Northern Rock was essentially the start of the credit crisis in the UK (though before they imploded the Germans had to rescue some banks, as did the Americans).
In August 2007 the credit markets froze, and Northern Rock, which funded itself through the money markets, found itself in trouble. They approached the BoE for a loan, and the bank disclosed this, causing a run on the bank as excitable TV coverage convinced savers their money was under threat. The government responded by guaranteeing the savers of Northern Rock, extending £26.9bn in loans to be repaid by 2010 at an interest rate of 6.75%, and then nationalising the bank in Feb 2008, injecting 3.5bn in capital into the organisation.
At the time, an enormous fuss was kicked up by the opposition to these sensible measures. The Telegraph scaremongered in Nov 2007 that the taxpayer would never get their money back after Alistair Darling refused to "guarantee" that the loans would be repaid (what reasonable person could give such a guarantee?) When the bank was nationalised in Feb 2008, George Osborne called Alistair Darling a "dead man walking" and said that "We will not back nationalisation. We will not help Gordon Brown take this country back to the 1970s."
Alistair Darling appointed Ron Sandler to sort the bank out. At the time the Rock had 1 million savers, 800,000 mortgages and 6000 staff. At the time of nationalisation the Rock received just 25% of it's funding through deposits. Nationalisation tasked it to get this up to 50%. Sandler made 1500 people redundant, but the Rock still employs 4500 staff and has 70 branches.
Sandler's strategy was to halve the mortgage book, and in order to incentify mortgagees to remortgage elsewhere, they have the highest standard variable mortgage on the market at 7.34%. Why so drastic? Because it was a race against time. If the property market tanked many people wouldn't be able to get remortgages elsewhere. They had to be incentivised to move quickly. They also had to cap the number of savers they could take on to 1.5% of the savings market to comply with EU rules on nationalised industries. But they are well on their way to achieving their target of 50% of funding through deposits.
So far the strategy has paid off. They've repaid £15.5bn of their loan so far, leaving them with £11.4 bn still outstanding. The scaremongering from earlier in the year that the taxpayer would lose the lot was unfounded.
Some charity groups have been accusing the Rock of harshness in their repossession strategy. They repossessed 4200 homes, compared to about 2200 the year before. But in the context of the total number of mortgages they held when this saga started, this is low.
Some Northern Rock mortgagees took out the now infamous "Together" mortgage which constituted a 95% mortgage, plus an unsecured loan, that took total lending to 125% of the purchase price. Most of the Rock's unsecured loan portfolio comes from these "Together" loans. Unsurprisingly, the mortgagees appear to have blown all the money advanced to them, and other lenders are reluctant to take them on. They represent the biggest threat to Northern Rock achieving normality. Once NR have repaid their loan to the govt, expect new mortgage rates to drop for very secure customers with low loans-to-value, as a way to attract good customers and dilute the number of risky mortgages on their books.
Still, Northern Rock is well on it's way to being mended. Once they have repaid the loan to the government, and sorted out their funding, they should be in a prime position to be floated on the market. I expect the government will wait a few years though. It's never sensible to float in a depressed stock market.
Two people come out well from this. Alistair Darling's actions in nationalising the bank and appointing Sandler to run it turn out to have been the right thing to do. Darling is going from strength to strength - no way can he be termed a "dead man walking". Ron Sandler appears to be an excellent trouble shooter. If we need troubleshooters again, his name will surely be on the top of the list.