On September 14 last year the news broke that Northern Rock, a bank based in Newcastle, had appealed to the government for help. Having relied on financing mortgages with short-term loans from America, it had been hit by the credit crisis and had run out of cash.

The chance of a discreet takeover by Lloyds TSB had been spoiled by the indecision of Gordon Brown, his chancellor Alistair Darling, the Bank of England and the financial regulator. Depositors queued to withdraw their money. The government dithered until the prospect of severe damage to the City’s reputation forced Darling’s hand. He announced that the government would guarantee all the depositors’ funds.

Estimates of the government’s liability rose from £10 billion to £50 billion, and then towards £100 billion. Darling and Brown were undecided about a solution. Taxpayers would be outraged if the shareholders of the bank were compensated, while nationalisation would arouse political controversy and possibly litigation.

An additional ingredient was the fate of the bank’s 6,000 employees in Newcastle, a Labour stronghold. The least damaging solution, the politicians agreed, was to entrust the bank’s salvation to a private institution. In London and New York several groups with expertise in saving banks sought the potentially lucrative mandate. On the fringes, lacking expertise in bank rescues, were the opportunists hoping to attract the government’s attention. Among them was Sir Richard Branson.

For more than ten years Branson had tried to earn profits from insurance, savings and banking. Virgin Direct, Virgin Money, Virgin One and other companies had been created in Britain and Australia in partnership with reputable financial institutions, and repeatedly the joint ventures had failed.

The rationale for a bid for Northern Rock was unassailable. Virgin would inherit 2m customers and a national network of branches.

The outcome, Branson knew, would be determined by the prime minister. Branson had cultivated him for several years, accepting Brown’s requests, when chancellor, to participate in his Business Council and enterprise seminars. In return, Brown had grown to trust the entrepreneur, a bond that had been strengthened by the government’s order that BSkyB should sell more than half of its stake in ITV, a company Virgin Media wanted to buy. Consistent with that partiality, Treasury officials were directed to be impressed by the proposal to use Virgin Money as the agent to save Northern Rock.

Branson offered to inject £1.3 billion of borrowed cash into Northern Rock in return for a 55% stake. Thereafter, he pledged to raise £11 billion from other banks to repay government loans, and to seek a further £13 billion in loans over the following years. Just how he hoped to raise that huge sum, especially during the onset of the credit crisis, puzzled officials in Whitehall. Nor did Branson clarify what would happen if he failed.

His own investment would be limited to £200m, the value he assigned to Virgin Money — a questionable sum, since the company’s annual profits were only £12m. In return for that notional £200m, Branson envisaged that he and his investors would double their money within three years, while the taxpayer bore nearly all the risk and would receive limited benefit from any rescue.

Nevertheless, during November, Brown and his officials were convinced that Branson offered the best solution. Virgin, the Treasury announced, was the government’s preferred bidder. Branson’s credibility appeared unassailable.

Brimming with confidence, he issued a message to Northern Rock’s customers: “I have the greatest respect for customers and I hope you will continue to be a valued customer of our new and exciting bank.”

Then the doubts set in. First, two hedge funds, allied with Northern Rock’s existing management, began buying shares. With 25% of the company’s shares, they could theoretically veto any government plan. In response, Branson proposed to dilute the shareholders’ investment, so that they would wield little influence. Next, Treasury officials began struggling to identify the advantages to the public of Branson’s plan. Then Vince Cable, acting leader of the Liberal Democrats, said that Virgin’s offer risked leaving the taxpayer more, not less, exposed. He also questioned Branson’s reliability.

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