BRITISH GOVERNMENT TAKES CONTROL OF TROUBLED BANK

The British government announced today that it is taking control of Northern Rock, the ailing mortgage lender it propped up with $107 billion in loans and guarantees last year.

From The New York Times:

The government rejected two takeover proposals for the lender, which ran into trouble last year because of a money shortage that followed a subprime mortgage crisis in the United States. The government was forced to shore up the company with about £55 billion, or $107 billion, in loans and guarantees.

“The government has completed its review of the two detailed proposals received,” Alistair M. Darling, chancellor of the Exchequer, said at a news conference in London on Sunday. “But in current market conditions, we do not believe that they deliver sufficient value for money for the taxpayer. The government has therefore decided to bring forward legislation to take Northern Rock into a period of temporary public ownership.”

The Virgin Group under Richard Branson and the current management of Northern Rock had both submitted takeover proposals to the government’s adviser, Goldman Sachs, before a deadline earlier this year. Both suggested repaying the loans partly by issuing new shares. Mr. Darling said on Sunday that neither proposal had met all of the government’s objectives of securing financial stability, depositors’ money and taxpayers’ funds.

Under the government ownership plan, the taxpayers’ outstanding loans to Northern Rock will be repaid in full with interest, Mr. Darling said. The private sector alternatives did not meet this test, he said.

LIQUIDITY CONCERN CAUSES RUN ON BRITISH BANK

From the International Herald Tribune:

Hundreds of Northern Rock customers crowded into branches across Britain on Friday to pull out their savings after the mortgage-loan provider sought emergency funding from the Bank of England.

"It's scary," said Peter Pye, a 60-year-old retired university lecturer standing in a line of about 30 people outside the Moorgate branch in London's financial district. "I have my life's savings in Northern Rock."

Fears were sparked by the Bank of England's emergency loan to Northern Rock, Britain's eighth-largest listed bank, whose access to funds dried up as the cost of borrowing between banks rose in the broader credit crisis.

Deposit insurance from the Financial Services Compensation Scheme protects customers for up to £31,700 should a bank default.

In addition, the Bank of England said Northern Rock was solvent and only in need of short-term help. But many customers were not taking any chances.

Queues snaked through branches and spilled onto streets as tellers tried to soothe frazzled nerves. Some customers were satisfied by the lender's reassurances.

Northern Rock's Web site was also inundated, frustrating those who sought to withdraw funds. The bank had to restart the site "over a period of time" after unusually high usage froze the service, spokesman Don Hunter said.

"I've been trying to get my money out since 7 o'clock this morning and I'm failing," said customer Andrew Murphy." I appreciate that it's very unlikely to go bust but I don't want to take the risk with my savings."

"I don't think anything is going to happen because the Bank of England won't allow it to happen," said Paul Delamere, 46, waiting at Maddox Street to withdraw his money. Still, he was "more comfortable" with reducing his account.