Page last updated at 14:03 GMT, Monday, 31 March 2008 15:03 UK

Rock pledges to repay taxpayers

Northern Rock branch
Northern Rock bank was nationalised on 21 February

Newly-nationalised bank Northern Rock has promised to repay its 24bn state loan by 2010 despite warning that it would not break even for three years.

The bank added that it would be "significantly loss making" in 2008, after a 2007 pre-tax loss of 167.6m.

Northern Rock also revealed that it would pay former chief executive Adam Applegarth a total of 785,000 as part of his severance agreement.

Shareholders have criticised the payout after the bank ran into problems.

Failure reward?

Mr Applegarth is in line to get a 760,000 payment, plus 25,000 in non-cash and other benefits. The total will be split into monthly payments.

"A lot of shareholders will be very unhappy with the size of Mr Applegarth's payoff but it looks like legally, the company could not have avoided paying that amount," said Roger Lawson of the Northern Rock Shareholders Association Group.

"Had Mr Applegarth taken the company to court then it could have ended up having to pay him even more."

Prime Minister Gordon Brown's spokesman said it was "clearly a matter for Northern Rock, which operates independently of government".

Vince Cable, the Liberal Democrats' Treasury spokesman, called the payment "outrageous".

"This is a straightforward case of reward for failure," he added.

Staff cuts

Northern Rock had to be rescued by the Bank of England in September 2007 after coming close to insolvency.

As it now tries to get back on its feet, Northern Rock said it would cut costs by 20%, and trim staff numbers by about 2,000, roughly a third of the total number, over the next three years.

Northern Rock's executive chairman Ron Sandler said that the bank was in talks with workers' unions and was in the process of deciding how and where the cuts would be made.

It's by no means all bad news
Robert Peston,
BBC business editor

The Unite union said: "Unite is calling on the company to ensure that any proposed restructuring must consider the welfare of employees and long-term success of the bank."

"Decisions must not be made merely in the pursuit of short-term cost savings," it continued.

It also wants to have a smaller business and plans to reduce its balance sheet to close to 50bn from about 107bn in 2007.

Mr Sandler said that between 25bn and 30bn of mortgages would come up for renewal during 2008, and would either be repayed or rolled over on higher interest rates.

Northern Rock would also halt commercial and retail lending, he said.

Fair chance

Mr Sandler also tried to reassure rival lenders that Northern Rock would not use its government guarantee to offer consumers hard to resist offers.

He said that the bank would not be "market leading but competitive", and still planned to generate about 5bn-worth of mortgage business a year.

Today reminds us that the nationalisation of Northern Rock is far from the end to the story
Shadow Chancellor George Osborne

The BBC's business editor Robert Peston said that while the bank's earnings figures looked worrying, "it's by no means all bad news".

"Ignoring the exceptionals, write downs and one-off charges, pre-tax profit emerges at about 420m for the year, sharply down on the 590m made in 2006, but indicative of a business with a future", he said.

However, Shadow Chancellor George Osborne said that: "There's still deep confusion about when taxpayers will get their money back from the Northern Rock fiasco."

"And there is not a word on when this bank, with all its liabilities, could be returned to the private sector."

"Today reminds us that the nationalisation of Northern Rock is far from the end to the story."

Wider problems

Northern Rock ran into trouble after problems in the US housing market prompted a global credit crunch. Faced with poor market conditions, many banks stopped lending to each other and Northern Rock's main source of financing dried up.

As a result, it was forced to approach the Bank of England for emergency funding, which prompted a run on the lender.

Northern Rock's business model meant that it borrowed money to fund about 60% of its total lending, with savers' assets making up the rest of the money.

That level of funding from the financial markets was almost double that of many of its rivals, who relied more heavily on money provided by savers.

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