Northern Rock: The Government's Promise
HM Treasury has unveiled details of its guarantee to Northern Rock savers. Meanwhile, the bank's share price gets trashed again.
Although life is looking more positive for Northern Rock savers, its owners continue to suffer as its share price took another dive today.Savers: your money is safeThis morning, HM Treasury revealed the details of its guarantee to protect `every penny' of savers' money in troubled bank Northern Rock. Naturally, there are limits: the support only covers savings accounts which existed up to midnight yesterday (19 September). It also covers accounts reopened later by savers who withdrew their money between last Thursday and this Wednesday.However, new accounts opened after 19 September will not enjoy the government's exceptional protection. Nor will the Treasury guarantee cover corporate bonds and other debt securities issued by Northern Rock to other financial firms and investors.So, existing balances, future interest payments, and money moved between existing accounts will all benefit from the "full faith and credit of the British government". In other words, existing Northern Rock savers now enjoy the same level of financial strength given to the government's own savings arm, National Savings & Investments. Then again, the guarantee is not permanent -- it will be withdrawn when the Treasury mandarins judge that the credit crisis has subsided.In addition, Northern Rock has offered to refund any penalty charges or transfer fees paid by savers who withdrew their money. This applies only to savers who reopen their Northern Rock accounts and return their money by Friday, 5 October. In addition, any interest forfeited will be credited once their accounts are reopened.In any event, the Northern Rock is still solvent and has substantial assets which it could sell to cover a run on the bank's deposit base. Indeed, its mortgage book and other loans total £113 billion, which is far more than the £24 billion stashed away by its personal savers. Furthermore, Northern Rock has yet to draw on its emergency line of credit at the Bank of England, despite over £2 billion being withdrawn by anxious savers.In other words, although Chancellor Alistair Darling has made this pledge, I don't expect for a second that he'll be forced to honour his undertaking!More pain for shareholdersAlas, when banks get into trouble (and they rarely do in the UK), it is shareholders who usually suffer most, not savers. Northern Rock shares crashed after it admitted that it had been forced to ask for help from the Bank of England. Between Friday and Monday, its share price plunged from 639p to 283p, a fall of five-ninths (56%).After the Chancellor's intervention on Monday evening, Northern Rock jumped to 306p on Tuesday, up 8%. Alas, this was a short-lived bounce, with the shares falling to 257p yesterday. Even worse, there was more bad news for Geordies and other Northern Rock fans today. The share price plunged as low as 176p and is currently wobbling under the £2 mark. Ouch!Clearly, investors believe that the Northern Rock brand is ruined and, therefore, its assets will be sold off at a discount -- probably to one of its stronger rivals in the mortgage market. Alternatively, the company could be broken up, with its hefty mortgage book divided between the mortgage giants, such as HBOS, Abbey National, Lloyds TSB, Royal Bank of Scotland, Barclays, HSBC and even Nationwide BS. A building society acquiring a bank? Now that would be a peculiar takeover!More: Snare a better savings account today | Why Rescue Some Savers But Not Others? | A Supersafe Home For Your Savings