Northern Rock

Northern Rock was originally a building society, born out of a merger between Rock Building Society and the Northern Counties Building Society in 1965, before demutualising in 1997.

It joined the Stock Exchange as a minor bank and many expected it to be taken over by a larger rival, but Northern Rock remained independent and grew to be the fifth largest mortgage lender in the UK.

Northern Rock collapsed in September 2007 (a year before Lehman Brothers). That's because in order to grow fast and satisfy shareholders, it had to keep expanding its mortgage lending. It did so aggressively, partly by going into sub-prime, and by offering first-time buyers the now notorious 125% mortgages. But around three-quarters of the cash it needed was coming from the money markets (borrowing from other banks), and only a quarter from its own depositors (savers). So when the money markets suddenly seized up in August 2007, it began to run out of money. When the BBC reported that the Bank of England was lining up an emergency bail-out, queues formed outside NR branches in the first run on a British bank in 150 years.

The bank was subsequently split into 'good' and 'bad' banks, with the latter holding its toxic assets and being named Northern Rock Asset Management.

The plan was to sell the good bank back to the private sector, while the bad bank was last year grouped with the government-owned rump of Bradford & Bingley in something called UK Asset Resolution. In the first year the bad bank made a £277m profit, because it was not selling new mortgages but raking in income from its old ones. The good bank, meanwhile, made a £232m loss. That's because it has started selling mortgages again, but has not made enough money as yet to cover the attractive interest rates it has been paying to savers – who saw them as underwritten by the government. As of 2011, the bidding process has moved into an active phase and Virgin Money is currently the front-runner alongside the ambitious Coventry building society.