"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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