on the past few days.


Mr Darling today pledged that the government would "do everything we can" to return financial markets to normal in the wake of the Northern Rock crisis. "I'm determined we maintain a stable banking system," he told reporters.


Asked whether he retained confidence in Mr King, the chancellor said: "The governor of the Bank of England, the chairman of the Financial Services Authority and I have been meeting very regularly for several weeks now. We keep in constant touch, we are just about to meet again. We are working closely together."


He said the same facilities as have been offered to Northern Rock savers would be made available to any bank which sought help, but stressed that "no other bank" had yet approached the Bank of England for assistance.


"In the event that another bank were to need assistance from the Bank of England - and there is no sign of that at the moment - then exactly the same facilities that Northern Rock has been offered would be offered to that other bank," he said.


Asked about the experience of his first few months at the Treasury, Mr Darling said: "Every chancellor should expect to deal with turbulence from time to time. There are always going to be difficult decisions to take."


In full-page adverts in the national press today, Northern Rock's embattled chief executive Adam Applegarth said he wanted to make it "emphatically clear to Northern Rock customers that we are open for business as usual".


He said the bank remains a safe place for savings, loans and mortgages.


"The simple fact now is that the chancellor has made it clear that all existing deposits in Northern Rock are fully backed by the Bank of England and are totally secure during the current instability in the financial markets."


He added: "These have been troubled times but Northern Rock will prevail. We will not let you down."


Phil Hammond MP, shadow chief secretary to the Treasury, said the chancellor had played his "last card" with the emergency pledge. Speaking on GMTV this morning he said the government had "no option" but to act.


"We are talking about real people here, their hopes and futures," he said, adding: "The chancellor has played his last card with the guarantee he gave yesterday. People have now been given an absolute government guarantee - if that doesn't stabilise the situation, nothing will."

    Banking shares rebound, G, 18.9.2007, http://business.guardian.co.uk/markets/story/0,,2171652,00.html

A&L seeks to ease worries

as shares crash

Mon Sep 17, 2007
6:15pm BST
Reuters

LONDON (Reuters) - Alliance & Leicester said on Monday it was successfully funding itself and had not sought any assistance from the Bank of England, after its shares plunged over 30 percent on fears it could face some of the problems that have battered rival mortgage lender Northern Rock.

A&L, the country's seventh-largest bank, saw its shares tumble in the last minutes of trade to close down 31.3 percent at 600 pence, its lowest level in almost 7 years.

"The market is looking to the potential next victims and in a sense all banks are more or less exposed," said Felix Lanters, an equities portfolio manager at Theodoor Gilissen.

But A&L dismissed concerns and said it had no funding trouble and hadn't sought central bank assistance.

"We are successfully funding the bank and we have not sought assistance from the Bank of England," an A&L spokesman said. "We know of no reason why the share price has fallen so sharply."

He added: "We stated on September 4 that current conditions in the funding and liquidity markets have had no material impact on profit or franchise growth. That remains the case."

The Bank of England, which routinely declines to comment on market movements, declined to comment on the share price drop and on speculation of funding concerns.

The UK Treasury and the Financial Services Authority were not immediately available for comment.

Shares in Northern Rock, in a tailspin since credit market liquidity dried up two months ago to hit its main source of funding, ended the day down more than 35 percent, as customers queued outside its branches to withdraw savings.

Other large mortgage lenders also reliant on funding from wholesale markets -- although not to the same extent as Northern Rock -- were hit on Monday, including Bradford & Bingley , which closed down 15.4 percent, and HBOS down 5.5 percent.

Merrill Lynch said in a note on Monday that A&L's takeover premium could also be removed as a result of market turbulence.

"We think a takeout is unlikely in the current environment, especially when there is no shortage of cheaper UK assets for an interested buyer," the bank said. Merrill cut its earnings forecast for A&L in 2008 by 12 percent, saying the outlook for wholesale funding costs was very tough.

    A&L seeks to ease worries as shares crash, R, 17.9.2007, http://uk.reuters.com/article/businessNews/idUKL1735699720070917

Government to guarantee

Northern Rock deposits

Last updated: September 17 2007 18:15
Published: September 16 2007 20:31
The Financial Times
By Jean Eaglesham,
Peter Thal Larsen,
Chris Giles
and Lina Saigol in London

Alistair Darling, chancellor of the exchequer, has announced that the government will guarantee all deposits of Northern Rock account holders as ministers sought to calm savers’ fears.

Mr Darling’s actions came amid signs of the panic that was spreading across the banking sector with shares of Alliance & Leicester falling 31 per cent on concerns that the bank would be the next to turn to the Bank of England for assistance.

Mr Darling said that “should it be necessary, we and the Bank of England will put in place arrangements that guarantee all the existing deposit arrangements.” The existing deposit guarantee scheme protects part or all of the first £35,000 of an individual’s savings only.

The chancellor is anxious to prevent the surge of withdrawals from Northern Rock, which has seen queues outside all of the struggling bank’s branches, triggering a wider crisis of confidence in the UK’s financial system.

The state guarantee came after savers again beseiged the bank’s branches. About £2bn has been withdrawn since Thursday, when the bank applied to the Bank of England for emergency funds.

Northern Rock shares plunged by a further 35 per cent in afternoon trading as the mortgage lender and its regulators prepared to try again to arrange a sale.

As depositors continued to withdraw their savings from Northern Rock – with some reported to have begun queuing as early as 4am on Monday – people familiar with the matter said the bank and its advisers were planning a new push to find a “commercial solution” that would allow it to be sold as a going concern.

Northern Rock held talks with Lloyds TSB, the UK’s fifth-biggest bank, as recently as last Monday. Those discussions were undermined by the turmoil in the credit markets and the Bank of England’s reluctance to offer financial support to facilitate a deal, people familiar with the matter said.

However, the central bank on Sunday indicated that the credit line it had provided to Northern Rock would not be removed in the event of a sale. “We have agreed that any bidder would be able to take on the facility for any unexpired term left,” it said.

Any renewed takeover interest will depend on whether Northern Rock’s business can be stabilised. About £2bn ($4bn) has now been withdrawn by savers. But people close to the bank say the figure – about 8 per cent of total deposits – is lower than initially feared.

Sir Callum McCarthy, chairman of UK regulator the Financial Services Authority, and Mr Darling both stressed over the weekend that the bank was solvent.

If no buyers come forward, it seems likely Northern Rock’s business will be gradually wound down, effectively leaving it with a shrinking mortgage book as loans are repaid. Its advisers are thought to have calculated that, in this situation, it would be worth about 180p a share.

The shares fell 35 per cent to 282.75p on Monday. Other bank shares also fell sharply, with Alliance & Leicester down 31 per cent, Bradford & Bingley down nearly 15 per cent and HBOS 5.5 per cent lower.

The Bank of England has been stung by criticism that it is providing a bail-out to Northern Rock and wants the terms to be published, so it can demonstrate how tough they are for Northern Rock’s shareholders. The central bank said: “We expect the terms to be disclosed in due course.”

Northern Rock executives spent the weekend trying to ensure the business was functioning, and organising the delivery of sufficient cash for customers to make their withdrawals. They are also seeking to fix the bank’s website, which has been struggling with the high volume of traffic.

Adam Applegarth, chief executive, again sought to reassure Northern Rock customers in a statement published on the lender’s website on Sunday.

“Your money is safe with us and if you want some, or all of it back, then you are perfectly entitled to it,” he said. “Whilst you may have to wait a little longer than usual to receive it, you will get it. However, your savings are secure and there is no need for you to withdraw your money based on our recent announcement, and the widespread media coverage that has ensued.”

His comments were echoed by Mr Darling, who told BBC Radio 4’s Today progamme: “If people want to get their money out of Northern Rock, they can. The money is there and it is backed by the Bank of England so they can get it.”

Mr Darling added: “The problem at the moment is not that there isn’t money in the system, because the banks do have a lot of money. It is the fact that they have been reluctant to lend to each other whilst they work out what the extent of their risk is following on the difficulties in the American market.”

    Government to guarantee Northern Rock deposits, FT, 17.9.2007, http://www.ft.com/cms/s/2/39199b78-6489-11dc-90ea-0000779fd2ac.html

Northern Rock shares plunge

as customers flee

Mon Sep 17, 2007
5:46pm BST
Reuters
By Steve Slater

LONDON (Reuters) - Thousands of customers queued to withdraw savings from embattled bank Northern Rock on Monday and its shares plunged again, heightening pressure for a sale of the business or its assets.

The country's fifth-biggest mortgage lender, which on Friday was rescued by emergency Bank of England funding, said there was no need for investors or customers to panic and it remained solvent.

Nevertheless, customers appeared set to continue pulling out savings and by early on Monday its shares had more than halved in value since Thursday's close.

"I didn't initially panic but the more you watch the news and read you think maybe we ought to do it as well," said Barbara Williams, retired, as she stood in line with hundreds of others at the Oxford Circus branch.

"We thought we would do what everyone else is doing. Rightly or wrongly it's a chance you can't take."

Fears have mounted that a run of withdrawals will exacerbate the lender's funding problems and force a fire sale of the business. The problems were triggered by the global credit crunch as banks, worried about exposure to dodgy U.S. mortgage debt, jacked up the price of lending to each other.

As the fallout threatened to have wider economic and political impact, Chancellor Alistair Darling said authorities would consider every option to solve the crisis.

By 11 a.m. shares in the bank were down 32 percent at 296 pence, following a 31 percent tumble on Friday to cut the bank's market value to under 1.3 billion pounds. The shares fell as low as 290p and have lost 70 percent this year.

"The franchise is broken -- the deposit franchise at least -- the run on the bank is happening as we speak and could see as much as 12 billion (pounds) of deposits withdrawn," said Mamoun Tazi, analyst at MF Global. "One way for this to stop is for the bank to be taken over."

The Newcastle-based bank provides one in 13 home loans. The central bank, as lender of last resort, stepped in on Friday to offer emergency funding to ease its funding problems after it struggled to borrow in money markets.

The bank had not drawn on the emergency facility by Sunday, the government said.

News of the emergency funding line sent thousands of Northern Rock's 1.4 million savings customers rushing to branches and to the Internet for their money. Customers were estimated to have withdrawn about 1.5 billion pounds on Friday and Saturday.

Some reports said as much as 2 billion pounds has been withdrawn, which would represent about 8 percent of its deposits.

Government, banking and regulatory officials are monitoring the situation closely, trying to halt the run on withdrawals.

But there was an element of panic and frustration across the bank's 76 branches.

"I didn't sleep at all on Friday night. It's a lot of money and I was very distressed and my husband was as well," said Karen Dawson, 53, a lawyer who was among hundreds in line at the Oxford Circus branch after failing to access her account via the Web site and by telephone since the crisis broke.

More significant could be the reaction of postal account holders, however, who account for 10 billion pounds of the bank's 24 billion pounds of retail deposits.

"YOUR MONEY IS SAFE..."

Northern Rock Chief Executive Adam Applegarth sought to reassure customers that their savings were secure via a message posted on the company's Web site, www.northernrock.co.uk.

"Your money is safe with us and if you want some, or all of it back, then you are perfectly entitled to it. Whilst you may have to wait a little longer than usual to receive it, you will get it," Applegarth said in the message posted on Sunday.

Northern Rock has hoisted a "for sale" sign up and banks including Lloyds TSB have considered deals, according to industry sources, but suitors have been put off by difficult credit markets and uncertainty about the true valuation.

Analysts said the bank, approaching its 10th anniversary as a listed company, is unlikely to survive in its present form.

Options include an outright sale or the slicing up of its 100 billion pound mortgage portfolio among the country's other major banks, which industry sources said could happen but was not imminent.

Other alternatives could include a rundown of the business in which cash is returned to depositors, branches closed and loans repaid.

Other bank shares were hit in the wake of the turmoil, with shares in Alliance & Leicester slumping 14 percent and big names such as HBOS, Royal Bank of Scotland and Barclays all down over 4 percent.

 

Additional reporting by Clara Ferreira Marques, Simon Rabinovitch, Gavin Haycock and Matt Falloon;

    Northern Rock shares plunge as customers flee, R, 17.9.2007, http://uk.reuters.com/article/UKNews1/idUKL171031020070917

4.45pm update

Thousands of savers

besiege Northern Rock

Monday September 17, 2007
Guardian Unlimited
Fiona Walsh and agencies

Shares in Northern Rock went into freefall today as the run on the bank gathered pace with investors rushing to dump the stock.

The shares nosedived, plummeting 41% to 257p at one stage, valuing the bank at barely more than £1bn. By the close, the shares had edged back to 282.75p, still down 35.45% on the day.

This follows Friday's hefty 32% drop and means that the group, Britain's fifth-largest mortgage lender, has now lost almost 80% of its stock market value since the start of the year - when it was valued at more than £5bn.

There were heavy losses among other banks, sending the FTSE 100 index of leading shares down by more than 100 points at one stage.


Alliance & Leicester, which suffered sharp falls on Friday, lost another 31.27% and Bradford & Bingley was almost 15.39% lower. HBOS lost 5.47%.


By the close of market, the FTSE 100 was down 106.5 points to 6182.8, or 1.69%.


As much as £2bn is believed to have been withdrawn from Northern Rock accounts on Friday and Saturday, although many online customers were unable to access their funds. The current share price gives the bank a market capitalisation of just over £1bn.


Queues started forming outside the bank's branches in the early hours this morning, with some customers arriving as early as 3am.


In Leeds, around 100 people were queuing outside the Northern Rock on Briggate. Some had even brought chairs and flasks to make their wait more comfortable.


Pensioner Chris Robertson, 67, said he had a lot of money at stake but did not want to take a risk.


He said: "Unfortunately I'm doing what everybody else is doing and panicking. I don't think I'll actually lose anything but I'm joining the herd."


Caroline Clarkson, 39, said she was frustrated by the bank's response to the crisis.


She said: "When you phone them, you can't get through and when you go to the website, it just crashes.


"When you read all the reports over the weekend and you think about your money, I decided it just was not worth the risk. Why risk it when I can take it out today and put it in another account?"


At a branch in Liverpool, one woman, who left clutching a handbag packed with around £3,000 with the strap double-wrapped around her shoulders, said: "It is not much but it's all I have in the world.


"But then, when I think of the staff inside, not knowing how this will turn out and their whole livelihoods are at stake, I feel rotten."


The bank is also bracing itself for a flood of withdrawal requests in the post from savers with postal accounts.


Savers have chosen to ignore assurances that their cash remains safe after the Bank of England stepped in to provide emergency funding. Both the chancellor, Alistair Darling and under-fire Northern Rock chief executive Adam Applegarth have repeatedly stressed that the bank remains solvent.


Speaking on BBC Radio this morning, Mr Darling said: "The root of the problem is in the international markets, in America in particular.


"In the UK our fundamental position is that we have a strong economy, low interest rates, low inflation, which we haven't had in the past and which will stand us in good stead."


Mr Darling will discuss the global financial crisis with US treasury secretary Henry Paulson when they meet later today.


In a message posted on the bank's website, Mr Applegarth made it clear that anyone who wanted to withdraw cash could do so.


"Your money is safe with us and if you want some, or all of it back, then you are perfectly entitled to it," he said. "Whilst you may have to wait a little longer than usual to receive it, you will get it."


However, analysts now believe that a takeover is now the only viable option for the bank. Frantic attempts to find a "white knight" to rescue the business are going on behind the scenes and hopes of a rescue have been heightened after the Bank of England confirmed that its emergency loan would continue to be available following a sale of the business.


Analysts warned that any buyer would have to move quickly. Nic Clarke of Charles Stanley said there was now a "gaping wound" in Northern Rock's reputation and that it has "little future" in its current incarnation.


"The images of customers queuing up in the high street has done irreparable damage to the franchise and when depositors have a wide range of choice of institutions that they can place their savings with why would they choose Northern Rock?", he said.


The takeout price for the bank could something "between 1p and 400p", depending of the quality of the loan book and how long the sale takes, according to Sandy Chen at Panmure Gordon.

    Thousands of savers besiege Northern Rock, G, 17.9.2007, http://business.guardian.co.uk/markets/story/0,,2170892,00.html

'Housing boom over'

as UK bank chaos grows

· Economist warns of sharp downturn
· Tory leader attacks Brown over crisis

Sunday September 16, 2007
The Observer
Heather Stewart and Lisa Bachelor

Britain's house price growth will be halved next year as the global financial crisis exacerbates the impact of rising mortgage rates, according to Nationwide, the biggest mortgage lender.

After the dramatic bail-out of high street bank Northern Rock underlined the impact of the American 'sub-prime' mortgage crisis on Britain's financial sector, Fionnuala Earley, Nationwide's group economist, said she expected house price inflation to slow to around 3 per cent next year.

Thousands of anxious customers queued outside Northern Rock branches for a second day yesterday, ignoring calls for calm from the Chancellor, Alistair Darling, and the bank's management, and sparking fears of a full-blown 'run' on the bank.

Speaking to Channel 4 News last night, Darling said he had been assured by the Financial Services Authority that Northern Rock was capable of meeting its financial obligations to its customers.

In the first signs of political fallout from the crisis, David Cameron accused Gordon Brown of failing to rein in public and private borrowing over the last decade, saying the nation's economic growth is based on a 'mountain of debt'. Writing in today's Sunday Telegraph, the Tory leader says: 'This government has presided over a huge expansion of public and private debt without showing awareness of the risks involved.

'Though the current crisis may have had its trigger in the United States... under Labour our economic growth has been built on a mountain of debt.'

House price growth was running at just below 10 per cent in August, but Nationwide believes it will have dropped to 7 per cent by December and continue slowing throughout next year.

The worldwide credit crunch that pushed Northern Rock to the brink of collapse could make a housing market slowdown worse, Earley warned. 'I think all it can do is make it [the market] cooler: that comes through sentiment, and through expectations.'

With base interest rates at a six-year high of 5.75 per cent, economists said that the feelgood factor was already evaporating and that the Northern Rock crisis could deal a fresh blow to confidence.

'This confirms some of the fears that people had, and reinforces the idea that they need to be more circumspect, and that money is tighter,' said Richard Hyman, director of retail research firm Verdict.

'It couldn't have come at a worse time: consumer confidence was already heading south,' said Kevin Hawkins, director general of the British Retail Consortium, though he added that, as long as Northern Rock was the only casualty, the effects could be short-lived.

A report from property website Rightmove, released on Friday, showed that property prices fell in the last month for the first time in three years. It is expected that, although there will be overall growth in the housing market, some areas of the UK could suffer significant price decline.

Meanwhile, Northern Rock apologised to customers last night, saying it was 'disappointed to see uncertainty caused'. The apology came amid growing speculation of a takeover bid, with HSBC and Lloyds TSB both being mooted as potential suitors. Insiders are predicting that a takeover could occur within weeks to secure the bank's future. One plan currently being looked at by City bankers is to divide the company's £100 billion mortgage portfolio between some of the major banks.

Savers have been rushing to pull out their cash since it emerged last Thursday that Darling had sanctioned an emergency loan from the Bank of England to prevent Northern Rock going bust.

One couple had even camped outside Northern Rock's Cheltenham branch in Gloucestershire overnight, desperate to withdraw the £1m proceeds of a house sale. 'We were told that because our money was in an online account we wouldn't be able to withdraw it there and then,' said Fiona Howard. 'That money is our lifeline, as we are living in rented accommodation at present.'

    'Housing boom over' as UK bank chaos grows, O, 16.9.2007, http://observer.guardian.co.uk/uk_news/story/0,,2170336,00.html

Fears Spread

Among U.K. Bank's Customers

September 16, 2007
By THE ASSOCIATED PRESS
Filed at 2:21 a.m. ET
The New York Times

LONDON (AP) -- Hundreds of customers lined up to withdraw their savings from a British mortgage bank Saturday, 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 global 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.

Treasury chief Alistair Darling and the country's Financial Service Authority tried to assure customers there was no doubt over Northern Rock's solvency.

The authority ''has reiterated yet again tonight that it is satisfied that Northern Rock is solvent, can carry on doing business and, crucially, paying out money if people want to withdraw their funds,'' Darling said on Channel 4 TV on Saturday night.

But The Sunday Telegraph said Northern Rock was preparing itself for a sell-off. Quoting unidentified sources, the paper said one plan would divide the bank's mortgage portfolio between other major banks in what would be a private-sector rescue of the lender.

The bank made the loan request Thursday because it relies heavily on wholesale money markets for cash, and had been unable to borrow the amounts it required from other banks since the money markets choked up last month. That was caused in part by U.S. banks making mortgage loans to Americans with poor credit histories.

Although Northern Rock requested substantial emergency funds at a penalty rate, the bank has said it had billions of pounds in cash at its disposal. It has yet to draw on any emergency funding.

Despite Darling's message, lines stretched around the block Saturday at some of the bank's 76 branches in Britain and the bank extended opening hours to deal with the situation.

''Yes, we are making matters worse, but I do think people need some reassurance from Northern Rock and the government and financial services that their money is safe,'' account holder Jane Taylor told Sky News while waiting outside a branch in Kingston-upon-Thames, west of London.

But others said they had faith in the bank and financial authorities and watched the lines in disbelief.

''It's mostly, in my opinion, ignorance and that's why they're panicking,'' said another bank customer who gave only his first name, Tom. ''I'm leaving mine there.''

Under Financial Services Compensation Scheme, deposits of up to $63,900 are guaranteed should a bank default.

Ron Stout, a spokesman for Northern Rock, told The Associated Press that reckless comments by some analysts about the bank's solvency prompted customers to panic and line up outside branches or strain the company's online banking system.

He said Northern Rock would continue to extend its banking hours, by opening one hour ahead of schedule on Monday, and to reassure customers that their investments are safe with the bank.

    Fears Spread Among U.K. Bank's Customers, NYT, 16.9.2007, http://www.nytimes.com/aponline/business/AP-Britain-Mortgage-Bank.html

FSA reiterates Northern Rock solvent

Sat Sep 15, 2007
10:41pm BST
Reuters

LONDON (Reuters) - The country's financial watchdog reiterated on Saturday that it considers mortgage bank Northern Rock to be solvent and that problems customers are facing in withdrawing money are not linked to its financial health.

Shares in Northern Rock plunged on Friday, and customers clamoured to withdraw money, after the bank agreed an emergency loan from the Bank to cope with a lack of liquidity and high interest rates in money markets.

"The FSA reiterates that it judges Northern Rock to be solvent and that savers can continue to deposit and withdraw funds," the Financial Services Authority (FSA) said in a statement.

"Clearly, there have been some operational problems with queues at some branches and difficulties with the bank's website caused by the unusually high volumes of customers trying to access their accounts as a result of the publicity surrounding Northern Rock.

"These problems are entirely logistical and are in no way related to the bank's solvency or its underlying ability to deliver funds to savers who wish to withdraw."

FSA Chairman Callum McCarthy added: "To be absolutely clear, if we believed that Northern Rock was not solvent, we would not have allowed it to remain open for business."

    FSA reiterates Northern Rock solvent, R, 16.9.2007, http://uk.reuters.com/article/businessNews/idUKL1569711020070915

Customers besiege Northern Rock

Sat Sep 15, 2007
10:34pm BST
Reuters
By Peter Griffiths

LONDON (Reuters) - Thousands of nervous customers queued for hours outside branches of Northern Rock on Saturday desperate to withdraw savings after it was forced to seek emergency funds to weather the global credit crunch.

Queues snaked round the block at branches of Britain's fifth-biggest mortgage provider for a second day after customers were reported to have withdrawn one billion pounds on Friday.

Thousands more jammed the bank's phonelines and Web site to try to get their hands on their money, raising fears that a "run on the bank" could exacerbate problems.

Despite assurances that their cash was safe, some customers said they had lost confidence in Northern Rock after it went to Britain's central bank for emergency funds.

One branch manager was forced to ring the police when a couple barricaded her in her office after they were unable to withdraw one million pounds of savings, according to a report in the Sun newspaper.

"Everything we have in our lives is in there," former hotel owner Fiona Howard told the tabloid. "We would be left with nothing if it is lost."

'CONFIDENCE IS SHATTERED'

Across the country, scores of customers queued from 6 a.m. to withdraw money after the story was splashed across front pages under headlines such as "Panic on the streets of Britain". Staff handed out leaflets saying "savings are safe".

"I just can't take the risk of there suddenly being an announcement that ... there's been another problem and they've closed the bank," one customer told Sky News. "I'm erring on the side of caution."

Another customer, Tony Looch, 68, told the BBC: "My confidence is shattered."

The chatrooms of financial Web site were abuzz with people complaining that they couldn't log on to the bank's web site or get through on the phone.

"I've been trying to take out my savings all night!" one user wrote on www.moneysupermarket.com.

Northern Rock is Britain's biggest casualty of a global financial crisis sparked by default on U.S. mortgages.

It has been hit by banks' reluctance to lend as they hoard cash to cope with the fallout from bad U.S. loans.

On Friday, the government said on Friday it had authorised the Bank of England to provide an unspecified amount of liquidity to Northern Rock.

A spokesman for the bank refused to comment on the amount of withdrawals made. The British Bankers' Association said people should "calm down".

"Northern Rock is a sound and safe bank and there is absolutely no reason for either mortgage customers or savers to worry," it said in a statement.

    Customers besiege Northern Rock, R, 15.9.2007, http://uk.reuters.com/article/businessNews/idUKL154823020070915

Run on the bank

September 15, 2007
From The Times
Patrick Hosking, Christine Seib, Marcus Leroux and Grainne Gilmore

The jitters plaguing financial markets spread to the high street for the first time yesterday as thousands of panicking savers queued to withdraw millions of pounds from Northern Rock, Britain’s eighth-biggest bank.

The rush to pull out savings followed the revelation that Northern Rock had been forced to ask the Bank of England for a rescue injection of finance.

As crowds of customers demanded their money back, shares in Northern Rock slumped by 31 per cent after it alerted shareholders to its difficulties, wiping £900 million from its value. Shares in other financial institutions were also hit, with Alliance & Leicester down 7 per cent and the specialist lender Paragon Group down 17 per cent.

The Bank of England pledged to provide unspecified liquidity support to see Northern Rock through the turbulence while it worked on an orderly resolution to its problems. The bank is braced for a fresh surge of withdrawals from its 76 branches to-day and last night was planning to extend its opening hours.

Adam Applegarth, the chief executive, told The Times that he had ordered extra deliveries of cash in expectation of the deluge.

The nerves were exacerbated yesterday when Northern Rock’s computer system collapsed under the weight of online customers scrambling to transfer money out of the bank. Savers were blocked from seeing details of their accounts, including statements, when they tried to log in. A spokesman said accusations that the bank had shut down its system to prevent a drain on its finances were ridiculous.

Ministers, regulators and bankers tried to calm the panic by issuing reassuring statements that customers’ deposits were safe. The Financial Services Authority, which supervises banks, said that Northern Rock was solvent, exceeded its regulatory capital requirement and had a good-quality loan book.

Alistair Darling, the Chancellor, who authorised the rescue, said: “At the moment there is plenty of money in the system, the banks have got money . . . they are simply not lending in the short-term way that institutions like Northern Rock need.”

Sentiment soured further amid fresh evidence that house prices were starting to fall. Rightmove, the online property site, reported that asking prices slumped by 2.6 per cent last month. That followed a report by the Royal Institution of Chartered Surveyors showing the first fall in house prices in nearly two years.

Northern Rock customers fearing for their savings filled branches across the country, with some queues stretching down
the street. At one London branch, customers queued for more than an hour. Wil-liam Gough, 75, said he did not believe the bank’s assurances that his savings were safe. “They’re telling us not to worry, but we’ve heard it before, with Marconi,” he said, referring to the collapse of the telecoms firm in 2002.

Another saver, Gary Diamond, said: “I don’t want to be the mug left without my savings.”

Another customer, an elderly woman, said that she could not afford to take any chances. “It’s my life savings we’re talking about, my pension. I’ll have nothing left if they go under.”

A retired hotelier and his wife barricaded the Cheltenham branch manager in her office after being told that they could not withdraw £1 million savings without notice. The situation was resolved only when police officers arrived to calm the couple down.

The British Bankers’ Association said: “Everyone should calm down and refrain from making simplistic comments in a very complex area which just causes unnecessary worry and concern. Northern Rock is a sound and safe bank and there is absolutely no reason for either mortgage customers or savers to worry.” It is the first time that the “lender of last resort” facility has been used since the Bank of England set up the present system in 1998. Other banks, including Barclays, have called on the Bank of England for overnight funding in recent weeks, but using the lender-of-last-resort facility is regarded as a much more serious step.

Sources at the Bank emphasised that Northern Rock would pay a penal rate of interest on any borrowings and would have to lodge assets as security.

Many financial institutions have been hit by a sudden shortage of cash and other liquid assets as banks hoard money in anticipation of having to provide finance to complex investment vehicles. Triggered initally by defaults by poor Americans struggling to meet increased mortgage bills, the problem has spread.

Northern Rock has been hit particularly badly because it relies much more on funding from wholesale investors, who have been paralysed by the credit crunch, rather than ordinary depositors. But it also risks being accused of overaggressive lending after lifting new loans by 43 per cent in the first eight months of 2007.

Around 85 per cent, or £24.7 billion, of Northern Rock’s business comes through mortgage brokers. National Savings & Investments, the govern-ment-backed savings institution, said that it saw a 20 per cent jump in the number of inquiries yesterday, the majority from Northern Rock savers.

Northern Rock has around £24 billion of customer deposits, though some of the money is locked up for months in long-term accounts. It said yesterday that it still expected to make an underlying profit of £500-540 million this year.

    Run on the bank, Ts, 15.9.2007, http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2457009.ece

Between Rock and a hard place

- savers besiege bank

· Fears of property crash as lending squeezed
· Northern Rock shares drop 30% after rescue
· Bank websites down as customers panic

Saturday September 15, 2007
Guardian
Larry Elliott and Ashley Seager


Branches of Northern Rock were besieged by savers yesterday as fears grew in the City that the Bank of England rescue package for Britain's fifth-biggest mortgage lender could herald a slide in house prices and further financial collapses.

Amid news that property prices were already falling sharply before the Bank's first use of its lender-of-last-resort facility in more than 30 years, the Newcastle-based Northern Rock was forced to keep branches open late to allow savers access to their money. By last night it was reported a total of £1bn had been withdrawn.

Customers ignored reassurances from the chancellor, Alistair Darling, the British Bankers Association and Northern Rock itself that funds were safe.

In the first real test of internet banking, websites at Northern Rock and many other banks crashed as savers tried to access their accounts. Police had to be called to a branch in Cheltenham, Gloucestershire, when a couple barricaded the manager in her office when she refused to let them withdraw their £1m savings.

Shares in Northern Rock fell more than 30% yesterday, dragging the stock market down. With speculation other mortgage lenders were at risk, the FTSE 100 index closed down more than 1%. A sharp drop in shares of buy-to-let lender Paragon Mortgages made it issue a statement that it had no need to resort to the Bank of England, while Bradford & Bingley and Alliance & Leicester denied they had problems.

"I'm sure there are more to come. Northern Rock was the biggest in terms of size but it's not going to be the only one to go. It's not the only one using that business mode," a City source said, adding that the economy would slow in coming months as lenders tightened their loan criteria and house prices came under pressure.

Property website Rightmove reported asking prices across the country had fallen 2.6% since August, and the London market suffered its first drop in asking prices in three years.

Julian Jessop, an analyst with Capital Economics, said the formal announcement yesterday that the Bank of England offered Northern Rock unlimited funds at a penal rate of interest showed that what had been a credit crunch was now "a good old-fashioned bank run". Senior City sources said questions were being asked whether the Financial Services Authority, the City's watchdog, should have detected the bank's problems earlier.

Northern Rock is now seen as a £2bn takeover target after the credit crunch prompted by the US sub-prime mortgage crisis left it unable to raise funds in the money markets. Barclays and National Australia Bank, which owns the Clydesdale Bank and Yorkshire Bank, were last night being tipped as potential bidders.

Northern Rock was heavily exposed to the turmoil in the global markets because it borrowed 80% of its funds from wholesale money markets, which have dried up in recent weeks. It expanded aggressively in the first half of the year, writing one in four new mortgages, and would lend first-time buyers many times their salary.

Adam Applegarth, chief executive of Northern Rock, said: "We can't see the end of this. We don't know how long it will last. We decided we had to move earlier rather than later. There was no point sitting around like Mr Micawber waiting for something to turn up."

Mr Darling said Britain's economy and its banking system remained strong. "Northern Rock is the only institution that has come to the Bank of England," the chancellor said. "At the moment there is plenty of money in the system, the banks have got money...they are simply not lending in the short-term way that institutions like Northern Rock need."

    Between Rock and a hard place - savers besiege bank, G, 15.9.2007, http://business.guardian.co.uk/markets/story/0,,2169786,00.html

Confidence in Northern Rock collapses

Published: September 14 2007
08:57
Last updated: September 14 2007
16:25
The Financial Times
By Chris Hughes in London

Fears about the future of Northern Rock grew on Friday as shares in the Newcastle-based lender slumped and customers lined up to withdraw funds.

The mortgage lender said in a statement on Friday that the Bank of England had agreed to provide it with as much funding “as may be necessary” as it warned that it would otherwise be incapable of refinancing maturing liabilities and flagged that full-year profits would be 20 per cent below consensus forecasts.

The Newcastle-based bank said that a severe liquidity squeeze in the wholesale markets had left it able to raise funds only in the short-term wholesale markets, and in insufficient quantities to refinance maturing liabilities and to write business at previous levels.

“Northern Rock has agreed with the Bank of England that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the Bank of England or entering into repurchase facilities with the Bank of England,” it said. “This additional source of funding will enable Northern Rock to adapt its business model in line with the developing market conditions.”

Confirmation that the Bank had thrown Northern Rock a lifeline unnerved investors and sent Northern Rock shares tumbling 30 per cent. By late afternoon the shares were down 201¾p or 31.6 per cent at 437¼p.

Shares in Paragon Group, a specialist buy-to-let lender, slumped nearly 20 per cent and housebuilders were also caught up in the sell-off worries about a broader housing market slowdown spread.

The unprecendented move by the Bank of England, which was approved by the Chancellor of the Exchequer, is the most dramatic illustration to date of how the British banking sector is being hit by the wave of turmoil that has paralysed the money markets.

Northern Rock is the first institution to be propped up since the Bank, in 1998, revised the rules under which it will act as a lender of last resort to banks in financial difficulty.

The bank said it had not used the facility yet and did not disclose the financial terms for the loan.

But Adam Applegarth, the chief executive, remained confident the bank, which has £24.35bn of deposits, would continue to trade.

“The support of the Bank of England through this facility reflects a recognition that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book,” said Adam Applegarth, the chief executive.

However, the bank said underlying pre-tax profits this year would be £500m to £540m, down from £588m last year and versus market expectations of £647m. Total loan growth for the year would be 9 per cent, even though net lending was up 43 per cent in the first 8 months of 2007.

The dire warning sent Northern Rock shares tumbling in opening trade. The shares fell as low as 491p, 23 per cent below Thursday’s closing price and at levels not seen since 2001.

The size of the funding was limited by the collateral that Northern Rock could provide, which was mainly prime residential mortgage assets. The bank likened the facility to emergency lending available to Eurozone banks from the European Central Bank.

Mr Applegarth said the company had slowed down its lending in response to the severe tightening of credit conditions that started on August 9.

The bank had initiated a recruitment freeze and cost growth would be only 3 per cent this year.

Mr Applegarth declined to outline how the company planned to develop its business model, saying only that the funding from the Bank was conditional on demonstrating “a sound business plan” and that the board was aware of its fiduciary duty to shareholders in respect of any possible takeover approaches.

“We are trying to guess what 2008 will look like. It will be a different Northern Rock. We will evolve to adapt to market conditions,” he said. “The market will thaw, the question no one can answer is when.”

Mr Applegarth also moved to calm Northern Rock’s customers saying that with the backing of the Bank, the company was probably “the safest place to invest”.

“Customers should be greatly reassured,” he said. “These facilities are only provided to companies with a sound future.”

But he warned that the mortgage market would see higher pricing in future. The outlook for 2008, however was hard to predict, he said.

The political reaction to the news was led by Alistair Darling, chancellor of the exchequer, who confirmed that Northern Rock was the only bank that had sought to use the Bank’s emergency facility.

“”Northern Rock is the only institution that has come to the Bank of England,” Mr Darling told Radio 4’s Today programme.

He pointed the finger of blame for the current crisis in the credit market at US lenders.

”Perhaps if someone in America had looked more closely at who they were lending to... perhaps some of these problems would have been avoided,” he said.

Northern Rock revealed that it had £325m invested in so-called structured investment vehicles, off-balance sheet schemes that debt investors have baulked at refinancing over the summer.

Mr Applegarth said the bank had invested in the SIVs as part of a balanced portfolio investment approach and urged other banks to reveal their exposures. Northern Rock did not have an off-balance sheet conduit – vehicles similar to SIVs but run purely for banks – and did not invest in asset-backed commercial paper.

“The way to get the freeze to thaw is for banks to come out and show what’s on their balance sheet,” he said.

He also sought to reassure over the bank’s credit quality, saying arrears of three months or more were 0.47 per cent at the end of August, the same as their level in June.

Analysts at Cazenove said in a note: “We assume Northern Rock will cease writing new business. The lack of new business flow and a penalty cost of funding will have a detrimental impact upon Northern Rock’s earnings ... Northern Rock is unlikely to remain independent but the value of the company to an acquirer may be significantly below the current share price.”

Cazenove said the company was worth 424p a share, but warned of a possible run on the retail deposit book.

Analsysts at Credit Suisse wrote: “If the share price falls a lot further, we think bid interest becomes increasingly likely. The loan from the Bank of England is temporary. Fundamentally Northern Rock depends on debt investor confidence in its model, and without that, there is no model.”

    Confidence in Northern Rock collapses, FT, 14.9.2007, http://www.ft.com/cms/s/0/f09ec422-6294-11dc-b3ad-0000779fd2ac.html

Banks in trouble

Hit by a rock

Sep 14th 2007
From Economist.com

The credit crisis hits the high street

A CENTURY ago, the depth of a banking crisis was measured by the length of the queue outside banks. These days, financial panics are more likely to be played out through heavy selling in share, bond or currency markets than old-fashioned bank runs. That makes the sight on the morning of Friday September 14th of a queue of people waiting (patiently in most cases) to take their money out of Northern Rock, a wounded British mortgage bank, all the more extraordinary. A crisis that started in America’s subprime mortgage market where dodgy loans were made to unsound borrowers has shaken the world’s financial capitals since mid-August. Now it has landed on the high street at one of Britain’s biggest mortgage lenders.

Northern Rock faced the triple ignominy of becoming the first British lender in 30 years to be granted a bailout by the Bank of England, losing 29% of its value on the stockmarket, and having to coax savers not to withdraw their money in a rush. (Customers queuing up in its home town of Newcastle reportedly burst out laughing when bank staff asked if anyone wanted to deposit money.) Its troubles weakened the world’s stockmarkets, and sterling also fell.

Yet Northern Rock appears to be less of a protagonist in the current credit crisis than a bad case of collateral damage. Its problems were caused not because it risked its shareholders’ money on poorly judged investments linked to American subprime mortgages, as many far bigger and more international banks have. Instead, it has been hit by a failure to borrow from other banks to fund its mortgage lending practices. The interbank market where such borrowing usually takes place has partially seized up in recent weeks because big banks are hoarding as much capital as they can to pay for the cost of their own bad investments.

Granted, Northern Rock’s racy business model exposed it more to such shocks than conservative lenders with large branch networks and steadier sources of finance, such as extensive customer deposits. It chose instead to borrow cheap funds when they were available in the markets, which enabled it to offer more attractive mortgage rates than some of its competitors. Its loan book has increased aggressively in recent years to about £17.4 billion ($35 billion).

In agreeing to bail it out, British financial authorities stressed that Northern Rock was “solvent, exceeds its regulatory capital requirement and has a good quality loan book.” The Bank of England charged the bank a penalty rate for the loans, but allowed it to borrow as much as it could provide collateral to support. That suggests the line of credit is potentially very large, but the neatest solution may eventually be its sale to a bigger bank.

The rescue has brought the crisis directly to the Bank of England’s front door. Until this month, it had stood aloof from efforts by America’s Federal Reserve and the European Central Bank to provide liquidity to banks to ease the crunch in the short-term money markets. Its governor, Mervyn King, this week made clear the importance of charging at penalty rates to prevent moral hazard. But Northern Rock is not alone among the world’s banks in funding itself in the wholesale markets. Until global interbank borrowing and lending opens up a bit, central bankers around the world will be watching anxiously for a repeat performance in their own neighbourhoods.

    Hit by a rock, E, 14.9.2007, http://www.economist.com/daily/news/displaystory.cfm?story_id=9821067&top_story=1

5pm update

Northern Rock shares plunge

Friday September 14, 2007
Guardian Unlimited
Fiona Walsh, business editor

Shares in Northern Rock plummeted more than 30% today and there were heavy losses among other banks as the crisis-hit mortgage lender issued a profit warning and confirmed it had received emergency funding from the Bank of England.

The gloom in the banking sector spread to the rest of the market, pushing the FTSE 100 index down by more than 150 points at one stage. But as Wall Street put in a resilient performance, the FTSE halved earlier losses to close 74.6 points lower at 6289.3, a fall of 1.2%.

On Wall Street, the Dow Jones Industrial Average tumbled more than 100 points within the opening minutes of trading, to 13,323 as US investors took fright at further signs of the sub-prime contagion spreading to Britain. By London close the Dow was just 4.1 points lower at 13,420.82.

In an unprecedented move last night, the Bank of England was forced to hand emergency funding to the group, Britain's fifth-largest mortgage provider. It has become the first major UK financial institution to run into serious difficulties as a result of the global credit squeeze, which has seen lending between banks shudder to a halt.

The Bank's intervention was agreed with its governor, Mervyn King, the chancellor, Alistair Darling, and the Financial Services Authority.

As queues of customers formed outside some branches of the Newcastle-based bank, both Mr Darling and Northern Rock chief executive Adam Applegarth urged customers to remain calm.

Speaking to BBC radio, the chancellor said Northern Rock was the only institution to have called for funding from the central bank and Britain's economy and banking system remained strong.

"At the moment there is plenty of money in the system, the banks have got money ... they are simply not lending in the short-term way that institutions like Northern Rock need."

He added: "What is encouraging is that we have a very strong economy in the UK."

Mr Applegarth stressed that Northern Rock remains solvent and said customers should be "very greatly reassured" that the business is now backed by Bank of England funds.
 

"If I was a depositor, I'd think this was probably the safest place to invest," he said.

Northern Rock has 800,000 mortgage holders and, over the first half of 2007, was the largest single new mortgage lender in Britain, with a near 19% share of the market.

It also has 1.4 million customers with savings accounts. In total it has £24bn in retail deposits.

Based in Newcastle, the bank employs 6,300 people. Unions said today they were seeking assurances from the group on jobs.

Karen Reay, national officer at Unite said that while staff have been told that there will be no compulsory redundancies, "Unite wants an undertaking that there will not be any voluntary redundancies given that they have today announced a recruitment freeze."

Northern Rock expects its profits for 2007 will be now be some £100m less than the City had been expecting, but Mr Applegarth declined to give a forecast for 2008.

He said he was not permitted to give any details about the amount of central bank backing, which is linked to the group's mortgage assets, or what timescale had been put on the funds: "It will be of sufficient duration in the Bank's view to see us through this liquidity squeeze," he said.

Northern Rock has not drawn on the emergency funds, Mr Applegarth said: "They are there as a backstop if we should need them."

He declined to say at what rate the cash would be provided, other than it was a "penalty rate".

Northern Rock started slowing its lending activities in August, when the credit crunch began to bite. "We thought a thaw might start in early September," said Mr Applegarth, but the situation worsened.

The central bank funds will now enable the group to be "more selective" than previously, he said.

Profits are now expected to be between £500m and £540m this year, substantially below City forecasts of around £650m.

By the close, Northern Rock shares were down 31.5% to 438p wiping £846m off its stock market value. The shares were already down by 50% this year.

Other banks were also dragged lower, with Bradford & Bingley and Alliance & Leicester each down by around 7% and HBOS falling by almost 4%.

    Northern Rock shares plunge, G, 14.9.2007, http://business.guardian.co.uk/markets/story/0,,2169152,00.html

Bank of England

in dramatic intervention

· Northern Rock forced to seek emergency funding
· Savers are assured that their money is secure

Friday September 14, 2007
Guardian
Ashley Seager

The Bank of England was last night forced to hand emergency funding to one of Britain's biggest mortgage providers - Northern Rock - as it became the first major financial institution in the UK to run into serious trouble as a result of the credit crisis that has caused turmoil in world financial markets.

The Bank's intervention was agreed with its governor, Mervyn King, the chancellor, Alistair Darling, and the Financial Services Authority sources close to the situation said last night. The news is likely to lead to big sell-offs in banking stocks when the stock market opens today.

Northern Rock customers were urged to stay calm. The lender has sought the funding because of a cash shortage caused by the month-long crisis in global credit markets which began with the collapse of the so-called "sub-prime" mortgage market in the United States.

John McFall, the chairman of the Treasury select committee, said savers' money was safe. "I don't think customers of Northern Rock should be worried about their current accounts or mortgages," he said. "The fact that the Bank is willing to act as lender of last resort should be reassuring, because it means they think the problems are temporary."

Although the amount sought by Northern Rock was not clear last night, this is the first time in years that the Bank has had to perform its traditional role as lender of last resort. It means depositors' money in the bank is safe, especially as Northern Rock has more than £100bn of assets.

Northern Rock faces the same problems as many other banks, all of which routinely borrow large amounts from each other every day. Since the sub-prime mortgage market crumbled in the US last month, banks have become wary of lending to each other, and the interest rates they charge each other has risen to more than one percentage point above the Bank of England's 5.75% base rate. Two weeks ago Barclays ago had to resort to the Bank's permanent standing facility and borrow £1.6bn although it said that was due to a glitch in its technical operations.

Northern Rock is thought to have had to apply for a larger amount to keep its cash flow running. The Bank declined to comment on the funding last night, as did Northern Rock.

Liberal Democrat Treasury spokesman Vince Cable said: "This is a very serious development indeed and it was entirely predictable, since Northern Rock is one of those banks which has been aggressively increasing its market share by offering mortgages at multiples of income well in excess of prudent levels. It is not surprising that in the growing credit crunch the market should start to become alarmed about its future viability."

A spokesman for the Newcastle-based lender said: "The company is aware of its obligations to inform the market if there is a material change in its circumstances." He added that its next scheduled trading update is due on October 1. "If it needs to make an announcement in the meantime it will do so," he said.

Northern Rock is not the first European victim of the sub-prime crisis. Two smaller German banks had to be bailed out or bought out and several hedge funds have gone bust.

Mr King told a parliamentary committee on Wednesday that the central bank would provide emergency loans to lenders that ran into difficulties but the problems would have to be the result of temporary market conditions. He insisted it was not the Bank's job to bail out those that made poor lending decisions.

Northern Rock specialises in mortgages, which has made other banks reluctant to lend to it in recent weeks. Its shares have halved in value in the past month. The company loaned almost one of every five mortgages approved in the first half of the year.

Speaking on BBC Radio 4's the World Tonight, Eric Leenders, executive director of retail of the British Bankers' Association, said: "We have to keep a sense of proportion and we have to recognise that we are in exceptional circumstances."

The Bank yesterday made its biggest concession yet to banks caught in the credit crisis, giving them more flexibility to borrow, without penalty, so they could manage daily cash flow. The move was designed to lower lending rates between banks.

The Bank, which has until now taken a largely hands-off stance on the credit crunch, allowed banks to top up reserves they hold in central bank coffers, and can draw cash against, by £4.4bn. Commercial banks snapped up the offer - draining the fund in less than an hour. Overnight inter-bank lending rates fell on the news to 5.87% from 5.9%. Three-month rates also eased to 6.88% from a nine-year high above 6.9%, sparking hopes the credit crunch may be starting to ease.

    Bank of England in dramatic intervention, G, 14.9.2007, http://business.guardian.co.uk/story/0,,2169138,00.html

Savings rates hit six-year high

Published: 2007/09/13
12:59:14 GMT
BBC News

For the first time in six years, it is now possible to earn interest on your savings of 7%.

The recent rise in the cost of lending between banks, which has pushed up some mortgage rates, is now leading to higher savings on some accounts.

The Stroud and Swindon building society has launched a one-year investment bond offering 7.05%.

And the Standard Life bank is also offering a similar deal at 7%, although for just six months.

The financial information service Moneyfacts said that in the past two weeks, 20 different banks and building societies had raised at least one of the interest rates they offered to savers.

Rachel Thrussell of Moneyfacts said some rates had gone up by 0.35 percentage points.

"Lenders are looking for alternative ways to fund their mortgage lending, and it seems as if increasing deposits has been the first port of call for many," she said.

"A return of 7% is quite outstanding," she added.

Good news?

Most attention has focused on the effect that the banks' recent liquidity crisis is having on their mortgage rates.

In the past day, the Abbey, Halifax and Standard Life have raised the rates on their tracker mortgages for new borrowers.

And the Governor of the Bank of England, Professor Mervyn King, warned that the cost of borrowing generally might be pushed higher.

"These changes... are likely to have consequences for the wider economy through the interest rates for borrowing and lending faced by households and companies," he told MPs this week.

For savers, who greatly outnumber mortgage borrowers, this is good news.

There are roughly seven times as many people with savings accounts of one sort or another as there are people with mortgages.

    Savings rates hit six-year high, BBC News, Published: 2007/09/13 12:59:14 GMT, http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/6993094.stm

House prices

and the great affordability gap

September 5, 2007
From The Times
Sam Coates, Political Correspondent

Mortgage payments are making up the biggest share of take-home pay for 17 years, according to figures released today.

The affordability gap has grown because property prices have risen three times faster than salaries in the past decade. Homeowners are spending a bigger proportion of their salary on the mortgage than at any time since the summer of 1990, according to a bleak assessment by the Royal Institution of Chartered Surveyors (RICS).

First-time buyers must spend almost five times more than they did a decade ago to get on the housing ladder, with poorer families having to save almost a year’s salary for stamp duty and a deposit.

The survey comes before tomorrow’s meeting of the Bank of England, which is expected to put a further rise in interest rates on hold. The Bank has already raised rates five times in the past year.

The new data raises the prospect of a surge in home repossessions, puts pressure on Gordon Brown and has prompted attacks from both Left and Right. The Conservatives say that Labour’s increases in stamp duty have hit first-time buyers hard.

The Prime Minister made housing an early priority, announcing plans to build three million homes by 2020, with up to 70,000 new properties a year to be designated as social homes for key workers and low-income families.

David Stubbs, the RICS senior economist, said: “First-time buyers are facing an enormous struggle to access the housing market. This may worsen if the turmoil in the US market forces mortgage providers to tighten lending criteria and demand even higher deposits.”

But he added that pressures may be nearing their peak, with house-price growth expected to be below earnings growth in 2008, while interest rates may also start to fall during the second half of next year.

Grant Shapps, the Shadow Housing Minister, said: “Despite all Gordon Brown’s rhetoric, it is now more difficult than ever to get on the housing ladder. Labour ministers have made life harder for those trying to buy a property, with additional costs like stamp duty which now hits first-time buyers.

“These figures demonstrate that, after ten years, this Labour Government has made the dream of homeownership more distant than ever for millions of people.”

The study found large regional variations, with London the most difficult place for low-earning couples to get on to the property ladder, followed by the South East and the South West.

In all of these regions couples on low earnings would have to save more than their combined annual take-home pay to afford a deposit and the stamp duty.

Research from Abbey, the high street bank, showed that first-time buyers in the South borrow nearly a third more than those in the North. People buying their first home in the South now borrow an average of £128,370 — 31 per cent more than the £89,189 that first-time buyers in the North borrow.

The gap between pay and house prices has grown most in West Sussex, where prices have gone up more than nine times faster than salaries, followed by Waltham Forest, in East London and Luton, in Bedfordshire, according to the RICS study. In Kensington and Chelsea, in Central London, the average property price of £500,000 is almost 20 times the local average annual salary of £26,000.

Across London, couples in the bottom quarter of earners are now having to spend 51 per cent of their post-tax income on their mortgages, compared with 33 per cent for couples in Yorkshire and Humberside.

Brendan Barber, General Secretary of the TUC, called on the Government to take action. “These stark figures bring alive the housing crisis,” he said. “They show just how quickly buying your own home has gone out of the reach of many working people.

“It is striking that house prices seem to have gone up in line with the pay of top directors and the super-rich, rather than middle and low earners.”

Yvette Cooper, the Housing Minister, last night admitted that the Government had more to do. “This report shows how important it is for councils, communities and house-builders to back plans for two million more homes by 2016.

“The long-term rate of housebuilding has not kept up with rising demand, causing long-term house prices to increase. The level of new housebuilding is at its highest since 1990, but we need a national consensus on building more homes.

“Those who are still opposing new homes need to face up to the unfair consequences for first-time buyers and young families who badly need new affordable homes.”

    House prices and the great affordability gap, Ts, 5.9.2007, http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article2388503.ece

12.30pm

House price growth slows to 0.1%

Wednesday August 29, 2007
Guardian Unlimited
Angela Balakrishnan

House price inflation eased last month to its slowest pace in a year, new data showed today, suggesting that five interest rates rises in a year are taking their toll on the housing market.

Figures from the Land Registry showed that house price growth in England and Wales slowed in July to a monthly rate of 0.1% - the weakest monthly rise since June 2006. The annual rate of increase is also well below the double-digits reached earlier this year, rising by 8.8% in July. This is down from an annual pace of 9.1% in June and a monthly rise of 0.4%.

The Land Registry said that the average house price rose to £181,460 last month.

"The growth rate divergence between London and the rest of the country persists," the agency said in a statement. "London, and to a lesser extent, the south-east, continue to ensure positive house price inflation."

The Bank of England's monetary policy committee has raised interest rates five times from 4.5% to 5.75% since last August and although many housing market surveys remain robust, there has been growing evidence that the market is coming off the boil.

    House price growth slows to 0.1%, G, 29.8.2007, http://money.guardian.co.uk/houseprices/story/0,,2158257,00.html

City bonuses hit record high

with £14bn payout

Executives fuel spiralling demand
for luxury goods amid growing inequality

Tuesday August 28, 2007
Guardian
Ashley Seager

City bonuses have increased by 30% to a record £14bn this year. The rise is twice as big as in 2006 and likely to exacerbate the widening gap between executive and shop-floor pay. The bonuses come against a background of record debt, rising bankruptcies and home repossessions.

Analysis by the Guardian of preliminary data from the Office for National Statistics (ONS) shows that bonuses across the economy rose 24% this spring to £26.4bn, comfortably exceeding the country's entire transport budget. More than half, £14.1bn, was earned by the 1 million people in the financial services sector. The figure for 2006 bonuses was £10.9bn.

The bonuses have fuelled unprecedented demand for luxury goods and high-end property. Bonuses are regularly cited by estate agents as a key factor in pushing up property prices in London.

The estate agent Savills says that prime London property prices have risen 30% in the past year while prices in almost all other regions stagnated. According to the Royal Institute of Chartered Surveyors, City buyers were behind a 20% surge in farmland prices last year as the high-rollers moved to buy up a chunk of the countryside, often surrounding a weekend retreat.

The waiting list for a new Rolls-Royce is now five years and there is a shortage of crew members for superyachts. Worldwide, 688 yachts measuring more than 80ft were launched and there will be 250 more this year.

The majority of the £14.1bn will have been earned by a few at the top of the City tree pulling in hundreds of thousands or even millions in spring bonuses at the end of a year which saw growth in the City account for more than half of all growth in the economy.

A recent survey of hedge funds estimated last year's bonuses of Noam Gottesman and Pierre Lagrange, both 44 and directors of London-based GLG Partners which manages £40bn of hedge funds, at between £200m and £250m each.

Last year saw a continued boom in mergers and acquisitions, hedge fund activity and private equity buyouts, peaking with the recent £10bn buyout of Alliance Boots.

Bonuses across the economy rose sharply because profits are at a record high at British firms following several years of strong growth in the world economy. Figures from the ONS on Friday showed profits growth of 16% in the second quarter of the year, the biggest rise for nearly 13 years, while wage growth of just 3.6% was the slowest in more than five years.

In spite of a big increase in welfare payments to those at the bottom end of the income scale over the past decade, inequality in Britain has started to widen.Sir Ronald Cohen, one of Britain's richest men and a founder of private equity group Apax warned recently that the gap between rich and poor could lead to riots. But analysts say the record bonuses may represent the peak for some time to come. Some have estimated that the recent turmoil in financial markets, which led to some big losses for hedge funds and a drying up of private equity buyouts, could mean bonuses paid early in 2008 will fall by 20%.

The record bonuses were condemned last night condemned by the trade unions: "These figures suggest that the fortunes of the City super-rich show no sign of abating while thousands of vulnerable workers languish on poverty wages," said Brendan Barber, the TUC's general secretary.

"How to tackle the increasingly inequitable nature of our society will be the top concern of unions in Brighton next month."

Richard Lambert, the director-general of the CBI, said: "Bonuses, like other performance-related pay mechanisms, are a very effective way to motivate employees and are used across the entire business spectrum, not just the financial services sector."

He added that the City contributed enormously to the vitality of the country and paid about one-fifth of all corporate tax revenues last year.

City bonuses hit record high with £14bn payout, G, 28.8.2007,
https://www.theguardian.com/business/2007/aug/28/
money.executivepay