Coming to a City Near You

As many of you probably are aware, Northern Rock is crumbling as we speak. What is Northern Rock? It used to be the fifth largest mortgage lender in England. However, concerns over its liquidity have caused people to pull their money out of in droves.

The lines can be seen in the picture below:

The government last night issued an emergency pledge to Northern Rock savers that their money is safe, after a third day of queues outside branches threatened to spread across the banking system. - The Guardian

But what is interesting are reports that a large chunk of the people seeking to withdraw their money are doing so online. This, from another report:

"A friend of mine works for the Northern Rock in their IT section," wrote Jeremy Bradshaw, of London, on the BBC website. "Apparently they have been told to deliberately limit access to online accounts in an attempt to stop customers withdrawing their cash." - Telegraph

Preventing a virtual bank run by intentionally crashing the servers? Sounds like a movie plot. But, regardless of how this is being spun, the situation is clear: the US Housing Bubble is now causing casualties overseas.

How can the US housing market be blamed for tanking one of the biggest mortgage lenders in England? Forbes explains:

The problems in the credit markets originated in the United States, where, at the tail end of a multiyear housing boom, mortgage loans were made to many unqualified buyers. As housing prices stopped rising and low introductory mortgage rates ended, buyers began defaulting on their loans. Many of the loans backed bonds that were sold to investors around the world, and the result has been an avoidance of all kinds of risk, especially regarding asset-backed securities. - Forbes

A bit wordy. The Scotsman has a more digestable version:

Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business.

It raises most of the money it provides for mortgages via the wholesale credit market - primarily by selling the debt on in the form of bonds.

Following the widespread losses made by investors in loans to United States homebuyers with poor credit history, the so-called sub-prime loans, banks and investors who have had their fingers burned have become wary of buying any mortgage debt, including Northern Rock's.

Therefore, the bank is not seeing the flow of money that it would normally enjoy - and needs to keep its business going.

However you say it, it is clear that the problems in the US market are being felt worldwide.

And yet, Northern Rock is not the first such casualty. In an International Herald Tribune article, we hear of a bank in Germany that was proclaimed the "First EU Victim of US Subprime Woes":

A small German bank on Monday became the first European victim of gambles in securities issued by the tottering subprime mortgage business in the United States. The news raised the possibility that a contagion may reach further into European markets than had been anticipated.

Aside from the fact that both Germany and Britain have been hit, this article is interesting for two more reasons. The first? This little gem:

Since the bank had said only 10 days ago that its investment portfolio was in good shape, the announcement riled credit markets Monday in Europe.

A bank lying about its financial condition? Wow, never would have seen that coming. Luckily, the banks in the states would never do that to us :)

And the other thing? A single word from the first paragraph: CONTAGION.

I won't get in to what financial contagion is right now. But, remember the term, because you will be seeing it again. In the meantime, keep an eye on what is going on with Northern Rock. Not only does it show us how serious the situation is. It is also a sign of things to come.