The confirmation by the Bank of England of support for Northern Rock plc on 12 September 2007 is the first major sign of international fallout from the collapse of the US subprime mortgage lending market.
In the US, lenders such as New Century Financial Corporation, the second largest subprime lender in California, have gone bankrupt. In the UK, as Northern Rock is classed as a bank, the authorities intervened in order to prevent market panic. There have been persistent rumours that several leading UK banks, including Barclays, have liquidity issues and the Bank of England wished to send a clear signal that no major bank will be allowed to fail.
The irony of Northern Rock is that it was generally deemed to be a successful company. The share price was GBP12.58 in February, but by 14 September 2007 it had dropped to GBP4.33.
Northern Rock achieved sales growth by offering 100% mortgages on home valuations, plus an extras 25%. Their projected growth rate was 20% per annum and yet the market was only growing at around 10%. In order to gain this volume of business, they needed very attractive mortgage products and also to adopt a flexible approach to consumers...
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