Volume 11.3 – Not the rock of ages – What should we make of the northern rock imbroglio

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What should we make of the Northern Rock imbroglio?
by Peter Warburton

Was Northern Rock the victim of US financial folly, or of its own incompetence? Are there deeper ethical considerations, to do with sponsorship? Peter Warburton investigates

Northern Rock began life 150 years ago as the Northern Community Fund, formed by a group of shopkeepers. In 1968, it merged with the Rock Permanent Benefit Building Society and by the time it abandoned its building society status, it was the consolidation of 53 societies. Northern Rock floated on the Stock Exchange as a public quoted company, relinquishing its mutual status, on the 1st October 1997.

The company has a very significant regional footprint. It employs more than 5000 people in Newcastle and Sunderland and its charitable foundation has donated more than £170 million to 1500 organisations and charities across the region. From 2003, Northern Rock became the primary sponsor of Newcastle United, renewing in 2005 for a five-year commitment at a cost of about £25 million. The company also sponsors Durham County Cricket
Club and Newcastle Falcons Rugby Club. Through its historical, charitable and sporting connections, Northern Rock has become integral to the regional economy. Little wonder then, that the overwhelming local reaction to its financial troubles has been a defence of its character and objectives. Newcastle offered Northern Rock the freedom of the city last October. It is tempting, therefore, to view Northern Rock as a victim of circumstances beyond its control: a righteous local hero cast down by the giants of the financial world.

This caricature neglects some important facts about the global financial markets and the recent development of mortgage finance on both sides of the Atlantic. The developed world, with the main exceptions of Japan and Germany, is in the grip of an unprecedented housing boom. Whilst this is not necessarily a house-building
boom, it is a love affair with the ownership of property. There has been no comparable period in modern history when house prices have appreciated by so much, for so long and in so many countries simultaneously. One manifestation of this has been the boom in mortgage finance and the financial innovation which has blossomed around it. There is no argument that the epicentre of the 2007 mortgage crisis was the United States. During the past four years, mortgage offers have been extended to millions of borrowers with slender chances of sustaining the arrangement. Home loans have been configured in such a way as to make the initial payments affordable but not the full costs of home ownership. In other cases, loans have been granted in the absence of any evidence of income and to the neglect of the borrower’s poor credit history. Over the past ten years, innovations in the provision…

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