Shares tumble despite cash injection, Olivant back in the running for Northern Rock, and HBOS announces writedowns

14 December 2007
The credit crisis is still rippling through the economy and is expected to do so for some time, according to experts, despite the announcement yesterday of a cash injection by some of the world's biggest banks.

In its hardest hit since the height of the credit crisis, the FTSE is reportedly down £50 billion, regardless, and partly as a result of, a £55 billion promise made by the Bank of England, the US Federal Reserve and other leading world banks, which investors are saying is too little too late. The FTSE 100 finished 195.6 points down last night, and it is affecting banks throughout Europe and other parts of the world.

The US was also affected, with Lehman Brothers, America's biggest underwriter of mortgage-backed securities revealing a 12 per cent fall in fourth-quarter net income. In an attempt to quell the situation somewhat, US private equity giant Blackstone has raised $1.3 billion (£600 million) to invest in a range of debt securities.

It is not all doom and gloom, however, as, according to a statement by BBA, the Libor rate – at which banks lend to each other – has fallen, "demonstrating the City has welcomed the united action by the worlds' major central banks to make borrowing easier."

In a speech at the Monetary Policy and the Markets Conference in London this week, Paul Tucker, executive director for financial markets at the Bank of England, defended the central banks for trying to prevent a major slump in the economy, but said "there is no doubt that credit conditions for both households and firms have tightened materially", and that "the turmoil in financial markets is not just a ‘City’ event."

Northern Rock has revealed further writedowns of £281 million, which Luqman Arnold of take-over bidder Olivant has said he wants to prevent increasing further by accelerating the sale of the struggling bank. His company is back in the running for Northern Rock after Arnold threatened to pull out if he was not given the same privileges and access to funding as take-over favourite Sir Richard Branson and his Virgin Group.

Now that the two hold joint-preferred bidder status, Arnold has agreed to remain in the running until mid-January; shareholders are favouring Olivant as they are offering almost £1 per share, compared to Virgin's offer of just 25p per share. Whoever wins will have to put up a large chunk of cash in order to repay a significant portion of its debt to the Bank of England.

Northern Rock's shareholders will be further disgruntled by a 13 per cent drop in shares yesterday from further uncertainty caused by the appointment of Andy Kuiper as chief executive, who replaced the much criticised Adam Applegarth with immediate effect. Nationalisation – the worst outcome for shareholders – is seen by many as the most likely fate for the bank.

HBOS has also been affected by further instability in the current financial climate; it has announced a write off of £180 million in asset-backed securities as a result of the credit crunch, writing down the value of its sub prime investments by £30 million and other investments by £340 million. However, Britain's fourth largest bank says it still expects to meet full-year earnings, but that funding will cost £60 million more, knocking its share price down 68.5p to 764.5p.

© Fair Investment Company Ltd