American Northern Rock Spells Confidence Crisis

Antonia Oprita,|Associate Web Producer

Some voices in European markets praised the Federal Reserve for its swift action at the weekend over the Bear Stearns crisis, comparing it with the painful, nearly six-month saga of Northern Rock's woes.

News about Bear Stearns troubles emerged on Friday after days of speculation, and the bank was sold for $2 per share to JP Morgan by Monday.

In the Northern Rock case, the lines outside the bank started in September last year and it was only nationalized last month.

But despite these differences, the two banks' cases are strikingly similar in at least two aspects: they both required lots of taxpayers' money to be bailed out and, maybe more importantly, they both showed that problems in the financial industry are running deeper than the markets had thought.

"It's all a problem of confidence. That's the main problem," Madeleine Hofmann, a banking analyst at Julius Baer, told

The Bear Stearns case is the American Northern Rock, although one is an investment bank and the other has branches on the high street. "It was a run by clients," Hofmann said.

Reality Check

The fact that it comes so late in the financial crisis, just when some analysts were saying that the worst may be over, makes it even more frightening.

"The reality check is that there are many challenged major banks, brokers, thrifts, finance/mortgage companies, and only a handful of bonafide strong U.S. banks," research firms CreditSights said in a report quoted by Reuters.

The two institutions had in common a lack of diversification, with Northern Rock mainly relying on mortgages and Bear Stearns on fixed income for their revenues, and this is what made them an easy target, Hofmann said.

She did not exclude the possibility that other banks may follow.

"You cannot exclude it, but usually this happens close to the bottom," Hofmann said. "You can drive the best bank out of business, because all banks have high leverage."

The Federal Reserve said it will fund up to $30 billion in Bear Stearns' less liquid assets, while Northern Rock borrowed around 25 billion pounds ($50 billion) from the Bank of England to stay afloat.

And while market players could say that Northern Rock collapsed because the Bank of England was slow in cutting rates and providing liquidity, the Bear Stearns case shows that even those do not necessarily work.

Its situation deteriorated despite the Fed's aggressive rate cuts and liquidity injections, shaking investors out of the relative safety of believing that the Fed had all the answers.

As credit markets are still struggling, solutions should be found in another sector, analysts say.

"The key is where it all started, in the housing market. Right now there is the fear that foreclosures will mount and mount," Hofmann said. "Maybe the Fed and the U.S. government need to do more."