London's boom is falling down

Customers line up at Northern Rock branch in Bromley, southeast London

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KAI RYSSDAL: EU finance ministers might not be able to do anything about the sliding dollar. But the cheaper greenback's not standing in the way of deals being done -- or at least talked about.

Over the weekend, two more American private equity firms are said to have expressed an interest in Northern Rock. That's the British bank that was bailed out of its subprime troubles by the Bank of England a couple of weeks ago. In all, that makes four groups interested in Northern Rock.

But this might just be an anomaly, because these are tough times in The City, as London's business district is known. Marketplace's Stephen Beard reports.


STEPHEN BEARD: The City has boomed in recent years. Foreign banks have flocked to do business here. The whole British capital's prosperity depends on this financial center. But says Damien Rees, financial editor of the Daily Telegraph, the subprime mess means there'll now be leaner pickings for the City.

DAMIEN REES: This credit crunch will make banks more cautious, so the amount of business flowing through London may well fall. So The City is going to be in for a rather more difficult time.

The City may even see a bigger downturn than New York, he says, because of the way London managed its banks in the aftermath of the subprime meltdown.

REES: That system of regulation has been tested, and it failed. And it failed badly.

It failed over Northern Rock -- analysts say when the mortgage lender ran into liquidity problems last month, the Bank of England bungled the bail-out and horrified depositors scrambled in their thousands to withdrew their savings:

NORTHERN ROCK CUSTOMER: It is just a colossal shock. I don't think I'll ever trust the banking system in this country again, and I'm very tempted to do what my mother-in-law used to do, and stick it under the mattress!

The run on Northern Rock made Britain look like a banana republic, said the head of Britain's main industry association, Richard Lambert.

RICHARD LAMBERT: This Northern Rock drama was the first big test of the arrangements that were set in place to ensure bank stability. And the outcome was the first run on a bank in England for 150 years -- so you can't say it was a complete triumph.

Although a fast-moving, thoroughly modern marketplace, The City is still steeped in tradition. On some official occasions, three-cornered hats and powdered wigs abound. The key figure in The City is the holder of an ancient post: the Governor of the Bank of England, Britain's equivalent of the Chairmen of the Fed.

He is usually considered above and beyond reproach. But after the Northern Rock affair, the present incumbent, Mervyn King, was pilloried in the press and Parliament. Damien Rees says he could soon be looking for a new job.

REES: Mervyn King is a lesser central banker, unfortunately, after Northern Rock than he was before. So I think we will soon be looking at the search for a new Governor of the Bank of England to take over by next summer.

While the Chairman of the Fed has been applauded so far for his handling of the credit crunch, the Governor of the Bank of England has been holed below the waterline. Howard Wheelden Senior Strategist at stockbrokers BGC is worried:

HOWARD WHEELDON: A loss of confidence in the City of London and the institutions that surround and serve the City of London -- and I include in that the Bank of England -- would be severe blow to the U.K. economy.

About one-third of Britain's entire economic output derives from business services, like finance, accounting, recruitment and law. The City is widely seen as the sector's most important locomotive. If The City runs seriously out of steam, Britain's economic growth could hit the buffers.

In London, this is Stephen Beard for Marketplace.

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