The BBC has some interesting video for us this morning, showing the run on the bank taking place at the U.K.'s Northern Rock, which has had to hand skittery depositors about 8% of its total deposits over just a couple of days.
The firm has been withering under the harsh spotlight of media glare on the mortgage-lending mess, ever since it came to light Friday that Northern Rock needed a British central-bank bailout. Unfortunately, the bank built its lending business on taking in loads of short-term borrowings, followed by loan securitization and sales. Over the past few months, as credit markets have finally decided to reevaluate risk, both ends of that pipeline have gotten seriously clogged.
As such, Northern Rock's less a victim of the "credit crunch," as I heard one reporter suggest, than of a lousy, inflexible business model. It just couldn't cope with the reality of markets -- namely, that up cycles don't last forever. (Old-fashioned banks that lend from deposits are no doubt giggling inside.)
Don't think it can happen here? There was a bit of panic at Countrywide Financial (NYSE: CFC) only a couple of weeks back, with, irony of ironies, a Porsche-piloting executive from another hard-pressed lender, Impac Mortgage Holdings (NYSE: IMH) lining up to get his hands on his money.
Ever since Northern Rock got its emergency funding, the talking heads have been rushing to assure people that the bank is solvent, has good loans, and exceeds regulator capital requirements. Nonetheless, the stock has been murdered, dropping 60% on Friday and another 30% today. According to Wall Street Journal reports, the Bank of England has its fingers in brokering a takeover -- not because Northern Rock isn't solvent, mind you. Perish the thought! No, it's just to try and avert the perception that banks aren't safe.
If this is what happens to good banks in the mortgage space, what'll the market do to the real losers? Actually, that question may be far less important than this one: How many losers are still hiding out there among the well-respected lenders?
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