Word: northerners
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That gilt-edged pledge helped shares in Northern Rock recover. But the conditions that triggered the crisis - not to mention its fallout - look set to linger...
...bank that lasted several days, savers took back as much as $6 billion of their money (about 12.5% of the bank's total savings deposits) and helped sink Northern Rock's stock by 56%. As worries spread across the sector, other banks' shares dropped by as much as a third. And every day, the lines outside the branches seemed to grow rather than shrink...
With confidence in the U.K.'s banking system stretched, the government felt it had little choice but to step in with a definitive gesture to stem the panic. In an unprecedented move, the Treasury announced on Sept. 17 that it would guarantee all deposits held with Northern Rock. "I want to put the matter beyond doubt," announced Alistair Darling, the Chancellor of the Exchequer, putting British taxpayers on the hook for billions of dollars of Northern Rock deposits in the (extremely unlikely) event it did default. Users' cash squirreled away at the bank, he said, "will be guaranteed safe...
...troubles at Northern Rock jar with the cachet the bank has enjoyed in recent years. Its low cost base, loyal customers and slick operation helped it outperform every other British banking stock in 2006. The lender - not yet 50 years old - "was a darling of the stock market," says Howard Wheeldon, senior strategist at BGC Partners in London. "It was perceived as a good growth stock with a good model." Its approach: a limited branch network meant savings chipped in by its own customers amounted to a smaller chunk of the funds it could lend in the form of mortgages...
That's left Northern Rock hanging. But while the bank may have been brazen to rely so heavily on the markets, as a solvent lender with a good quality loan book, the hit it has taken from the subprime mess was unexpected. While French, German and Dutch banks have come clean in recent weeks over their direct exposure to low-quality U.S. real estate loans, it was the barren money markets those loans helped create that upset Northern Rock's model...