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When Northern Rock crashed, some commentators tried to say: "I told you so." They claimed they predicted the Newcastle-based bank would hit trouble and might ultimately fail.
They were being disingenuous. Nobody foresaw the crisis that would engulf the international financial system to the extent that the supply of wholesale cash became totally locked. That development was inconceivable.
What they did worry about in the case of Northern Rock was its aggressive lending to people on low incomes, mostly in the North of England, who, if the UK economy took a turn for the worse, might lose their jobs and be unable to repay their loans. Today's results show they were right to be alarmed. This is a bank, now state-owned, where 39 per centof its mortgage-holders are in negative equity and more than 22,000 are in arrears of three months or more with their repayments.
The contrast between these figures and those released yesterday by Barclays and HSBC could not be greater. Under its gung-ho chief executive Adam Applegarth, Northern Rock aspired to be as big a player on the banking stage as those two Titans. The strategy he and his colleagues devised was to go all- out for growth. This involved throwing caution to the wind. Northern Rock would lend up to 125 per cent the value of the property. It would allow borrowers to self-certify how much they earned. Instead of the usual advance of up to three times income, Northern Rock went for five.
To finance its loans, the bank did not adopt the time-honoured custom of using savers' deposits. That would take an age and Northern Rock's management was impatient to get ahead. They turned to the global markets, with dire consequences.
What they created, as is all too evident today, was a bank that was lending to people who could ill afford to repay. It was, in effect, a major sub-prime lender.
Applegarth insisted the bank's loan book was sound, that the housing stock of its clients was solid. It took little account of the impact of a deep, recession on jobs. This same mantra was repeated by the Financial Services Authority when it was asked, after Northern Rock had gone down, as to why it wasn't concerned about the bank's fragility. It was not in the watchdog's remit to examine banks' business models. Now, thankfully, that has changed. Meanwhile, Northern Rock is being nursed back to health. But as this news shows, it will take some time.
