Northern Rock bosses to face MPs

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Top executives from Northern Rock are preparing to be grilled by MPs in a probe into what went wrong at the firm.

The appearance at the Treasury Select Committee on Tuesday morning is tipped to be lively - with the bank's business model expected to be scrutinised.

It comes a month after the global credit crunch first forced the mortgage lender to turn to the Bank of England for funding help.

Chief executive Adam Applegarth will be among those giving evidence.

Head of the Bank of England, Mervyn King and the head of the Financial Services Authority (FSA) have already faced tough questions from MPs.

Assessing options

Northern Rock's bid for emergency funding resulted in a run on the bank with thousands of savers queuing to withdraw money - totalling more than £2bn - or 8% of the amount of deposits it held.

In terms of the probability of this organisation getting into difficulty we had it as a low probability Hector SantsFinancial Services Authority <a class="" href="/1/hi/business/7007076.stm">Northern Rock timeline</a> <a class="" href="/1/hi/business/7035435.stm">FSA boss faces MPs</a> <a class="" href="/1/hi/business/7004001.stm">King defends bank role</a>

Analysts say that as a result of the images of panicking customers outside branches, the Northern Rock brand has been irredeemably damaged.

The bank, whose market value has plunged by more than 60% since the start of the crisis, is now assessing options including a sale, a break-up and closing to new business.

On Monday it said it was continuing talks with a number of "potentially interested" suitors, but that discussions are at a very early stage.

Its statement came after a consortium led by Sir Richard Branson's Virgin Group put forward plans to take control of the bank.

'Irresponsible'

FSA chief executive Hector Sants told the select committee that there were "lessons to be learned" from the regulation of Northern Rock.

"In terms of the probability of this organisation getting into difficulty we had it as a low probability," Mr Sants told the MPs.

"When events transpired that proved to be incorrect."

And in a separate hearing, Bank of England governor Mervyn King has defended his handling of the Northern Rock crisis, saying that it would have been "irresponsible" to have intervened earlier to help the bank.

The firm hit troubles because of its business model - which sees it raising most of the money which it provides for mortgages via the wholesale credit market - primarily by selling the debt on in the form of bonds.

Following the widespread losses made by investors in loans to US homebuyers with poor credit history, the so-called sub-prime loans, banks and investors who have had their fingers burned have become wary of buying any mortgage debt, including Northern Rock's, cutting its access to credit.

It has emerged over the past few weeks that Northern Rock has been forced to borrow about £10bn from the Bank of England to keep going.

And the Treasury has agreed to protect all savings deposited at the bank - providing a further breathing space for the bank as it considers whether it can remain independent or should be taken over.