What went so wrong at Northern Rock?
News that the Financial Services Authority (FSA) has widened its investigation into Northern Rock and reporting irregularities regarding mortgage arrears is a devastating blow for the company. This comes at a time when the UK government is looking to spin off the operation after splitting the company into a "good bank" and a "bad bank". It does not reflect well on the UK government that it has taken so long to get to the bottom of the reporting irregularities and indeed the investigation is not yet finished.
For many years experts have believed that the rise and rise of Northern Rock was set against a business model which was flawed from day one. The FSA has on numerous occasions allegedly questioned the business model but taken no action, leaving investors to push the share price higher and higher and customers to flock to a company which was offering some of the best value mortgages in the market. So what went wrong at Northern Rock?
It is difficult to know exactly why these alleged reporting regularities occurred and why the company was so aggressive in the money markets with very little in the way of assets behind it. It is now known that for every mortgage agreed by Northern Rock the vast majority of the money used to fund them came from the money markets, with just a small deposit from the client and relatively small backing from the company. But could it happen again?
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