Northern Rock: Gordon Brown's big gamble

[133724]

With every previous attempt to reassure the bank’s customers ending in failure, the Prime Minister took the gamble of putting up £21billion of taxpayers’ money to halt the panic withdrawals.



The Government was forced to act after Northern Rock branches were besieged for a third day by thousands of customers queueing all day to empty their accounts. By the end of trading £1billion had been withdrawn, taking the total to £3billion since last Friday.

As the bank’s share price continued to fall, anxiety in the City spread to other mortgage lenders. Almost a third was wiped off the value of Alliance & Leicester shares, while Bradford & Bingley shares suffered a 15·4 per cent slump.

As the Government’s attempts to shore up public confidence in the banking system became increasingly desperate, the Treasury said it would also act as a guarantor for any other lenders that got into similar difficulties, leaving it open to an almost limitless financial liability. The acid test for Mr Brown’s high-risk strategy will come when the banks open for business today and discover if the Government’s reassurances have worked. If the queues return — or, worse still, spread to other banks — it will amount to a public vote of no confidence in Mr Brown’s strategy, as well as seriously damaging his authority.

http://www.telegraph.co.uk/news/main.jhtml;jsessionid=LFDHGSZDI3UJXQFIQMFSFFOAVCBQ0IV0?xml=/news/2007/09/18/nrock118.xml

[lurky]

1. Is there any equivalent of FDIC deposit protection in the UK?

Or do customers just hope that the B of E is nice enough to bail out their bank if it gets into trouble? I'm just wondering what's causing all those people to panic.

[Beerboy]

3. I've seen that deposits are guaranted to 31,000 Pounds.

That's at least $62,000 American, a tidy sum. Now might be a good time to look into buying shares of these banks.

[muriel_volestrangler]

6. More exactly, the first £2,000 is guaranteed to be returned in full

and then the next £33,000 (or maybe £31,000, I'm not sure) is guaranteed to be returned at 90%. Of course, that second bit may mean that people's life savings won't be wiped out (a good thing), but still means it can be worthwhile withdrawing funds if there's some doubt about the future. If you have, say, £5,000 deposited - not a great deal, after all (not enough to buy any new car, for instance) - you have £300 at risk if the bank collapses. So if in doubt, a lot of people may have thought they were better off playing safe, and moving their money to somewhere else. The rule clearly wasn't designed to stop rushes on banks.

[Blackhatjack]

2. Pay attention --coming to a US Bank near you!

At some point the Fed Reserve is going to stop pumping money into the economy because it is devaluing the dollar.

When that day comes, we may see lines like those in Britain today --regardless of the FDIC protection.

[Beerboy]

4. I'm pretty sure it's been done before.

Why would anyone want the U.S. mint printing presses to run triple shifts? I imagine those holding U.S. dollars are salivating right now, hoping the Fed releases a statement like your post.

[Blackhatjack]

5. Pressure from those holding our debt is already strong....

Venezuela has already begun converting 'dollars' to 'euros' and 'yen.'

China and Japan are holding huge amounts of America's debt. They don't want to see further devaluation of their holdings from the Fed pumping billions into the system. They also are deadset against an interest rate cut, and are calling for interest rate hikes as an incentive not to convert their dollar holdings.

The US is in a box on this one. The market has already factored in a rate cut, and if that does not materialize you will begin to see institutions and individuals move their money into investment vehicles that track markets overseas. If the transfer were big enough, and banks and mortgage companies needed more funds than they could borrow at a reasonable rate, we could see 'runs' on banks here just like in Britain.