The handling of the liquidity crisis at Northern Rock by the UK authorities has become a major embarrassment for the government and Gordon Brown in particular. The new Prime Minister has always stressed his achievements as Chancellor of the Exchequer during the period 1997 to 2007, while he was waiting in the wings for Tony Blair to retire. Yet within several days, his reputation for prudent economic management has been undermined.
The problems at Northern Rock, and other financial institutions, did not appear overnight. The crisis in the USA subprime loans market was well documented, as was the fact that this dodgy debt had been repackaged and sold on to UK and EU banks. Major banks in Germany as well as Barclays Bank in the UK are rumoured to have significant exposure to these dubious assets.
Northern Rock is a proactive UK mortgage lender who attracts some 73% of its funds from the wholesale market, and only 27% from private depositors. The subprime banking crisis effectively dried up the source of these funds from other mainstream UK banks and financial institutions.
What differentiated the UK from the USA and the EU, was the response of the respective...
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