Sep

17

"It's not that I disbelieve Northern Rock," customer Anne Burke, 50, said as she waited with her 90-year-old father in a line of 130 people outside the Brighton branch. "But everyone is worried and I don't want to be the last one in the queue. If everyone else does it, it becomes the right thing to do." (Bloomberg News)

This is an interesting example of mob psychology and herd behavior, particularly in light of the following facts:

1) The Bank of England has declared Northern Rock to be solvent, and is providing massive liquidity to meet withdrawals. Additionally, the British FDIC equivalent guarantees deposits up to 31,700 pounds.

2) The credit default swaps on Northern Rock are trading around 170 basis points — rather tighter than several big US broker-dealers.

3) Alliance & Leicester's (the 7th largest bank in the UK) stock price fell about 30% today as the panic spread to a second institution. A company spokesman said that he "knows no reason for the share price fall."

The last time the Bank of England provided "emergency funding" to a bank in these circumstances was 1973 — when the economic landscape was obviously very different.

The Chancellor of the Exchequer just issued the following statement:

"I can announce today … should it be necessary … we with the Bank of England would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability."

It sure isn't 1933 …


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2 Comments so far

  1. gabe on September 17, 2007 3:09 pm

    apparently The Wreck is tightly connected to the Labour elite and tried to subvert Thatcher during the miners’ strike 20 years ago by letting them not pay their mortgages while they were out on strike for the KGB.

    from http://www.order-order.com/

    “Northern Rock is a regional bank from Labour’s North-Eastern electoral heartlands. Labour supporting figures are on the board. Sir Derek Wanless, Gordon’s favourite banker, chairs the Risk and Audit committee. Sir Iain Gibson sits on both those committees and was appointed by Gordon to the Court of the Bank of England. As far back as the miners strike it has been seen as a “Labour” bank. In the eighties Conservative ministers were furious when striking miners were told not to worry about their mortgages by Northern Rock - removing a pressure on them to return to work. The Labour movement lauded them for it and for their giving of 5% of profits to North Eastern charitable projects.”

  2. Paul on September 18, 2007 3:49 am

    ‘’ 2) The credit default swaps on Northern Rock are trading around 170 basis points — rather tighter than several big US broker-dealers. ‘’

    I believe this to be untrue: US brokers 5y CDS are (currently!)trading considerably tighter than Northern Rock and are much more liquid. GS and MS around 60/70, LEH and BSC around 130/140.

    What is interesting is that CIT and CFC are still trading wider: both around 260. So it seems the credit market at least has some confidence in Northern Rock. The story is not a new disaster and we have seen worse recently. The risk however could be if people start to withdraw money from Alliance & Leicester, Bradford and Bingley etc etc.

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