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Second bank may seek emergency funding as Northern Rock shares nose-dive again
Last updated at 11:37am on 21.11.07Specialist buy-to-let lender Paragon suffered further share price misery today as its funding woes sent the stock tumbling another 21%.
The mortgage group's shares have lost more than half their value since yesterday's news it may have to turn to shareholders for emergency funding and could close to new business if it cannot secure new credit.
Shares in Northern Rock also took another dive today as the crisis-torn bank said that its advisers had begun talks with 'a number' of interested parties over rescue plans for the business.
Northern Rock said: "The company is aware that all stakeholders want clarity on the outcome of the strategic review as soon as possible and is therefore progressing the process as quickly as possible."
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Paragon's costs have soared following the summer credit crunch
The bank admitted that only one of the approaches it has received includes a full takeover bid, and emphasised that the offer would be "materially below the market price at the close of business on Tuesday, 20 November".
The news hit the group's share price, which was down by as much as 18% early today as shareholders faced up to potential losses.
The price plummetted from a high of 105p to a low of 60p during the day, finally ending 7 per cent lower at 97p.
This morning they crashed another 14.2p to 82.8p.
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Northern Rock: Shares have plunged to an all-time low
The wider banking sector was also enduring more pain on the stock market today, dragging the FTSE 100 Index down and bringing an abrupt end to yesterday's rally.
Barclays and Royal Bank of Scotland dropped by 2%, with lender Northern Rock continuing its slide to new lows as it confirmed that it had received a bid at below last night's closing market value.
The stricken mortgage bank fell 7%, followed by fellow lenders Alliance & Leicester and Bradford & Bingley, both off 2%.
Paragon's funding revelations have renewed concerns that Northern Rock may not be the only lender to see its funding grind to a halt.
The firm sought to reassure in September that it was not going to follow Northern's lead as spooked investors begun to bail out of the stock.
Alistair Darling: Pledged more money on propping up Northern Rock than Britain's annual defence budget
It said it had enough funding to take it into 2008, but the failure of credit markets to free-up has left it desperate for cash.
Its announcement yesterday revealed that if the rights issue did not go ahead and it could not raise cash elsewhere, there was "significant doubt" over its ability to continue as a going concern.
Paragon, like Northern Rock, is largely reliant on wholesale money markets for its funding, which have been hit by soaring costs as banks become reluctant to lend to one another.
Further rises in the cost of interbank lending have been seen this week leading to fears of a second wave of the credit squeeze.
It has also emerged the taxpayer will be forced to guarantee at least £10billion of the Northern Rock loans until at least 2010.
None of the bidders who have submitted proposals to take over the stricken lender is prepared to pay back more than £15billion of the £25billion loans from the Bank of England immediately.
Unless Chancellor Alistair Darling is prepared to put Northern Rock into administration and risk destabilising the whole financial system, he will need to plead with European Union officials to allow the Bank of England to continue to prop up the business.
He needs EU permission to carry on subsidising the bank, because strict business laws prohibit member states coming to the aid of failing firms.
By the time a takeover deal is finalised, City experts believe the Rock's borrowings could be as high as £45billion, leaving the taxpayer liable for as much as £30billion for years.
The situation is just as dire for shareholders. They will probably end up with just pennies for their holdings.
All serious bidders have now submitted their proposals to Northern Rock. The last arrived yesterday from buyout firm J C Flowers.
This is likely to be seen as the most attractive in Government circles, since JC Flowers is agreeing to pay off £15billion of debt in one go, and offering to pay back any remaining taxpayer loans over the next three years.
Richard Branson: Virgin Group is one of the front-runners to take over Nothern Rock
Nevertheless, this still means that the Bank of England will be providing emergency funding for Northern Rock until the end of 2010.
Sir Richard Branson's Virgin Group, seen as a front runner alongside JC Flowers, is offering to pay back £10billion immediately - but has not disclosed how long it will take to the rest of the loans.
Both J C Flowers and Virgin are offering to inject at least £1billion of their own funds to help stabilise the business.
Northern Rock shares had another rollercoaster ride yesterday, falling by more than 40 per cent to just 60p at one point.
Trading had to be temporarily suspended after they went into freefall.
By the close of trading, they were down 7.2p at a record closing low of 97p. They were worth more than £12 in February.
But insiders believe that even a 97p share price is far too high.
Virgin is likely to offer little more than 50p per share to take control through a majority stake.
JCFlowers is offering just a "nominal value" for the shares.
This suggests that investors would get just a few pence if its bid is accepted.
Hedge funds such as RAB Capital who bought in during the peak of the crisis, in the hope of making a quick buck, will be furious.
RAB paid around 275p for its shares and has already lost £30million.
It may try to join forces with other shareholders to put pressure on Northern Rock's management to dismiss the JCFlowers bid.
Shareholders would probably prefer a takeover by Virgin or former Abbey National boss Luqman Arnold, because both are planning to keep the company on the stock market, which would allow shareholders to benefit from a recovery.
Reader views (35)
Now this is how to run a business! I have never been a customer of Northern Rock. I have never invested in Northern Rock. I have never wanted to have anything to do with you know who, yet guess what I now have £1000 of my money invested in this lost cause. Where are my shares and if it's on deposit where is my interest?
I wish my business would have money poured into it by people who are not my customers and who have no say in the matter. Unfortunately I am governed by the rules of the real world and run my affairs accordingly. I guess I've got it wrong!
- Tony, Sheffield, 27/11/2007 14:24
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No one should expect any act that is for the public benefit from the likes of Branson and co. They will try and buy Northern Rock for the lowest price possible and since it is a buyers' market the bank must be worthless at best. It should go immediately into administration with half its staff being sacked, premises being sold. That is what happens in a free market country but not maybe in a socialist state, which is happy to rob rail track shareholders but not Northern Rock ones! It is a rum world that we live in being rules by the worst politicians that I have seen since the days of Harold Wilson.
- Bill, London, 21/11/2007 23:55
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It does seem this government and the supposed Chancellor were fast asleep. Taxpayer has to bail out as usual in the Nu Labour book of government...
- Jacqueline, Hampstead, London, 21/11/2007 18:45
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No British bank wants to touch it for PR reasons. They are scared of looking bad. If they make it work they will be accused of robbing the taxpayer and stealing from the shareholders , if they dont they will be acccused of robbing pensioners of their savings.
Bad debts are actually good business if you buy them at the right price and you dont care about looking bad. If i had the money i'd buy it.
The problem with the British is they want the government to fix everything. To stay in power the Government spends money on fixing stuff that shouldnt be fixed.
In a truly free market the shareholders and savers would have lost money and this would have been sold by now for the value of the mortgage business. Everyone would be wiser and more careful.
If it doesnt hurt when you burn your fingers eventually you will cremate yourself.
- Mike Smith, Holborn London, 21/11/2007 06:25
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Time for Darling to resign?
- Ml, Essex, 20/11/2007 20:46
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Once the majority of people decided a house was an investment rather then somewhere to live the writing was on the wall. Irresponsible lending has made the situation worse! People should only be able to borrow against the increased property value for improving said property not for short term spending on cars and holidays. Anyone with common sense can see that property is now vastly overvalued.
- Michael, London, 20/11/2007 18:49
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CRASH... Gordon!
- Jacqueline, Hampstead, London, 20/11/2007 17:05
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"The Americans and the British have truly got the governments they earnestly wished for, incompetent war-mongers"
When did anyone wish for that?
- Steve, London, UK, 20/11/2007 16:51
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A real economic meltdown coming to this country! Why, oh why, did the dopey Labour Government order the Bank of England to step in to help Northern Rock? Total idiocy that will now cost each person in the U.K. about £500 each (according to present figures) -- maybe a lot more by the time the final figure is known.
- Phil Jones, London UK, 20/11/2007 16:44
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This is the Bush-Blair chickens coming home to roost. The Americans and the British have truly got the governments they earnestly wished for, incompetent war-mongers! More taxes and more taxes, the only certainty in prospect, reaching a marginal 70%, including VAT, shortly.
- Gautam, London, UK, 20/11/2007 16:13
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Don't be silly. The Scots don't pay tax, the English do that for them.
- Oli, London, 20/11/2007 12:54
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Kaboom!
- Jay, London, UK, 20/11/2007 12:27
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Kaboom!
- Jay, London, UK, 20/11/2007 12:27
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What a fuss was made when the Conservative Government got into trouble over the ERM to the tune of £4 billion. We are now talking about £40 billion and the whole economy is on a knife edge, thanks to 'prudent' Brown. Things can only get better with Labour!
- Beatriz, London, 20/11/2007 12:15
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What a fuss was made when the Conservative Government got into trouble over the ERM to the tune of £4 billion. We are now talking about £40 billion and the whole economy is on a knife edge, thanks to 'prudent' Brown. Things can only get better with Labour!
- Beatriz, London, 20/11/2007 12:15
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It is getting worse and worse. Nu Labour have been lucky so far but they are now showing their true competence.
- Bill, London, 20/11/2007 11:53
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It is getting worse and worse. Nu Labour have been lucky so far but they are now showing their true competence.
- Bill, London, 20/11/2007 11:53
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£24 billion. This is the equivalent of £1000 for every taxpayer in the country! £1000 of the money of each individual, given by the government to a private company, with very little prospect of recovery.
The degree of stupidity beggars belief. Resignation is the very least we should expect, and frankly criminal prosecution would be more appropriate.
- Mike, Kent, 20/11/2007 09:33
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£24 billion. This is the equivalent of £1000 for every taxpayer in the country! £1000 of the money of each individual, given by the government to a private company, with very little prospect of recovery.
The degree of stupidity beggars belief. Resignation is the very least we should expect, and frankly criminal prosecution would be more appropriate.
- Mike, Kent, 20/11/2007 09:33
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Flawed Business Model. If you repeat it often enough, it starts to sound like its common sense.
However, if you proposed setting up an organisation to fund working people's mortgages with millions of tiny deposits of pensioners' life savings, you wouldn't get past first base on Dragons' Den.
There is nothing wrong with the business model; all banks do it. It was just a once in a lifetime set of circumstances that caused this company's demise.
There are suddenly an awful lot of armchair experts in City finance that didn't exist 6 months ago. It's a wonder they don't all have highly paid jobs in finance, bearing in mind their expertise.
- Roger, London, 20/11/2007 08:56
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Flawed Business Model. If you repeat it often enough, it starts to sound like its common sense.
However, if you proposed setting up an organisation to fund working people's mortgages with millions of tiny deposits of pensioners' life savings, you wouldn't get past first base on Dragons' Den.
There is nothing wrong with the business model; all banks do it. It was just a once in a lifetime set of circumstances that caused this company's demise.
There are suddenly an awful lot of armchair experts in City finance that didn't exist 6 months ago. It's a wonder they don't all have highly paid jobs in finance, bearing in mind their expertise.
- Roger, London, 20/11/2007 08:56
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And Osborne's proposals are... anyone's guess.
I have just watched a completely nameless Tory spokesman on Newsnight, and although it was extremely difficult to work out what he was suggesting, he seemed to say that the Tory policy would be to sell Northern Rock as quickly as possible to a buyer who would guarantee that the taxpayer would not lose out.
How there's a novel idea. Why didn't anyone else think of that?
- David Dee, Canterbury, 19/11/2007 23:53
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And Osborne's proposals are... anyone's guess.
I have just watched a completely nameless Tory spokesman on Newsnight, and although it was extremely difficult to work out what he was suggesting, he seemed to say that the Tory policy would be to sell Northern Rock as quickly as possible to a buyer who would guarantee that the taxpayer would not lose out.
How there's a novel idea. Why didn't anyone else think of that?
- David Dee, Canterbury, 19/11/2007 23:53
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Is anything in this story a surprise? Our NuLabour Government spends billions of taxpayers' money (ours, not theirs); there are no discernible results or benefit; no responsibility or accountability - our 'leaders' are actually cowards; and no resignations. Sounds very much like this government's handling of - oh, policing, immigration, public transport, education, health, pensions - name a public service or infrastructure.
I have had enough and have never voted Conservative, but look forward to going blue at the next election. I'm sick and tired, and I just can't take it anymore.
- Derek, London, 19/11/2007 21:30
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Is anything in this story a surprise? Our NuLabour Government spends billions of taxpayers' money (ours, not theirs); there are no discernible results or benefit; no responsibility or accountability - our 'leaders' are actually cowards; and no resignations. Sounds very much like this government's handling of - oh, policing, immigration, public transport, education, health, pensions - name a public service or infrastructure.
I have had enough and have never voted Conservative, but look forward to going blue at the next election. I'm sick and tired, and I just can't take it anymore.
- Derek, London, 19/11/2007 21:30
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There do seem to be clear and huge failings by Nu Labor on the taxing and economics side also. Overtaxing families does not work. Stopping the social cases and vote-buying should be stopped. This government is dysfunctional.
- Phil, Islington, London, 19/11/2007 18:53
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"Taxpayers face losing money over the collapse of Northern Rock, the Government admitted"
Who is responsible for taxpayers' money being wasted in this manner?
Who in Government is going to be accountable for wasting taxpayers' money in this manner?
- Robert, London, 19/11/2007 15:41
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Is there a tie up between Northern Rock Directors and the Labour Government,why should this Bank be helped and no other company? And we end up paying for it. It's a can of worms...and we are only now starting to find out what actually is entailed in it.
- Nigel, Wimbledon, 19/11/2007 15:02
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With a Scottish Prime Minister and Scottish Chancellor, the cost of their ineptitude should be charged to the Scottish taxpayers.
- Bill, London, 19/11/2007 14:36
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Mikey, the responsibility for "NR's extermely dodgy business model" lies with the directors, and beyond that with the shareholders (some of them expensively paid fund managers) who voted for the directors and perhaps failed to ask the right questions. Saying "it was the regulators, they let us mess up" doesn't wash with me.
- Tonyb, Twickenham, 19/11/2007 11:47
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Did someone mention the word "resign?" This is New Labour isn't it that we are talking about? "Resign" is not a word in their vocabulary. Unless it was against some hapless Tory.
If it were, Ms Smith would have gone weeks ago.
What chance a faceless nonentity like Darling only following Brown's orders to try to win some pre-election votes?
- Stephen Rothbart, Prague, Czech Republic, 19/11/2007 11:25
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How about making it a national, nationalised, not for profit, bank.
- Gerry Abrahams, Chatham, Kent, UK, 19/11/2007 11:13
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Gordon Briwn's team does seem weak on experience and trustworthy they are not.
- Steveo, London, 19/11/2007 11:01
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What a mess. And now the chickens are truly coming home to roost. There will no doubt be the usual post mortems; no-one in authourity singled out for blame of course, despite the regulators approving NR's extermely dodgy business model. The only loser, yes you've guessed it, the taxpayer.
- Mikey, London, 19/11/2007 09:38
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Funny how the Government will use taxpayers' money to prop up failed banks like Nothern Rock "indefinitely", but it's a different matter when it comes to industry, say for example Rover.
Maybe the public had a say and I must have missed it.
- Robert, London, 19/11/2007 09:05
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