Subprime Mortgage Crisis and Nationalisation
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, a process known as securitisation. In August 2007, when the global demand from investors for securitised mortgages was falling away, the lack of money raised by this means meant that Northern Rock became unable to repay loans from the money market. This problem had been anticipated by the financial markets, which drew greater attention to it. 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. This 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 everyone else was doing the same.
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. The bank is managed at "arms length" by the government through UK Financial Investments Limited.
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 is currently government owned. However there is 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 a fair level of 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. 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 matures. The reason for this change was government policy to increase the availability of credit. This £14 billion will 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. On 17 November 2011 it was announced that Virgin Money were going to buy Northern Rock plc for £747 million. The sale was completed on 1 January 2012 and by July of that year a further £73 million deferred consideration was paid by Virgin.
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