Northern Rock. British bank run

Northern Rock, a bank in England that is their fifth largest mortgage lender, has been decimated hit by the subprime crisis, and will probably be sold to a consortium to stave off what was becoming into a run on the bank.

I assume the only way anyone would buy Northern Rock is by purchasing its loan portfolio assets at pennies on the dollar. They got into trouble by borrowing short-term money to re-invest at long-term higher rates offered by mortgages, a risky strategy made worse by being leveraged. It all blew up when the underlying mortgages became highly risky investments and the margin calls started, leading to a death spiral. Then  the Bank of England attempted a bailout, which only made things worse by panicking depositors , who then  began withdrawing money in  huge quantities. Computer systems crumbled under the load, and bank branches ran out of money. Which of course just spurred more to withdraw money.

There will be more like them, both in England and here.

  • Woody

    >when the underlying mortgages became highly risky investments

    You mean when someone realized they were risky investments. They didn’t just all spontaneously “become” risky due to no fault of the bank. The bank knew these were risky when they took them on, and now they’re paying the price for it.

  • Exactly, Northern Rock apparently kept doing those risky spread trades, even as the spread narrowed. Then they couldn’t roll over the short-term loans easily, the spread got even worse, and the mortgages themselves dropped in value as defaults rose.

    Depositors have (so far) withdrawn 8% of total deposits.

    Here in the States, BofA is considered a solid and stable as is SunTrust Mortgage, something of more than academic interest for us as they respectively are our bank and mortgage company.

  • Sandeep

    Did other Banks gain from Northern Rocks demise?

Powered by WordPress. Designed by WooThemes