Just when you thought it was becoming safe to go back into a bank, whoosh, a big one bites the dust. Northern Rock, Britain’s fifth biggest mortgage lender has been rescued by the Bank of England in a dramatic late night move.

The Financial Times used the “r” word, the most dreaded word in finance: “rescue” to describe the actions of the Bank of England. The news broke on the BBC website.

“The Bank of England will on Friday provide emergency funding to rescue Northern Rock plc, one of Britain’s major lenders that has fallen victim to the credit squeeze triggered by the US subprime meltdown,” the Fin Times started its dramatic report.

Northern Rock shares fell 4.9% on Thursday on the London Stock Exchange. Its shares have lost half their value this year as investors became more and more convinced that its business model was being damaged by the subprime mess and credit freeze.

London brokers say it had a value of around $US5.5 billion, or around $A6.5 billion, that makes it right for takeover and captalisation by a bigger competitor, even the NAB which has banking operations in England.

Northern Rock had more than $US200bn in assets, mostly mortgages, at the end of June. It is another example of the haphazard way the subprime crisis and associated credit problems continue to capture victims around the world in a way that the promoters of the collateralised debt obligations and other “innovations” said would not happen.

None of the promoters or believers (such as at our big five banks) thought the main problem would be this five week long credit freeze which won’t go away. And now it has caught a big one, not a minnow in the backblocks of the US or a small Aussie hedge fund like the failed Basis Capital group. With the end of quarter approaching on 30 September, news of the rescue could spark another round of asset write downs and problems for hedge funds, banks, investors and others caught up in the crisis.

Northern Rock is the the first British financial institution to be propped up since the Bank of England in 1998 revised the rules under which it would act as a lender of last resort to banks. London reports said the Bank of England is expected to say shortly that a similar facility is available to any other institution facing short-term difficulties.

The Bank of England’s move to become the “lender of last resort” came after consultation with the Treasury and the Financial Services Authority, which was again explained earlier in the week in a letter to the UK parliamentary treasury Committee by the Bank of England Governor, Mervyn King. UK reports say the Northern Rock isn’t broke or unprofitable, nor is it insolvent, it has just been unable to refinance billions of dollars in short term commercial paper with which it financed its very aggressive drive to expand its loan books in the past three years.

Last year it increased its share of the UK mortgage market from 8.7% in the second half of 2006 to 9.7% in the first half of 2007 through aggressive selling at fine profit margins. That has now come back to haunt it.

It is the biggest financial institution in the world so far to be caught up and crippled by the subprime mortgage crisis and associated credit freeze. Around 100 US mortgage lenders have shut, failed or been sold.

Northern Rock has deposits of $A55 billion, which makes it a nasty proposition should its financial position be worse than expected.

This means that the US Federal Reserve will almost certainly cut its federal Funds rate by 0.50% at its meeting next Wednesday morning, our time. It will make for a very fraught time in European, British and UK markets tonight in every sector: shares, bonds, cash, options, commodities: you name it.

For a month or so now banks have been wondering if one of their number was really in trouble. Northern Rock may be the answer the markets have been waiting for, or it may be the start of more bad news.

The Bank Of England’s Mervyn King also said on his Wednesday letter that the bank will only provide funds to a troubled institution as a lender of last resort if the risk of a collapse could lead to “serious economic damage”.

Enough said. This is very, very serious.