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Rock pledges to repay taxpayers Rock pledges to repay taxpayers
(about 2 hours later)
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.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.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.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.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 cutsStaff cuts
Northern Rock had to be rescued by the Bank of England in September 2007 after coming close to insolvency.Northern Rock had to be rescued by the Bank of England in September 2007 after coming close to insolvency.
BBC business editor Robert Peston said any severance payments to Mr Applegarth were always likely to provoke controversy. 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.
However, he added that the £760,000 payment, plus £25,000 in non-cash and other benefits, that Mr Applegarth will receive is less than his contractual entitlement. 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 Read Robert's thoughts in fullIt's by no means all bad news Robert Peston,BBC business editor Read Robert's thoughts in full
One contributor to the bank's loss was just under £50m of payments to City firms and professional advisers, incurred by it and the government when it was struggling to avoid nationalisation. 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."
As it tries to get back on its feet, Northern Rock said it would cut costs by 20%, and trim staff numbers by a third over the next three years. "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.It also wants to have a smaller business and plans to reduce its balance sheet to close to £50bn from about £107bn in 2007.
The BBC's Robert Peston said that while the bank's earnings figures looked worrying, "it's by no means all bad news". 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.
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."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.
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.
Northern Rock ran into trouble after problems in the US housing market prompted a global credit crunch. As a result, it was forced to approach the Bank of England for emergency funding, which prompted a run on the lender.
Faced with deteriorating 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, the first on a UK bank in more than 100 years.
Critics have blamed the bank's former management, and in particular Mr Applegarth, for borrowing too much money from the financial markets to fund Northern Rock's business.
They have complained that the bank's aggressive lending policy and a failure of oversight from market regulators led to the nationalisation of Northern Rock and a slump in the value of their investments.
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.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.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.