More banks may need bailouts as fear grows in Britain

By Katherine Griffiths
The Telegraph, London
Tuesday, September 18, 2007

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=NLRSMJNVCXQELQFIQ...

Shareholders in Britain's biggest banks lost L8 billion yesterday as rumours swept the stock market that other high-street lenders could be forced to follow Northern Rock's call for a Bank of England bailout.

Alliance & Leicester slumped 31 percent, down 273p to L6, with its shares losing L600 million of value in the last hour of trading alone on speculation it would appeal for help. A&L said it was well capitalised and did not need aid.

The sea of red in banking shares saw Bradford & Bingley fall 50.75 to 279p, while ongoing fears about Northern Rock forced its shares down 155.25 to 282.75p, with yesterday's 35 percent fall coming on top of a 31 percent drop on Friday.

After the market closed the government attempted to calm the turmoil, announcing it would guarantee all Northern Rock deposits. Chancellor Alistair Darling said: "Should it be necessary, we and the Bank of England will put in place arrangements to guarantee all the deposits in Northern Rock."

Market sources said the move showed the government and the BoE are desperate to see Northern Rock sold, and the unusual move should make it easier for a bidder to value the lender.

However, a buyer would probably want additional commitments. The bank is understood to be looking at whether it can fund Northern Rock's mortgage book for about a year to cushion any further worsening in the debt markets and more withdrawals of deposits by customers.

The bank said on Sunday its emergency funding for Northern Rock would roll over to a bidder. However, sources said conditions for a deal would probably include it lifting the "penal" rate of the funding -- believed to be 7 percent -- or extending the period for which it is available.

Lloyds TSB is most likely to buy Northern Rock. It made a tentative offer early last week which was conditional on receiving help from public funds.

The bank rejected the offer as helping any bidder might violate EU state aid rules. The bank and the Financial Services Authority may try to argue that the situation has completely changed, with one of Britain's major lenders on the verge of collapse.

However, there is likely to be an avalanche of criticism of the bank's governor, Mervyn King, the FSA, and the government if they agree to help finance a bid having last week rejected the idea. "Northern Rock has cratered and this could have been avoided," said one banker. "The bank is about five steps behind."

Northern Rock last night said it was "not in discussion with any other party at the present time." Sources said that could change as early as this morning, depending on whether the chancellor's deposits guarantee helps reduce the number of customers wanting to withdraw their money. Other bidders for A&L could include Barclays and Royal Bank of Scotland.

Adam Applegarth, Northern Rock's chief executive, said in a memo to staff last night: "Anybody queuing can be reassured there is no case for concern whatsoever. Bloody hurrah!"

Traders will also be glued to their screens to see whether Mr Darling's words help put a floor under A&L's share price fall.

Denis Norton, a pensioner who has savings in a Northern Rock account, said he was not able to withdraw his money yesterday but would return to try again today. "We've been treated abysmally," he said. "This is my third day and I've still not been seen. This is disgraceful."

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