, London, on 14 September 2007, to withdraw their savings due to fallout from the subprime crisis. branding on
Briggate in
Leeds Background Under non-executive chairman
Matt Ridley and Chief Executive
Adam Applegarth, Northern Rock had a business plan which involved borrowing heavily in the UK and international money markets, extending mortgages to customers based on this funding, and then re-selling these mortgages on international capital markets, in a process known as
securitisation. In 2007, there was much press attention given to the growing crisis due to subprime mortgage lending, particularly in the United States. Amid the resultant unease by August 2007, global demand from investors for securitised mortgages had fallen away, and Northern Rock was unable to raise funding by selling its securitised loan books, and therefore became unable to repay short-term loans from the money market.
2007 crisis and initial responses On 14 September 2007, the bank sought and received a liquidity support facility from the Bank of England, to replace funds it was unable to raise from the money market. Reporting of this complex scenario led to panic among individual depositors, who feared that their savings might not be available should Northern Rock go into receivership. The result was a
bank run – the UK's first in 150 years – where depositors lined up outside the bank to withdraw all of their savings as quickly as possible, particularly since many other people were doing the same. As the UK government provided the liquidity support facility, they also exerted pressure on the bank to create a longer-term recovery plan. Over the next few months, there were numerous changes to the board of directors and executive team. On 19 October, chairman Matt Ridley resigned and was replaced by Bryan Sanderson, a former Managing Director of BP. Chief Executive Adam Applegarth's resignation was then announced in mid-November, with the caveat that he would remain with the group until it established independent funding or was purchased. Four non-executive directors, Sir Derek Wanless, Nichola Pease, Adam Fenwick and Rosemary Radcliffe also resigned. A month later, Applegarth left and former Marketing Director, Andy Kuipers, was appointed Chief Executive. Notably, Dave Jones, the Group Finance Director through the crisis, had only been in his role since the retirement of Bob Bennett in January 2007. Alongside Applegarth, Bennett had been one of the architects of the bank's flotation in 1997 and its subsequent substantial growth. He had been wary of its continued aggressive growth strategy, which would continue up until summer 2007, despite the increasing volatility in the markets on which Northern Rock relied. Commentators later suggested that with Bennett's retirement, the executive board was dominated by Applegarth. A report by the Financial Services Authority conceded in February 2008 that it had been wrong to consider Northern Rock low risk, and as a result had given the company too little scrutiny. The group was criticised when it emerged that they had begun to pay in excess of 150 senior staff members substantial retention bonuses. Northern Rock hoped the bonuses would enable them to retain critical staff members at risk of being poached by other companies. It had previously been criticised in 1998 when the pay of the executive team that led the flotation was 40% higher in the year following. In late 2007, Virgin Money was named as the preferred bidder for the group, with Olivant Group later beginning talks around takeover. The bank was managed at "
arm's length" by the government through
UK Financial Investments. The bank planned to repay the government debt within three to four years, primarily by encouraging mortgage customers to take their mortgage to another lender. Costs were also reduced by reducing numbers of staff. As of 3 March 2009, the bank was repaying the loan well ahead of target, owing a net balance of only £8.9 billion of the loan which stood at £26.9 billion at the end of 2007. By October, customers appeared to be regaining confidence in the bank, when it emerged that there had been a surge in the number of new accounts which had been opened. People perceived Northern Rock as a safe place to put their money, given that it was currently government owned. However, there was no guarantee that if Northern Rock was to fail that the government would top-up any compensation over and above the standard £85,000 offered by the
Financial Services Compensation Scheme. Former shareholders and hedge funds also took legal action in January 2009 to get compensation for their shares; the shareholders lost the case. They also lost their appeals in the British courts, but hoped to take the case to the European courts. However, on 8 December 2009, it was announced that the valuer Andrew Caldwell had decided that the Northern Rock shareholders should get no compensation. On 23 February 2009, Northern Rock announced that they would be offering £14 billion worth of new mortgages, over the next two years, as a part of their new business plan. This new lending was partly funded by an increase in the government loan and a reversal of previous strategy to pay the loan off as quickly as possible by actively encouraging mortgage customers to leave when their mortgage deal matured. The reason for this change was government policy to increase the availability of credit. This £14 billion was to be split into £5 billion in 2009 and £9 billion in 2010. Potential buyers for the bank included
Virgin Money,
National Australia Bank,
NBNK,
Santander,
Blackstone,
Tesco,
TowerBrook,
Yorkshire Building Society and
Coventry Building Society. Former
Chancellor of the Exchequer Alistair Darling had stated that he was in no "hurry" to return the bank to the private sector. The bank was split into two parts,
assets and banking on 1 January 2010. On 15 June 2011, it was announced that the bank was to be sold to a single buyer in the private sector by the end of the year. On 22 March 2011, the bank issued its first mortgage securitisation since the 2007 recession which nearly brought the bank down.
Purchase by Virgin Money On 17 November 2011, it was announced that Virgin Money was going to buy Northern Rock plc for £747 million.
Northern Rock Shareholder Action Group The Northern Rock Shareholder Action Group (NRSAG) has been active since the Northern Rock crisis began in 2007, seeking fair compensation for the thousands of small shareholders who owned Northern Rock shares. The group is run by a committee of volunteers. The
UK Shareholders Association provide administrative and advisory oversight to the group. The Committee reached the conclusion that HM Treasury has made a substantial amount of money from running down the loan book of the bank. The NRSAG claimed that despite comparable conditions, no other failed bank was handled in this manner during the
2008 financial crisis. Instead, other banks received full Government backing, bailouts and shareholders retained their shares. The Government has earned a sizable surplus in the years after nationalisation, even though any and all Government assistance was completely reimbursed in those years, including interest paid at penal rates at no expense to the UK public. The NRSAG asked the Government to review their original compensation decision, given that the updated and widely confirmed numbers prove a huge surplus. To request an appeal, the NRSAG wrote to the Treasury Select Committee. ==Operations==