Future business school lecturers looking to illustrate the importance of diversifying your sources of funding will probably have a well-thumbed case study at their disposal entitled “Northern Rock”. The UK mortgage lender has gone from hero to zero in a matter of weeks thanks to market dynamics over which it has no control. But as more than 40% of its funding comes from RMBS it faced the prospect in early September of being a forced issuer in a market where the relationship between fundamentals and pricing has completely broken down.
The precipitous slump in Northern Rock’s share price (it has fallen more than 45% year to date), together with fevered speculation in the financial press that it was now ripe for takeover by a larger rival such as HSBC, suggest that its wholesale-funded business model is fundamentally flawed.
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