Northern Rock suitors 'will not get guarantees from Bank'

Click to follow
The Independent Online

Northern Rock's future as a viable business hangs in the balance after the Bank of England refused to provide guarantees to potential bidders.

Lloyds TSB came close to buying Northern Rock at the start of last week but the deal fell apart. Banking sources said Lloyds TSB was asking for support from the Bank of England on terms the central bank had to refuse.

The Bank of England last week backed Northern Rock by offering funding at a penal rate, said to be 7 per cent, secured on mortgage assets.

Yesterday the Bank of England denied that it had refused to transfer the facility to cover Northern Rock's loan book if it was bought. "Any bidder would be able to take up this facility for any unexpired term that is left," a spokesman said.

With nearly £2bn of funds taken out on Friday and Saturday, Northern Rock and the authorities are in a race against time to bolster public confidence to stop the Newcastle-based mortgage lender from imploding.

The Bank of England's emergency funding was meant to maintain customer confidence in the mortgage lender, but news of the guarantee sent savers flocking to the former building society's branches and its website to get their money out.

Industry sources said that unless its decline is halted soon, there is little chance of Northern Rock being sold as a going concern, threatening 6,500jobs, mainly in the North-eastof England.

If Lloyds TSB had bought Northern Rock, the price would have been at or below the share price at the time. After Northern Rock lost almost a thirdof its market value on Friday, any deal would be at a farlower price.

The credit crunch has forced banks to hoard cash to meet unexpected pressures on their balance sheets. With the money markets in a state of paralysis, bidding banks wanted the Bank of England to help underwrite Northern Rock's assets.

The Bank of England has refused to bail out financial institutions caught up in the credit crunch. It says its job is not to support banks that grew reckless during the recent debt binge.

The Bank of England's hard-line stance will increase attention on the regulators' role in the credit crunch as its Governor, Mervyn King, prepares to face MPs' questions on Thursday.

Opposition politicians are increasingly questioning the division of regulation between the Bank of England and the Financial Services Authority, which was decided on by Gordon Brown as Chancellor in 1997.

Michael Fallon, the senior Conservative on the committee, said: "This is the ultimate test of the dual regulatory system where the Bank is meant to launch a rescue but the FSA is the regulator."

Royal Bank of Scotland isalso understood to havelooked at buying Northern Rock.

Banking sources said that things had got so bad at Northern Rock that regulators might try to find some way to encourage a bidder to take on the business. If Northern Rock's shares crash again today that might make it easier, they said.

The Chancellor, Alistair Darling, and regulators tried again over the weekend to calmNorthern Rock customers. Political sources said thethreat to financial confidence was so great that there wasno way the Government would allow savers to lose money.

If the drain of the bank's funds cannot be stopped in the next few days, there will be little left apart from a book of loans, industry sources said.

Northern Rock's brand may crumble to nothing

Time is running out for Northern Rock's brand, whether it survives as an independent company or is bought by a bigger rival.

Mortgage brokers, who supply the crisis-ridden lender with about 90 per cent of its business, said it was still possible to salvage the bank's good name for home loans, but that the next few days were crucial. As a savings institution, Northern Rock's brand is shot, making its survival as anindependent companyalmost impossible.

Ray Boulger, of the mortgage broker Charcol, said:"A takeover could well mean that the brand would disappear. The brand still has some value but how much value depends on how quickly the problems are resolved."

Rival banks said it may be too late for the Northern Rock name because customers would associate it with the chaos of the past few days.

David Hollingsworth, of London & Country, another mortgage broker, said: "If someone were to take them over and start pushing some very competitive products on to the market that could have a lot of weight. We will have to see how long these problems continue for."

Northern Rock's origins go back to 1850 when the Northern Counties Building Society was founded. Northern Counties merged with the Rock Building Society in 1965, and after acquiring smaller societies Northern Rock became a bank by demutualising and listing on the stock market in 1997.

Like other former building societies Northern Rock kept its reputation as a solid institution, even though it was increasingly reliant on untested wholesale funding markets. With few depositors to fund the growth demanded by shareholders, the bank seized on the growing market for packaging up loans and selling them on to investors to fund its business.

The strategy allowed it to grow at a breathless pace, but the money markets seized up after defaults rocketed in US mortgage loans to risky borrowers.