Bank bailout spooks British

LONDON/NEW YORK -- U.S. Treasury Secretary Henry Paulson called for calm in the global markets 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 plunged further. The clamor came despite assurances depositors' money was safe after Northern Rock's rescue Friday by emergency Bank of England funding. Britain scrapped the usual statutory limit that gives a maximum protection of $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.

Customers stood in lines outside of bank branches around Britain to withdraw all or some of their deposits. Spooked consumers have removed $4 billion since early Friday, when Northern Rock revealed it had asked the central bank for emergency funds and warned its profits would take a big hit. Scenes of nervous depositors, broadcast nationwide, appeared to stoke further apprehension.

"Extensive news coverage of people queuing up to withdraw their savings from Northern Rock could well fuel the fears that other financial institutions will be affected and increase general concern about the economic outlook," said Howard Archer, chief U.K. economist with Global Insight.

Archer said if Northern Rock's problems are not sorted out quickly, they could "have a significant dampening impact on both consumer and business confidence."

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," Paulson 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, making banks reluctant to lend to each other in August.

The Dutch central bank said Monday the credit crunch may force banks around the world to take back up to $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."

The U.S. Federal Reserve on Monday said it added $16.8 billion in temporary reserves to the U.S. 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.

Investors will be watching third-quarter earnings results this week from four big investment banks -- Lehman Brothers, Morgan Stanley, Bear Stearns Cos. Inc. and Goldman Sachs Group Inc. -- to assess how deeply the credit crisis has cut.

National City Corp., the ninth-largest U.S. bank, said 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.

Merrill Lynch said 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.