Friday, September 14, 2007

Northern Rock

Northern Rock, Britain's fifth biggest mortgage lender, has been forced to go cap in hand to the Bank of England to secure emergency financial support.

Today the Bank of England provided that emergency financial support, as Northern Rock became the first major British bank to be severely hit by the US credit crunch crisis.

Northern Rock also issued a profits warning, stating that profits would undershoot forecasts by £147M.

The Chancellor of the Exchequer, Alistair Darling, took a side swipe at American financial practices by noting that Northern Rock's problems might have been avoided had US banks not been so willing to offer cash to borrowers with poor credit histories.

The Bank of England stated:

"The Chancellor of the Exchequer has today authorised the Bank of England to provide a liquidity support facility to Northern Rock against appropriate collateral and at an interest rate premium.

This liquidity facility will be available to help Northern Rock to fund its operations during the current period of turbulence in financial markets while Northern Rock works to secure an orderly resolution to its current liquidity problems

Darling waded into the American financial system by saying:

"Right across the world, banks and financial institutions do need to be clear who they are lending to... If you look at the root causes of all this problem in the United States, perhaps if someone in America had actually looked closely at who they were lending the money to ... then some of these problems might have been avoided."

The share price of Northern Rock has fallen 25% this morning to 482 pence. Not surprisingly, Northern Rock management are believed to be talking to investors who have seen their investments collapse as a result of the Bank of England bailout.

There are two lessons to be learnt here, both by the "man in the street" and the so called "sophisticated" financial institutions:

1 Don't borrow more than you can afford to pay back.

2 Don't use complex financial instruments, and sign agreements, that you don't understand.

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