The Northern Rock chairman shades his eyes as he walks into the room. Ron Sandler has recently had laser eye surgery and the June sunshine is proving a little painful while the treatment beds down.

His distance vision is now fine, he said, but for the time being he still needs reading glasses, particularly to look at messages on his Blackberry.

Given the steady stream of bad news on house prices, mortgage arrears and the threat of negative equity, those e-mails would make for painful reading, surgery or no surgery.

“We can certainly see what’s happening in terms of our arrears and our repossessions,” said Sandler. “We can certainly see that the market has deteriorated considerably over the past six months. But whether we are at the bottom, whether it has further to go – that is something on which I rely on others who are far more expert in this area.

“The job I have to do is clearly going to be more difficult if there is a further deterioration in the housing market, but it is fundamentally the same job.”

Sandler was approached by the government to run Northern Rock late last year, while hopes were still high that the struggling bank could be sold to Sir Richard Branson’s Virgin Money, or passed into the hands of former Abbey boss Luqman Arnold.

The man who helped haul the Lloyd’s of London insurance market out of the fire was considered an obvious choice for a task from which many would have run a mile. His main remit is to repay the £27 billion Northern Rock has borrowed from the Bank of England, and ultimately sell the business, somehow or other, back to the private sector.

Nobody said it would be easy. After 100 days, Sandler says he has “got under the skin of the organisation” and found the “pressure points”.

“The risk function in the bank was not big enough, did not have enough visibility,” he said. “There have been some very unclear distinctions between those who set policy and those who implement policy.”

He refused to get drawn into a “blame game”, but Sandler admitted that the board was examining the possibility of legal action against Adam Applegarth, the former chief executive, and other former directors. Sandler has already changed the way the bank accounts for late mortgage payments – a decision that contributed to a sudden leap in Northern Rock’s arrears figures. He is now recruiting a team of risk experts to overhaul the bank’s practices.

The risks faced by Northern Rock are fairly clear. Sandler said he had run computer programs to see how the bank’s business would weather a recession on the scale witnessed in 1991 and 1992. “At least to the extent of the downturns we have tested, the taxpayer gets his money back,” he said. What he fears most is any significant rise in unemployment.

Paying back the taxpayer is dependent on Northern Rock’s mortgage customers leaving in droves, he said. Every time a customer moves, redeeming a mortgage, Sandler gets more cash he can give back to the Bank of England. He hopes to return £7 billion this year. The biggest threat to Sandler missing his repayment deadline of 2010 is not a rise in bad debts but a prolonged freeze in the mortgage market, which would prevent Northern Rock’s customers moving elsewhere.

Two weeks ago Sandler struck a deal with Lloyds TSB. Northern Rock customers who can no longer be offered a competitive deal will be diverted to a Lloyds call centre.

Critics, such as the Liberal Democrats’ Vince Cable and Lord Oakeshott, are concerned that the bank will become a parking place for some of the worst mortgage debts. Sandler insisted this was not the case.

“Over time, there is no question that the average quality of our loan book will deteriorate. The problem comes in that tail of low-quality mortgages. The loan losses are always going to come from the lower-quality loans with people who struggle to find other sources of borrowing.”

For the moment, Sandler said he was confident that Northern Rock had enough capital to absorb the losses it is likely to face. Then again, he acknowledged that many other bank bosses had said similar things in recent months and were forced to eat their words. If things do get tougher than expected, Sandler will have to resort to selling assets because, under public ownership, he no longer has the option of launching a rights issue. That could include a sale and leaseback deal on an office block being built on the outskirts of Sunderland.

For the moment, Sandler is focusing on managing the redundancy programme he has initiated and retraining the remaining staff on how to stop selling mortgages – and turn people away with a smile.

He admitted it was not easy to recruit senior people, but he is beefing up the bank’s debt-management team to handle the increasing number of customers falling behind with payments.

Sandler believes the success of his efforts at Northern Rock will be determined by how he works through the arrears.

Others would argue that he will ultimately be judged on how he gets the bank out of public ownership. “It could be listed, it could be bought by another bank, it could be bought by private equity,” said Sandler. “We can’t, here and now, determine which is going to be the appropriate way to proceed, as it is likely to be some years down the road.

“What we can see is that for the bank to be capable of being returned to the private sector, it has to have certain financial parameters. It has to have a cost-income ratio of a certain level. It has to have a level of capitalisation of a certain adequacy. It has to have a growth profile of a certain type. It has to have profitability and a return on equity above a certain threshold.

“We have a very clear idea, financially and operationally, of what will be required for this bank to be taken back into the private sector.”

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