UK Banks:Northern Rock was the first UK casualty of the subprime crisis, which will have repercussions for the financial sector in 2008, writes Fiona Walsh.
If a single image can sum up a year, then for 2007, it must be the sight of those panicked savers besieging Northern Rock branches in a desperate attempt to withdraw their cash.
The dramatic news that Britain's fifth-largest mortgage lender had been forced to seek emergency funding from the Bank of England came through on the evening of Thursday, September 13th. By the early hours of Friday morning, long lines had formed outside every branch of the Newcastle-based bank, while many thousands more jammed its online banking service.
They queued and they queued and they queued - and those who managed to get through the doors were withdrawing money at the rate of £1 billion (€1.4 billion) a day. They were still queuing four days later, when the government stepped in with its unprecedented guarantee of savers' funds.
It was the first run on a British bank in more than a century and had a huge impact, both politically and on consumer confidence generally.
While the City of London had been grappling with the fall-out from the American subprime housing mess for some months, Northern Rock was the first high-profile British casualty of the deepening crisis. Still afloat, but only just, as the year draws to a close Northern Rock is moving closer to nationalisation by the day as the government further extends its support for the stricken bank.
The year had started so promisingly for Northern Rock, the banking sector and the rest of the City. 2006 had been the year of the deal and 2007 looked set to break new merger and acquisition records on the back of a renewed wave of takeovers from increasingly ambitious private-equity players.
But as their targets got bigger and better-known, the private-equity firms found themselves under an increasingly harsh spotlight. Trade unions waged a relentless campaign against them, highlighting their penchant for secrecy and criticising their record on employment and pension rights.
But the real bone of contention was the rate of tax paid by the multimillionaire private-equity partners. Taking advantage of a tax break introduced by the Labour government to encourage entrepreneurs, some paid as little as 5 per cent on much of their profits.
As one of their own (Nicholas Ferguson, chairman of SVG Capital) admitted in one of the year's more memorable business quotes, this was "less tax than a cleaning lady" would pay.
Leading players were hauled up before the Treasury Select Committee to face a grilling from MPs. They defended their record on jobs and resolved to be more open in the future. The chancellor, meanwhile, acted to close the tax loophole by replacing the capital gains tax taper relief with one rate of 18 per cent, a move that caused outrage in the small business community, a row that will rumble on into 2008.
There were still deals, despite the looming credit squeeze. In the banking sector, the Royal Bank of Scotland emerged victorious in early October in the seven-month, £49 billion (€71 billion) bidding war with Barclays for control of the Dutch banking giant, ABN Amro.
Earlier in the year, Alliance Boots, the chemist shops to wholesaling group, was bought out by Kohlberg Kravis Roberts (KKR), a doyen of the private-equity industry. KKR joined forces with AB's wealthy chairman, Stefano Pessina, in the £11.1 billion offer, which marked the first ever private-equity takeover of a FTSE 100 company.
But Sainsbury's, the target of two private-equity takeover attempts in 2007, managed to retain its independence. Qatari-based investment fund Delta Two called off its £10.6 billion bid in November because of the increased cost of funding in the wake of the global credit crunch. It also baulked at the cost of pumping extra funds into the supermarket group's pension fund.
October 2007 marked the 20th anniversary of the great crash of 1987, when global share prices plummeted by 25 per cent in 48 hours. Investors have endured some sharp falls over the past year, although nothing on the scale of Black Monday. While the FTSE 100 index tumbled back through the 6,000 level at one stage amid the subprime panic, it ended the year more or less where it started.
As the City enters the new year, however, the threat of recession in the US and a slowdown in the UK looms large. House prices are falling, consumer confidence is fragile and there is the ever-present fear of more subprime shocks to come. However, it turns out in the end, 2008 will not be a year for the fainthearted.
Fiona Walsh writes for the Guardian newspaper in London
