Arnold takes on Branson in two-horse race for Rock

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Luqman Arnold claimed the support of investors holding nearly a quarter of Northern Rock's shares yesterday as he challenged the company and the Government to accept his proposals for saving the stricken bank.

Mr Arnold said investors holding 23 per cent of the shares would underwrite a 450m rights issue at or around the market price to support the bank. The maximum he would seek to raise would be 650m, and he is confident of shareholder support if he chose to do so.

Olivant, Mr Arnold's private investment company, would put in an extra 150m in cash for new shares and would receive "high-value warrants" over 7 per cent of the bank's equity. These would act like share options and could be cashed in after a number of years if the share price had risen to the required level.

In a surprise move, Olivant proposed issuing equivalent warrants for 5 per cent of Northern Rock's equity to the Bank of England. This politically minded move could help protect the Government from charges that public funds had subsidised private investors.

Mr Arnold, a former chief executive of Abbey National, said that shareholder approval for his plan was a key advantage over the proposal of Sir Richard Branson's Virgin Money consortium. Large and small shareholders have opposed Virgin's proposal, which would pay 25p a share in a rights issue. Olivant proposes installing Mr Arnold as executive chairman of Northern Rock immediately if the board and the tripartite authorities approve it. He said a change of control requiring shareholder approval was too time-consuming for a bank that was drifting badly. He said: "We really don't think an auction is necessary or that a takeover is appropriate. It puts the company through stress and delays things... If the company recommends [our proposal] and the tripartite authorities accept it, because it has strong shareholder support we could be in there the next day."

Virgin was chosen as preferred bidder nearly two weeks ago, when Olivant's proposal was at a very early stage. After its detailed proposal was delivered yesterday morning, it is understood the authorities and Northern Rock are now treating Olivant more seriously, though their advisers have to go through the 100-page document in detail.

Mr Arnold cast doubt on Virgin's plans to put its own brand on Northern Rock and massively boost deposits and mortgage market share. The bank's dep-osits have roughly halved from 25bn since the retail run began on 14 September.

"This is going to be very, very hard work. In our business plan, deposits will grow steadily but there is no magic solution here." Instead, the bank would rely on securitising Northern Rock's high-quality assets, for which Mr Arnold insisted there was still a market despite the credit crunch.

A key difference between Olivant's and Virgin's proposals is the amount of equity they would inject into the company. Mr Arnold argues that Northern Rock does not need more than 800m; Virgin proposes injecting 1.3bn of cash plus the Virgin Money business.

Mr Arnold rejected claims that he was at a disadvantage in gaining bank funding compared with Virgin. "If you are asking me if I am confident I can raise the money, absolutely," he said. He refused to name the investors who supported his plan but RAB Capital and SRM Global, which between them hold about 16 per cent of Northern Rock's stock, have publicly supported Olivant's proposal. The Northern Rock Small Shareholders Group also said it was prepared to support Olivant.

Northern Rock's shares closed up 7.4 per cent at 110.6p.

King and Cable in stand-off

The Bank of England has been drawn into a public spat with Vincent Cable after Mervyn King, the Governor, became the latest victim of the acting Liberal Democrat leader's dry wit.

In an unusual step, the Bank made correspondence between the two men public after Mr Cable compared the Governor to Sir Humphrey Appleby, the obstructive senior civil servant from the BBC sitcom Yes Minister.

Mr Cable complained he had received a "bland" response to his queries about Northern Rock's borrowing from the Bank, and said he had turned down a meeting with the Governor because Mr King had insisted it should be confidential. "It was a reply worthy of Humphrey Appleby," Mr Cable said.

Mr King's letter listed publicly available information on Northern Rock and was followed by a six-page market notice, available on the Bank's website,describing its termauctions to banks.

Mr Cable has previously described the Bank's loans to Northern Rock as the equivalent of 30 Millennium Domes "without even the prospect of a decent popconcert at the end".