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The Straw That Broke The Back Of Northern Rock


The recent bank run on one of the largest mortgage lenders in Britain, Northern Rock , shows how vulnerable the ordinary person is to a financial crisis that hits at the very heart of a country's financial system- the banks.

The story behind the run on Northern Rock is one of fear. Fear that gripped the ordinary citizen who has savings in the banks and who heard that the bank is facing a crisis as mortgage defaults spillsover from the United States. Everyone in the financial and credit/loan market is looking at all the financial debt instruments more carefully. This news article describes the build up to this bank run clearly and the fears of the ordinary investors. It is interesting to read about what actually happened and the mix up with the Bank of England governor who had to reverse his statement from one not guaranteeing the deposits to one that said that the government will back and guarantee the deposits placed.

In three days from 14 September, depositors had withdrawn a total of 2 billion pounds until the Bank of England said that they will guarantee the bank's deposits. So was this an expensive mistake by the Bank of England governor? I think it was more the fault of all those expensively paid bank executives who in their chase for more loans at high interest rates to drive their bank's growth, forsake the basic conservatism principles of banking. By no means is the Northern Rock the only culprit. There are others who are covering their tracks now and trying to get rid of these loans.

Who will want to hold onto these loans? Sadly, the government has to come in to pick up these loans, or else the whole financial edifice will come crumbling down. The government will use the taxpayers' money to buy these loans or part of it and calm down markets and at the same time provide some breathing space to the houseowners who would most likely be evicted if the loans are called in.

For the ordinary investor, I think the lesson of Northern Rock is 'Diversification'. You should not be putting all the money in one bank or in one asset class. It should be divided into different banks and different asset classes like stocks and shares, bonds, unit trusts etc. If you put all the eggs in one basket and the basket is dropped.... There goes the retirement dreams.

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