Slaughter and May head of equity capital markets Nilufer von Bismarck was one of the large group of partners fielded by the firm advising HM Treasury during the global financial crisis. Here, she shares her experience during the Northern Rock crisis.

Nilufer Von Bismarck
Nilufer Von Bismarck

The wake of the financial crisis continues to haunt us through stunted global growth, a relatively vulnerable banking market and straitened budgetary policies.

Ten years on, the unprecedented chaos which began in the UK with the collapse and subsequent nationalisation of Northern Rock remains as surreal and frightening as it felt in 2007.

As depositors queued outside Northern Rock branches, solutions had to be identified and implemented real time and nimbleness of thought and action were vital on the part of advisers and HM Treasury. It was a tense and fraught time with work spanning days and nights without interruption. The Northern Rock solution saw the genesis of the good bank/ bad bank structure since replicated globally.

Over the year following Northern Rock’s nationalisation, the house of cards collapsed around the world and we found ourselves in the throes of a financial crisis. In the US we saw the demise of Bear Stearns and Lehman Brothers.

This side of the Atlantic panic set in as the funding markets began to dry up. Our banking system was on the brink of being brought down. RBS, Lloyds and HBOS all sought emergency state funding.

The mechanism for providing this funding needed to be devised in short order. There was no room for error or prevarication. First, an overall structure for re-capitalising the banks was devised between advisers and HM Treasury, which structure was announced in early October. This structure also formed the template for state intervention to support banks in other parts of the world.

Implementation of necessity needed to follow in short order. Over a weekend, in mid- October 2008, bespoke documentation in respect of state funding needed to be created, agreed and signed.

The timeframe required all documentation to be settled before the end of the weekend so as to ensure stability on Monday morning when the markets opened. An added complication was the health of HBOS which saw arrangements implemented for Lloyds to take it over as part of the state re-capitalisation.

There were separate negotiations with each bank leading to three sets of documentation. Each bank had a different negotiating stance and so bespoke drafting was required, all with no time to lose. The work spanned two days and two nights and finally, right down to the wire, the documentation for all three banks was signed by the relevant parties at around 6.00am on the Monday morning. The state intervention which followed worked to stem the banking crisis, albeit giving way to an economic crisis.

A decade later, there is a belief that the regulatory reforms which have been introduced are sufficient to protect us from a repeat of the crisis. It is certainly the case that Northern Rock could not operate today with the leverage and liquidity it had in 2007 and other regulatory changes should see investors picking up the tab in the future before tax payers.

However, the Bank of England remains hawkish about financial stability given Brexit and the high level of consumer debt, which has been fed by low interest rates and quantitative easing.

Slaughter and May head of equity capital markets Nilufer von Bismarck has shared her experience with The Lawyer as part of our coverage of the global financial crisis, 10 years on. Read more analysis and opinions here.