One hundred days of chaos: can Rock move from ruin to rescue?

Small investors will suffer and the advisers will cash in. These are the only things you can bank on in a saga that has already rumbled on too long and threatens further twists as bidders put their cards on the table. By Simon Evans

When the full extent of Northern Rock's financial difficulties became apparent on 14 August, few commentators could have foreseen the twists and turns likely in the coming months. Nor could they have predicted how long it would take to resolve the debacle.

Last Wednesday the saga entered its 100th day, and with Northern Rock's beleaguered board promising to review all the offers and options on the table by February, a further 99 days of the tale are possible.

It's a story of extraordinary mismanagement, incompetence and naivety that has shattered the man on the street's confidence in financial markets. Unsurprisingly, it looks like the ranks of small investors, who make up a large chunk of the company's share register following the Newcastle company's demutualisation in the late 1990s, will bear the brunt of the catalogue of failings.

Shareholders have watched Northern Rock's share price plummet from more than £12 in the spring to less than £1 last week, with many predicting that the value will be totally wiped out in due course.

Last week RAB Capital, a hedge fund that bought heavily into Northern Rock shares after the August announcement, mooted the threat of legal action if a "fire sale of assets at the worst moment in the credit market" takes place.

With private equity bidders circling the fast-decaying carcass of Northern Rock, the politically charged word "nationalisation" has also been put forward, with the acting Liberal Democrat leader, Vince Cable, believing it to be the only sensible short-term option for saving the bank.

You don't have to be a veteran City watcher to get a tingle of déjà vu when looking at Northern Rock; it bears striking similarities to the collapse of Railtrack.

Private shareholders piled into the 1996 listing of the rail infrastructure business, the last throw of the privatisation programme kicked off by the Thatcher government.

But the company, totally reliant on government subsidies, fell into administration in 2001 after the Hatfield rail crash, when the then transport minister, Stephen Byers, decided on a de facto nationalisation amid accusations of an artificially engineered end to the group's existence.

As in the case of Northern Rock, shares in Railtrack tumbled in value prior to its eventual demise, shedding £15 in three years to hit just £2.60p. It was at this point, in 2002, that the Government waded in with its controversial "rescue" package, which was met with considerable opposition by thousands of angry investors who believed they had received the rawest of deals.

Andrew Chalklen, chairman of the Railtrack Private Shareholders Action Group, said: "The Government set out to defraud Railtrack shareholders and they partially did. They used a combination of trickery and threats. I have no problem with their support of Northern Rock today but it shows how politically motivated the ending of Railtrack was."

That legal dispute rumbled on until 2005, with Mr Byers being forced to testify over his handling of the debacle.

Alan Duncan, then the shadow transport secretary, described the Railtrack affair as a "massive deceit" and one of the "biggest political scandals" he had ever seen. However, it's likely to prove small beer compared to Northern Rock should the saga turn still sourer in the coming months, with a lot of both political and public capital at stake – some £25bn to be exact.

But amid all the uncertainty we do, at last, seem to be edging towards clarity on a few issues.

Nationalisation, however tempting for some of the redder-of-hue backbenchers in the Government, looks to be off the agenda. Such a move would destroy the Chancellor's waning reputation among those in the Square Mile who are already sceptical of his abilities and motives.

This week we should also find out the likely make-up of the shortlist of private equity bidders that will do battle for Northern Rock. It is thought around eight to 10 proposals have so far been made, with the list likely to be snipped back to three names. JC Flowers, Virgin, Cerberus, Olivant, Apollo, ING, Thomas H Lee and the Tyne Consortium led by little-known Welsh entrepreneur Alfred Gooding are among the bidders.

The Gooding proposal, backed by US private equity firms Five Mile Capital and Olympus, looks doomed to failure. Virgin has said it would rebrand the bank as Virgin Money and pay off around £11bn of the £25bn government loan upfront. But the terms, and the pros- pect of a maverick like Sir Richard Branson being involved the bank, are thought by some to be unpalatable for government officials.

The pair in the box seat would seem to be JC Flowers and the alternative proposal tabled by former Abbey chief Luqman Arnold and his Olivant group.

Flowers' offer came in last Wednesday "materially below" Northern Rock's £409m market value on that day, the Newcastle lender claimed. Flowers, like Virgin, is proposing to stump up £1bn to shore up the bank's balance sheet. But crucially, it is offering to pay off £15bn of the government loan up- front, with the remainder being paid back over the next three years.

Mr Arnold, who presided over a renaissance in the fortunes of Abbey during his time in charge, has proposed taking a minority stake. He promises to bring in a heavyweight management team to revive the group. The £1bn hole in the balance sheet would be filled by a rights issue from existing investors.

The king-makers in the whole affair would seem to be the plethora of advisers who stand to win whoever scoops Northern Rock in the end. Royal Bank of Scotland is backing both the Virgin and Flowers offers but may jump ship if another bidder seems more likely to triumph. Citigroup, Lazard, Credit Suisse and JPMorgan are the other banks providing financing to would- be bidders. Goldman Sachs is advising the Bank of England.

Estimates suggest that Northern Rock is facing losses of around £300m on the back of its exposure to structured investment vehicles (SIVs) and other products with links to the American sub-prime mortgage imbroglio. It may also need to increase its provisions on its unsecured consumer loan book if markets deteriorate further.

Though neither is materially damaging, both add to the perception that more black holes could soon be unearthed.

And the extent of those black holes could decide whether further twists are around the corner in this increasingly farcical saga.

'Blackadder' revisited for the Chancellor

Few, if any, new arrivals at Number 11 Downing Street can have had a tougher introduction to the role of Chancellor than Alistair Darling.

Unlike his predecessor, Gordon Brown, who basked in the euphoria of the election victory in 1997 and quickly boosted his reputation with the shrewd move to grant the Bank of England its independence, Darling has taken up the cudgels as the second most powerful man in government at a time of crises.

On occasions he has resembled his namesake Captain Darling, made famous in the BBC television comedy 'Blackadder' – weak, floundering and, sometimes, embarrassingly reverential to his boss.

On the initial rescue of Northern Rock, few have praise for Darling's handling of the first run on a bank for nearly 150 years.

To have let the bank die would have been political suicide, with neither the Conservatives nor the Liberal Democrats offering anything different at the time.

It is the Chancellor's flip-flopping in the subsequent weeks and months that has attracted criticism, with no one expecting he would allow the saga to rumble on so long.

That it took 100 days to get Northern Rock's lame-duck chief executive, Adam Applegarth, to hand in his resignation, though he will linger for a few months yet, was absurd.

The management of the bidding process has also been nothing short of dire. As highlighted last week, companies and individuals looking to bid for Northern Rock haven't known which set of advisers is running the auction process.

As Northern Rock's largest creditor to the tune of more than £20bn, Darling has unsurprisingly talked up the strength of the bank's asset book. But revelations about 70 per cent of the mortgage portfolio being owned by a separate offshore company, coupled with acceptance that the bank's balance sheet is around £1bn worse than previously thought, have merely added to the perception that Darling has little real grasp of the situation.

Although he can hardly be blamed for long-term problems that have surfaced on his watch, the Northern Rock issue has combined with the loss of the two Revenue & Customs disks, containing the personal records of 25 million British citizens, to batter his image.

Further deterioration in the credit markets in the coming months, which many economists are predicting, could add to the Chancellor's woes as the taxpayers' exposure to Northern Rock increases.

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