LONDON/NEW YORK- (Reuters) - Treasury Secretary Henry Paulson called for calm in the global markets on Monday as savers lined up to pull deposits from Britain’s fifth largest housing lender hit by the credit crunch that began with American mortgage failures.
Credit problems continued to reverberate on both sides of the Atlantic as shares in UK lender Northern Rock NRK.L plunged further. The clamor came despite assurances depositors money was safe after Northern Rock’s rescue on Friday by emergency Bank of England funding. Britain scrapped the usual statutory limit that gives a maximum protection of 31,700 pounds ($62,000).
The bailed-out bank said it is considering “all strategic options” as a number of suitors were reported interested in taking it over. Dealmakers in the United States, meanwhile, reported new problems in financing takeovers.
Speaking to reporters in London, the U.S. Treasury Secretary downplayed the severity of the credit problems.
“Pointing fingers in the middle of a period of stress and strain is not as useful as getting together and then seeking solutions,” he told reporters during a visit to London.
“You don’t want an overreaction, you want a balance,” he said.
Northern Rock, once a darling of the bank sector for its innovative use of financial markets for funding, has little exposure to high-risk debt. But it got into trouble when global investors worried about the widespread repackaging of poor-quality debt pulled back from the market and banks reluctant to lend to each other in August.
The Dutch central bank (DNB) said on Monday the credit crunch may force banks around the world to take back up to 1.2 trillion euros ($1.66 trillion) in debt onto their balance sheets if investors are unable to refinance it, but noted that would be “in an extreme scenario.”
Paulson, visiting Paris, cautioned: “It will take a while to work through the turbulence in capital markets.”
However he added: “We’re doing so against a backdrop of a strong global economy.”
The U.S. Federal Reserve on Monday said it added $16.8 billion in temporary reserves to the banking system through overnight repurchase agreements. It was the single largest repurchase action since early August when global central banks boosted liquidity injections to head off a globe-girdling credit squeeze.
Monday is a crucial day for financial markets as they discover how far borrowers have succeeded in meeting deadlines for refinancing tens of billions of dollars in commercial paper -- short-term debt used to fund longer term investments.
But even if this hurdle is overcome the crisis could roll on for months as U.S. mortgage borrowers become due to refinance low early payments on their loans at higher interest rates.
Overnight sterling lending rates briefly hit levels not seen in over six years on Monday as the Northern Rock crisis sent banks scrambling for immediate access to cash. Rates jumped as high as 6.50 percent, according to Reuters data, well above the Bank of England’s 5.75 percent benchmark rate.
Investors will be watching third-quarter earnings results this week from four big investment banks -- Lehman Brothers LEH.N, Morgan Stanley (MS.N), Bear Stearns Cos. Inc. BSC.N and Goldman Sachs Group Inc. (GS.N) -- to assess how deeply the credit crisis has cut.
National City Corp NCC.N, the ninth-largest U.S. bank, said on Monday it expects a third-quarter loss from mortgage banking of around $160 million.
It had already slashed its mortgage exposure in December when it sold First Franklin Financial Corp., which specializes in higher-risk debt, to Merrill Lynch MER.N.
Merrill Lynch said on Monday it had cut an unspecified number of jobs at First Franklin, a leading U.S. subprime mortgage lender it acquired nine months ago for $1.3 billion.
Meanwhile, U.S. home builder Hovnanian Enterprises Inc. (HOV.N), which caters to the wealthy, reported 2,100 gross sales during a three-day sales blitz over the weekend. Shares of Hovnanian rose 3 percent on news that the company was successful in lowering its bloated inventory of unsold homes.
Debt markets remained jittery as U.S. mortgage lender and vehicle fleet company PHH Corp. (PHH.N) said its deal to be acquired could collapse because of a funding shortfall. Its shares fell 17 percent.
Another much bigger deal, a $26 billion acquisition of First Data Corp (FDC.N) by Kohlberg Kravis Roberts, that was delayed by the credit freeze began steps toward completion of its closely watched deal. Investment banks on Monday began marketing a portion of First Data’s leveraged buyout debt to prospective investors. Lead banks Credit Suisse and Citigroup were selling $5 billion of the $15 billion loan Monday afternoon. Terms have been a tailored to meet the demands of gun-shy investors.
Financial markets expect the Federal Reserve to cut the U.S. benchmark interest rate on Tuesday to help ease the credit squeeze, which risks hurting major economies by driving up market interest rates and tightening the terms set for companies and consumers to borrow.
Former Fed chairman Alan Greenspan told Reuters the U.S. economy could weather a mild decline in house prices. “But if the whole thing festers it will erode household balance sheets and eventually impact on what the critical support has been in this economy: consumer expenditures,” he added.
“Earlier in the year, I was talking about a one-third probability of a (U.S.) recession. It’s come up somewhat, but it’s still at this stage somewhat less than 50 (percent),” Greenspan said in the interview on Monday.
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