'Bad bank' aims to do good by getting your money back

Bradford & Bingley, a former building society which overstretched itself in buy-to-let and self-certification mortgages, was sunk by jittery wholesale money markets and a crashing housing market.

Northern Rock's infamous Together mortgages, which lent householders up to 125 per cent of the value of their property, helped swathes of homeowners live beyond their means.

But now the Government intends to turn two of the biggest UK banking failures into a beacon of financial management and efficiency as a giant bad bank.

Last week, UK Financial Investments (UKFI), the body which manages the state's bank assets, confirmed it will merge B&B's mortgage book with the vast bulk of Northern Rock's loans, under one holding company. UKFI said merging the two nationalised lenders was the "natural outcome" and would "maximise value for the taxpayer". Winding down a loan book worth a combined 93bn will be done by a single management team.

"What we are about is getting the taxpayer's money back," said Keith Morgan, head of wholly-owned investments at UKFI.

"That means integrating these companies together effectively and efficiently."

Where to base the new bad bank's headquarters is yet to be decided, but already West Yorkshire is staking its claim.

Howard Kew, chief executive of Financial Leeds, said basing the new organisation's board and support functions in Crossflatts is vital to the region's economic prosperity.

"We've got to keep banging the message that we've got a high level of capability here," he said. "We've got the skills base here. That makes it a sensible place to do it."

Mr Kew, whose organisation promotes the Leeds city region as a financial hub, has met Mr Morgan to emphasise West Yorkshire's suitability.

The bulk of B&B's 950 employees are based in Crossflatts, after its branch network was sold to Spanish bank Santander. Northern Rock's 4,500 workforce is split between its head office in Newcastle, Doxford in Sunderland and its branch network.

"They (Crossflatts and the North East) have both got people in them doing important things and the two locations will be retained," said Mr Morgan.

He expects significant savings will come from merging the organisations' support functions. "Working on a common IT and systems platform will be more efficient," said Mr Morgan.

"There will be some situations where we might retain certain elements but there will be savings from getting down on to one single IT platform."

Northern Rock was split into a good and bad bank earlier this year. Northern Rock Plc retained the 19bn savings book and 10bn of prime mortgages and Government plans to return this to private ownership.

The 54bn mortgage and unsecured loan book was sliced off to create a bad bank called Northern Rock (Asset Management).

Mr Morgan said that merging this with B&B's 39bn loan book will allow the two lenders to share expertise.

"If we've got buy-to-let in both companies it would make a lot of sense to manage the buy-to-let in both by the same approach," he said. "We expect there to be some swapping of methodology and approach."

However, Mr Morgan said it was too soon to say where the bad bank will have its headquarters. An industry source said a logical outcome could be to move NRAM to Doxford, but base the new organisation and its support functions in Bingley.

"Politically, it would be a lot easier to close asset management in Newcastle but tell Newcastle they have got a new bank," he said.

"Clearly, the B&B management team have had 18 months to build and foster process controls. At Northern Rock there has been a lot more turmoil because they have had to split in two."

He added B&B managing director Richard Banks could benefit from his long-standing history with Richard Pym, who chairs both nationalised banks.

"They were at Alliance & Leicester together and Richard Banks sits in Bingley. I would imagine he might retain that management team," he said.

Mr Banks has talked about turning B&B into a mortgage servicing provider, running loan books for lenders on an outsourced basis. However, state aid rules would currently make this impossible.

But for now, UKFI is concentrating on improving efficiency and making the merged bad bank as lean as possible. Many believe it could be a valuable asset for the taxpayer in future. Indeed, both lenders believe profitability could be achieved within a year.

"If you manage them efficiently and work through people's arrears issues and the economy improves, then the value of these assets could increase enormously," said Mr Kew.

"Potentially the value to UK Plc of the back book is more important asset than the disposable going concern bank."

From mutuals to merger

1850 – Northern Counties Permanent Building Society established

1851 – Bradford Equitable Building Society and Bingley Permanent Building Society both established

1865 – Rock Building Society established

1964 – Bradford & Bingley Building Society formed from merger of Bradford Equitable Building Society and Bingley Permanent Building Society

1965 – Northern Rock Building Society formed from merger of Northern Counties Permanent Building Society and Rock Building Society

1997 – Northern Rock bank formed when the society floats on the London Stock Exchange

2000 – Bradford & Bingley Building Society demutualises, floating on the London Stock Exchange

September 2007 – queues form outside Northern Rock in the first run on a British bank in more than a century, as it struggles in the credit markets

February 2008 – Northern Rock nationalised

June 2008 – Bradford & Bingley launches a 400m rights issue

September 2008 – Bradford & Bingley is nationalised. Spanish bank Santander buys its savings book and branch network

January 2010 – UKFI splits Northern Rock into "good" and "bad" bank - Northern Rock plc and Northern Rock (Asset Management)

March 2010 – UKFI confirms plans to merge Northern Rock and Bradford & Bingley loan books.