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.[30]
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.[31]
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.[32]
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.[33] A month later, Applegarth left and former Marketing Director, Andy Kuipers, was appointed Chief Executive.[34]
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.[35] 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.[36]
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.[37] 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.[38]
In late 2007, Virgin Money was named as the preferred bidder for the group, with Olivant Group later beginning talks around takeover.[34]
Nationalisation
On 22 February 2008, the bank was taken into state ownership as a result of two unsuccessful bids to take over the bank, neither being able to fully commit to repayment of taxpayers' money within three years.[39] The bank was managed at "arm's length" by the government through UK Financial Investments.[40]
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.[41] 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.[42]
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.[43]
Purchase by Virgin Money
On 17 November 2011, it was announced that Virgin Money was going to buy Northern Rock plc for £747 million.[22] The sale was completed on 1 January 2012, and by July of that year a further £73 million deferred consideration was paid by Virgin. In 2014 Virgin Money repaid a further £154.5 million that it had received as part of the refinancing package.[57]
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.[58]
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[59] 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.[60]
