Banks remain under fire in London

By Michael Hunter and Robert Orr

Financial Times

The FTSE 100 fell sharply on Monday as the fall-out from the rescue of Northern Rock continued to hit the markets.

Other lenders also suffered from the growing crisis of confidence, fuelled by comments from Alan Greenspan, former chairman of the Federal Reserve, that US house prices were likely to fall “significantly”.

Mr Greenspan’s thoughts, made in an interview with the Financial Times, raised the prospect of further contagion from bad debt within the US housing sector spreading around the globe via complex investment instruments based on American mortgage debt.

In London, Northern Rock lost a further 40 per cent of its value as savers scrambled to withdraw deposits from the bank, with an estimated £2bn withdrawn in just three days.

The Newcastle-based lender’s shares fell by a similar amount on Friday following the shock news that it needed to be bailed out by the Bank of England due to a drying up of liquidity in the capital markets.

Alistair Darling, chancellor of the exchequer, said he stood by the Bank of England’s decision to bail out Northern Rock. In an interview on BBC Radio Four’s Today programme he said the troubled lender could draw from the central bank ”as needed”.

Despite the continuation of talks over a rescue takeover, Northern Rock slumped 40 per cent to a new low of 267p. The shares were worth more than £12 only a few months ago.

With the rest of the banking sector also down sharply, the FTSE 100 fell 101.4 points, or 1.6 per cent, to 6,189.5.

Alliance & Leicester slumped 18.3 per cent to 713p, Bradford & Bingley fell 11.8 per cent to 291p and HBOS, the UK’s biggest mortgage lender, dropped 4.2 per cent to 821½p.

The prospect of more stringent mortgage lending also hampered the house building sector. Barratt Developments fell 7.2 per cent to 769½p, Persimmon lost 5.9 per cent to 956p and Taylor Wimpey was 2.8 per cent weaker at 304.3p.

Pub operator Mitchells & Butler fell 4.7 per cent to 590p after it said hedging costs ahead of an abortive attempt to create a property holding joint venture, mothballed due to the turbulence on world credit markets, would appear as a £140m special item on its annual accounts.

Of the risers, Sage, the information technology company, gained 2.7 per cent to 249¾p after a push from Deutsche Bank.