Northern Rock One Year On
A year has passed since Northern Rock hit the headlines with anxious depositors queuing outside its high street branches.
The conventional view of the mortgage market amongst the general public was that people deposited their money with banks and building societies and that the banks and building societies lent the money to other people as mortgages. In fact, at that time, something like half of all mortgages were funded by the lending institution borrowing the money on the international money markets, and not as a result of re-lending depositors’ money.
The sub-prime lending crisis struck in America first, but its effects were quickly felt internationally. The crisis of confidence felt by depositors in Northern Rock rapidly escalated. The bank turned to the Government for help as all other sources of working capital dried up. I believe that the Government’s response to the crisis was the correct one.
A year on the management of Northern Rock are making good progress in implementing their business plan. They have re-paid nearly £10bn of the £27bn loan made by the Bank of England. This is ahead of the plan originally agreed with the Government and makes those opposition politicians who issued hysterical warnings about the tax-payer’s money being lost seem foolish. This achievement has been brought about against a difficult trading background.
Taking the bank into temporary public ownership was not the Government’s preferred option. The Government wanted to find a private sector solution to the problems of Northern Rock without nationalisation. However, it turned out not to be possible to do so while also providing sufficient protection for the tax-payers interests.
The new management team at Northern Rock are operating at arms-length from Government. In my role as Minister for North East I have supported the Government’s three objectives, focussed on the interests of depositors, tax-payers and broader financial stability. I have also raised three further issues that matter very much to the North East of England. These are the interests of the employees, the Northern Rock Foundation, and the shareholders, particularly the small shareholders.
Together with Doug Henderson, Northern Rock’s constituency MP, I have met on different occasions with the new management of Northern Rock, Treasury Ministers, and the trade unions representing Northern Rock employees. I have also met with Govt officials at One NorthEast and JobCentre Plus to make sure that everything that can be done is being done to help ex-Northern Rock employees into alternative jobs.
The Government has agreed that the Northern Rock Foundation will be funded at £15m for the next three years, which effectively doubles the Foundation’s potential spend for this year. The Foundation is the largest single charitable donor in the North East of England, so its future is important to us.
It is impossible not to feel sympathy with the small shareholders of Northern Rock, however it is a matter of law that all shareholders have to be treated equally, and, in fairness, it is difficult to see how it could be otherwise. An independent valuer is being appointed to assess the value of the shares.
It’s been a tough year for the Northern Rock team. A lot has been achieved and the business recovery plan is on track. Ironically, this is a private-sector crisis being solved by public-sector intervention.
This article was originally published in the Newcastle Journal