Northern Rock shares slump amid rescue deal fears

30 October 2007
Northern Rock’s shares fell almost eight per cent yesterday amid fears that a rescue deal may be some way off. The troubled bank’s shares yesterday plummeted and at one point were as low as 175.3p before eventually recovering less than a point down at 190p.

The slump could be something to do with the fact that the ailing bank’s advisers are keen to hold off on a buy-out as it is thought none of the proposals put forward so far will resolve the key issues of ongoing funding, building a viable future business and repaying the Bank of England - Northern Rock has borrowed £20billion over the past six weeks.

US private equity firm, JC flowers was one of the first to make a bid, closely followed by Richard Branson’s Virgin Media, and it looked as though the battle was set to commence between the two until yesterday, American financial services group GMAC and New York private equity firm Cerebus joined forces to make a fresh bid for the crippled mortgage lender.

Two weeks ago, Matt Ridley quit his position as chairman, which was widely expected to pave the way for other high-profile players to step down. But in fact, the opposite seems to have happened with chief executive Adam Applegate, who has resigned from his other role as non executive director of housing firm Persimmon in order to pay more attention to Northern Rock.

Northern Rock has also denied this week that it is planning to make job cuts, insisting only that recruitment has been frozen.

Despite the depth of the crisis, it is thought that some of Northern Rock’s shareholders believe that the bank can still be saved without he need for a takeover, but that is looking more unlikely, and with the treasury keen to keep Northern Rock under the control of a financial institution, which leaves Virgin Money on the outskirts, it is predicted that GMAC – an insurance company and bank – is now the forerunner.

One dealer told the Daily Mirror, “The bid interest is there but it looks like taking a lot more time than some people had been hoping.”

Meanwhile, Britain’s leading banks are urging the chancellor to launch an enquiry into the Northern Rock debacle before making any rash decisions on banking reform.

The British Bankers Association fears that Alistair Darling will respond to the crisis by making fundamental changes to the banking system without properly deciphering what went wrong and why. The BBA reportedly has concerns about how higher levels of protection for savers of crisis hit banks would be funded; it is thought these fears will be raised when the BBA meets with representatives from the Treasury, FSA and Bank of England later this week.

© Fair Investment Company Ltd