Northern Rock stock tumbles 30% as withdrawals soar

LONDON: Northern Rock, the UK mortgage lender bailed out by the Bank of England last week, tumbled to a seven-year low in London trading after customers lined up at branches across the country to withdraw their savings.

Trading in the shares was suspended briefly Monday morning after the stock tumbled more than 30% as the London Stock Exchange opened. Before trading was suspended at 0710 GMT, the shares were down 140 pence to 298 pence, on top of a 31% fall Friday. It has slumped 77% from the all-time high in February.

Hundreds of clients ignored assurances from CEO Adam Applegarth and UK chancellor of the exchequer Alistair Darling that their deposits are safe after the biggest rescue by the central bank in 30 years.

The bank said on Monday it had not yet drawn any funds from an emergency facility it had arranged with the Bank of England.

“Savings are safe. The Bank of England wouldn't have given us this facility if we weren't a solvent, well capitalised bank,” a spokesman for the bank said, as thousands of customers continued to withdraw funds.
As the fallout threatened to have wider economic and political impact, Darling said authorities would consider every option to solve the crisis.

UK banking rules only safeguard £ 31,700 for individual depositors and many did not want to take any chances.
“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.”

“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 in central London.

“We thought we would do what everyone else is doing. Rightly or wrongly it’s a chance you can’t take.”
Merrill Lynch cut its earnings estimate by about 50% for 2007 and said future profit is “little more than guesswork.” Analysts said the bank may be split up or acquired.

“What we’re seeing with Northern Rock is a crisis of confidence,” said Neil Wesley, who helps oversee about £165 billion at London-based Morley Fund Management. “It will not continue to exist in its current form.”

The lender’s £100 billion of mortgages may be broken up between UK banks, the Sunday Telegraph said, citing unidentified people close to the company. New York-based Merrill is advising Northern Rock, and possible buyers include London-based HSBC Holdings, Lloyds TSB Group and Barclays, as well as Edinburgh-based Royal Bank of Scotland Group Plc and HBOS Plc, the paper said.

Northern Rock, whose roots date back to 1850, required emergency financing because it relies on the capital markets rather than deposits for 73% of its funds and the collapse in subprime mortgages in the US drove market rates higher.

The cost of overnight borrowing in pounds climbed 60 basis points to 6.47%, the biggest increase since June, according to the British Bankers’ Association. The gap between the three-month London interbank offered rate and the Bank of England’s benchmark, currently at 5.75%, is near the widest in at least two decades.

“The high costs of wholesale funding will continue,” said Sandy Chen, a London-based analyst at Panmure Gordon. “The liquidity crisis will deepen into an insolvency crisis.”

Northern Rock’s debacle and the increase in mortgage costs may also bring an end to the decade-long property boom in the UK.