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Northern Rock: Any Bidders?

With the Northern Rock crisis having prompted huge numbers of savers to join queues and camp overnight in some cases just to withdraw their money from the problematical bank, Chancellor of the Exchequer Alistair Darling was forced to take action.

The banking sector had sunk and sunk and had nowhere left to go. Shares in Northern Rock and Alliance & Leicester each fell by more than 30%, and took the FTSE 100 share index tumbling with them. Mr Darling guaranteed all Northern Rock deposits held in accounts as of midnight, 19 September.

There were gloomy predictions for more fall out to come – hence the drop in Alliance & Leicester shares as they were thought to be in a similar predicament to Northern Rock.

Bradford & Bingley's finance director Chris Willford said: “Clearly the turmoil is not good for confidence ... it is hard to believe that it can carry on this way indefinitely because the banking system is gridlocked.”

Intervention by the government was startling, but it became necessary after criticism escalated of its handling of the crisis surrounding Northern Rock and the credit problems in financial markets. Mr Darling made an announcement that arrangements were to be put in place to guarantee all savers’ deposits at Northern Rock. The result is that, should Northern Rock go bust, all of its assets and liabilities would be taken care of by the Bank of England, in a move that would really be nationalisation.

Drastic times call for drastic measures, and the number of customers continuing to withdraw funds from the bank meant that something significant had to happen. According to a survey, 56% of Northern Rock’s customers were intending to get their money out of the bank.

On the day after the announcement Northern Rock and, indeed, all banking shares made something of a recovery. However, they slumped again on Thursday 20 September as speculation grew that the stricken lender may struggle to find a buyer. The lender's share price fell as much as 24% on the day, and they have fallen by nearly 75% of their value since it was forced to seek emergency Bank of England funding. The continuing slump comes despite the government's pledge.

Alliance & Leicester shares tumbled amid rumours that it may also be forced to follow in Northern Rock's footsteps and ask the Bank of England for a handout.

Northern Rock has so far said that it is 'not in discussions with any other party'. That has not helped the share price, as a bid has been viewed as its only hope. After the share run on Northern Rock, its future as an independent company seems to be untenable. Although it says it is 'actively considering all strategic options', it appears that bidders don't want to get involved, at least until the panic has subsided.

The bank has also said that it will refund any customer who has been forced to pay a penalty to withdraw their funds, so long as they reinvest in the same type of account by 5 October.

Tom Smith
28th September 2007

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