Sunday, February 17, 2008

Northern Rock is nationalized

In a surprise move, the British government has nationalized the Northern Rock Building Society (link to FT article). A building society is like a savings and loan, but it is basically a bank now. Northern Rock had grown aggressively through a practice of making loans and funding them in the commercial paper market. With the subprime collapse they got hit on both sides of the balance sheet.

There had been some talk of a buyout by Virgin. But according to the Government, the numbers didn't add up. Apparently the shareholders didn't agree with this. Their shares were trading for 90p (about $2) and will now be worthless.

This is the first nationalization of a bank for 25 years or so. But the Northern Rock was the first British bank in 100 years to suffer a bank run.