Northern Rock Bank Up for Sale: Bid deadline today 4th February

Northern Rock is a famous mortgage bank of UK. However, following the mortgage market meltdown in the past year, it is now to be sold out. It was one of the favourite banks of the UK citizens for taking easy mortgages or loans for buying properties like house, home, business, etc., but today it is up for sale.

Northern Rock landed itself into financial distress because of its incorrect business functions and models which had no room or preparations for what we know as the global credit crunch.

Unlike the other UK based banks, Northern Rock had devised the business model upon borrowing funds from the wholesale money markets to carry on or run its mortgage business, rather than the usual method of using the deposits of the savings account money which people leave to the banks in their savings account. Borrowing such money from wholesale money markets is not only costly, but also risky, as it does not have any backup for repaying the debt that the bank borrows.

Yet after the subprime mortgage crisis in the US which had the global effect, Northern Rock suddenly found it could not secure the cheap funds it needed, as credit was either unavailable or was found to be more expensive.

As the first emergency loan from the Bank of England was announced, thousands of Northern Rock savers rushed to withdraw their funds, before the government's pledge to guarantee all savings. This caused mayhem in the banks money, as saving bank account holder had withdrawn their money and bank was left ailing with less cash, despite the help or emergency aid from the Bank of England.

Now, the FSA or the Financial Services Authority (like that of RBI in India and Fed in USA), is being criticized for not keeping a close eye on the way the bank was functioning. As per the news, Northern Rock's senior managers were most at fault, it also blames that the FSA was guilty of a "systematic failure of duty" in not preventing the bank's "reckless" business plan.

It’s up for sale now. Sir Richard of Virgin Atlantic has already confirmed that Virgin aims to meet the deadline, and is said to be the frontrunner. Along with him, 2 more bidders are expected to be interested in the buying the bank. Under the sale to a private buyer, the government intends to turn the £25bn of Bank of England loans - essentially taxpayers' money - into bonds, which will then be sold to investors. It is not yet known when the government will announce which bid for Northern Rock has been successful.

People who believe that banks which are in the business money savings and money lending or are aggressive in the real estate loan markets, should think again. We have already seen the fate of Global Trust Bank. Recent news was about the losses reported by French bank Societe Generale or SocGen, saying that one of its traders did a scam. All those are affected are the shareholders of the bank.

Table of Contents