FOR Adam Applegarth, the embattled chief executive of Northern Rock, the relentless pressure finally took its toll. More than two months after the bank had been plunged into financial crisis, he cracked.

On Thursday evening, a “heartbroken” Applegarth contacted Bryan Sanderson, the Northern Rock chairman, to tell him he had decided to resign.

Applegarth said this weekend his decision was linked to the first phase of the bank’s restructuring – the submission of bid proposals that started to roll in last Friday.

“Since the middle of August it’s been seven days a week, 20 hours a day, entirely focused on getting the company in shape and looking after stakeholders,” said Applegarth. “I guess I’ll get to the end of my watch here and breathe a huge sigh.”

However, the chief executive is believed to have become increasingly irritated by the groups of reporters camped outside the gates of his Northumber-land estate. In the past week, the cricket-loving 46-year-old’s annoyance at being hounded by the media reached its peak.

A series of stories lambasted him for selling £2.6m of shares at peak prices and attacked his lifestyle, alleging he used the money to buy luxury cars, including an Aston Martin for himself and a Ferrari for his wife.

Applegarth’s decision to quit will have been emotional. He has spent his entire, 24-year working life at Northern Rock after joining from university. He became chief executive in 2001 and set the bank the target of becoming Britain’s third-largest lender, using the financial markets to fund aggressive lending.

But in the past three months, Applegarth’s grand ambition has turned into a nightmare. The liquidity freeze in the credit markets, which started in August, plunged Northern Rock into crisis. On September 13, it emerged that the bank had been forced to go to the Bank of England for emergency funding.

Insiders said that from this point Applegarth knew his days were numbered – even though the Northern Rock board later rejected his offer to resign.

Sanderson, who was parachuted in as chairman to replace Matt Ridley on October 19, had planned to announce Applegarth’s departure only after the bank had decided on a buyer or gained funds to allow it to remain independent.

In the end, Applegarth has fallen on his sword early – though he will stay to see out the second stage of a strategic review due to be completed by the end of January.

He was just the highest-profile casualty of Friday’s boardroom bloodbath. In a sweeping shake-up, Sanderson ousted nonexecutive directors Sir Derek Wanless, the former Nat-West chief executive, Nichola Pease, a high-profile fund manager, Adam Fenwick and Rosemary Radcliffe.

Within days of his arrival, Sanderson had made it clear that the four were likely to be axed.

On Friday, from his London office in Brook Street, near Clar-idges Hotel, Sanderson delivered the final blow, telephoning the four to tell them of their fate.

“We are having to move at great speed and there is not time for as much delicacy as you would want. We need a fresh team to take us through the next phase,” said Sanderson.

The boardroom shake-out comes at a pivotal point for Northern Rock. Though attempts to engineer a swift sale have failed, bidders have now been flushed out.

On Friday, a consortium led by Sir Richard Branson’s Virgin Group submitted a proposal to take control of the bank.

Olivant, the investment firm led by former Abbey National chief executive Luqman Arnold, has also made a proposal to turn around Northern Rock in its current form by injecting new management and taking a minority stake by buying new shares.

JC Flowers, the private-equity firm, is expected to make a bid while Northern Rock expects a further three to five offers to emerge in the next few days.

One high-street bank is interested in snapping up Northern Rock’s branch network, while a number are considering a bid for the bank’s efficient administration and information-technology systems.

But despite the proposals, most informed observers believe the auction will grind on for months. “I would be amazed if there is anything like a solution before Christmas or even a month later,” said one banker.

In the past two weeks, some observers have claimed the auction was in danger of turning into a shambles.

The political heat has also been turned up, after it emerged that some potential bidders for Northern Rock could ask for an estimated £2 billion interest bill to be waived as part of any deal. Such a move poses the threat that the cost of saving Northern Rock could fall to the taxpayer.

With the government now on the hook for more than £23 billion that Northern Rock has borrowed from the Bank, chancellor Alistair Darling finds himself under intense pressure.

What seems certain is that the government is likely to be a major creditor well beyond February – the date set by Darling to review the loan facility.

Any bidder for the whole bank is almost certain to demand that the Bank extends some sort of support of Northern Rock.

So far, this has been at a punitive rate of between 6.75% and 7%. The big issue is whether this rate will be cut and how long the Treasury will be prepared to provide funds. However, Virgin and Arnold have both claimed they can promptly repay a significant portion of the Bank’s loans.

Last week, the Treasury and potential bidders appeared to be playing a complex game of cat-and-mouse.

Before tabling firm takeover proposals, a number of bidders have demanded more clarity from the Treasury on the level of financial support it would offer. These bidders are thought to include JC Flowers, Cerberus, the American hedge fund, and the Virgin consortium.

However, the Treasury wants to see the bid plans before starting negotiations on any financial arrangements.

Darling’s reputation as the Labour government’s crisis fixer will be on the line this week when he reveals the “principles” that will guide the Treasury’s approach to assessing bids for Northern Rock.

Darling is expected to say that the ultimate decision on Northern Rock’s sale rests with the bank’s board, but he will also stress that the interests of taxpayers must be protected. The Treasury is also prepared for a private-equity takeover of Northern Rock, while a break-up could also be considered.

One major Treasury concern is to ensure that any buyer does not get too juicy a deal.

The big fear is that Northern Rock could be turned around swiftly, delivering massive profits to its new owners – a result that would be seen as a political disaster.

“You could be cynical and say that the solution for the government is anything that gets Northern Rock off the front pages, protects the taxpayer and stops this becoming a political fiasco,” said one senior banker.

Potential bidders are understood to have become increasingly frustrated about the auction. One criticism is that it is unclear who is in charge and whether Northern Rock’s board has had the power to judge what is the best bid.

Some believe Sanderson’s brutal boardroom shake-up was meant to be a clear signal that the bank and its three investment banking advisers – Black-stone, Merrill Lynch and Citi – are running the show.

The pressure on Darling for further clarification of the Treasury’s position mounted last week after a sales memorandum sent to about 50 potential suitors was leaked to the press.

The memorandum, called Project Wing, suggests three options, including an outright sale of the whole bank or two plans to sell off parts of Northern Rock.

One plan includes a sale of the bank’s administration platform and 76 branches and possibly the £13.5 billion in remaining savings deposits. A second involves the sale of the bank’s infrastructure plus securitised mortgages, leaving a rump of loans and assets. Under both of the carve-up plans, the rump of the business would remain as a listed company.

The memo also makes some broad assumptions. By January, Northern Rock is expected to be borrowing £24 billion from the Bank, though by 2010 this will fall to £6 billion.

While profits are expected to plunge to £143m in 2008 from Northern Rock’s forecast £500m this year, the document forecasts a rapid recovery to £643m in 2010. However, these forecasts are understood to be based on the government being prepared to slash the current punitive rate charged by the Bank.

The big problem is that none of these financial conditions has been signed off by the Treasury.

Another looming problem is state aid. Under European Commission rules on state aid, governments can provide “rescue aid” for up to six months. The rules also allow longer-term financing in the form of restructuring aid.

However, the commission only approves this if there is clear evidence that the company can be restructured into a viable business with no need for further financing from government.

Even then, there are difficulties, since the commission can impose conditions and can even force loans to be immediately repaid.

So far, the European Commission has said only that it is in close contact with the British government.

But Brussels insiders said competition commissioner Neelie Kroes has made it clear that the British government will not be allowed to “ride roughshod” over rules on state aid.

“The position on funding is serious, but not insurmountable,” said one insider.

In theory, the government does not need to act until March 13, when the six-month rescue aid period ends.

However, time is running out.

According to Brussels sources, the Treasury has yet to apply for any approval. Given that commission approval can take two months, the British government is under pressure to act.

The fate of Northern Rock has been thrust back into the political spotlight after Darling wrote to Vincent Cable, the acting Liberal Democrat leader, last week.

In the letter, the chancellor said his key objective was “minimising the cost to the public purse” – the first public admission that the taxpayer could lose money. Previously, Darling had insisted that his aim was to “protect taxpayers”.

The bidding battle looks finely balanced. JC Flowers, which has lined up £15 billion in finance from a series of banks, is a strong contender and is thought to be ready to mount a full offer within a month.

Under its plan, Northern Rock would be taken private and stabi-lised inside 18 months and floated within two to three years.

However, JC Flowers is likely to set a tight deadline for its offer to be accepted since it is concerned that it will be used a stalking horse to entice rivals into a competitive auction.

Branson’s consortium has considerable firepower through the backing of AIG, the world’s biggest insurer, and billionaire investor Wilbur Ross. Arnold’s plan appears to be gaining the backing of shareholders given the difficulty of selling Northern Rock at a good price in the current turmoil Even so, the chancellor faces a huge challenge to find a solution. The hard negotiating has barely started.

- Virgin founder Sir Richard Branson wants to roll Northern Rock into Virgin Money, his credit-card arm. The billionaire has backing from AIG, the world’s largest insurer and the hedge fund Tosca, whose chairman is Sir George Mathewson.

- The private-equity firm JC Flowers, led by Christopher Flowers, wants to take Northern Rock private. It has lined up £15 billion in funding and recruited a top team, including former Alliance & Leicester boss Richard Pym.

- The American private-equity house Cerberus is chaired by John Snow, a former US treasury secretary. The group is interested in either a rescue plan for Northern Rock or a break-up to buy its mortgage assets. It is backed by GMAC.

- Luqman Arnold heads Olivant, an investment group. It is aiming to parachute in a new management team led by Arnold, a former Abbey National chief executive. It would keep Northern Rock as a listed firm and take a 10%-20% stake.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts