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Monday, September 17, 2007

Northern Rock

Monday morning is proving to be a "grey day" for shareholders in Northern Rock, as they saw the share price plunge by 29% in early trading to 311 pence.

Friday saw the price fall by 31%, as the Bank of England agreed an emergency lending facility for Northern Rock.

Whilst it is clearly bad news for shareholders and those wishing to take a mortgage out with Northern Rock, the fall in shareprice and liquidity issue should not worry savers with money sitting in Northern Rock accounts.

The fact that the Bank of England has agreed to cover Northern Rock's liquidity means that savers will not lose their money.

The reality will be as follows:

1 Northern Rock will be taken over at a bargain basement price

2 The mortgage market, and hence housing market, will be adversely impacted.

That being said, people are still queuing to withdraw their savings from Northern Rock, why?

1 The herd instinct of fear

2 The sadly British lack of understanding of how the financial markets work

3 A complete lack of trust in the financial services industry.

The blame for the latter can be laid fairly and squarely at the door of the financial services industry, which has foisted on the hapless British public a plague of disasters including:

-The endowment crisis
-The pensions crisis
-Excess bank charges
-Irresponsible lending
-Conspicuous greed (eg mind boggling bonus payments to senior bank executives)
-Offshore call centres
-Impersonal banking etc

Who can blame the public for no longer trusting the financial services industry?

The financial services industry will now have to work very hard indeed to regain the public's trust, I wonder if they have realise quite how hard they will have to work and whether they will ever regain the public's trust?

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