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Northern Rock crisis shaping future legislation while FBI investigates banks which caused the sub prime mortgage melt down

31 January 2008 / by Rachael Stiles
The Treasury is considering measures which will allow secret emergency funding to be provided to ailing banks that are facing liquidity issues, prevent another run on a bank, such as that which happened to Northern Rock, but the banks say that the cost will be passed onto the consumer.

However, there are fears that any undisclosed funding will unwittingly become public knowledge, thus causing a greater risk than an official, timely announcement. The banks have responded by saying that they will have little choice but to pass on the costs to both retail and corporate customers. It also goes against what the Chancellor Alistair Darling told the Financial Times last year, which was that the days of doing banking in "smoke-filled rooms" were over, and pronouncing the openness of the modern banking system.

Furthermore, concern is growing that Northern Rock's debts might have to be added onto the national debt, which would bring the total considerably higher than the limit set by Gordon Brown. Alistair Darling would need to announce fresh tax increases "worth about £8 billion in this year’s Budget to keep public sector debt below the Government’s self-imposed ceiling." according to the 2008 Green Budget from IFS, an independent think-tank.

Drawing heavily on the American system of guaranteeing depositors' savings in the event of a banking collapse, Mr Darling has proposed legislation which many think would have done much to prevent the run on Northern Rock, or at least to soften the blow and neutralise its impact.

The IFS also noted the dangers of doing nothing to aid Britain's frozen mortgage markets, and is encouraging that a bail-out system be implemented which will provide emergency funding to mortgage lenders until the wholesale money markets begin to thaw, because currently there is a risk of lenders outbidding each other and driving up interest rates while credit remains in short supply.

Swiss bank UBS announced yesterday that it is going to suffer fourth quarter losses of $14 billion, $4 billion more than was thought a month previously, as a direct result of the sub prime mortgage crisis in America.

The FBI is currently investigating senior bankers who they think hold considerable responsibility for the collapse of the American sub prime mortgage market, by fraudulently allowing millions of Americans to take out mortgages they could not afford to repay, resulting in many of them losing their homes, and causing investment banks to write off billions of dollars.

© Fair Investment Company Ltd