Between a Rock and a hard place: sale or State?

Bankers urge a private sale; they want to avert nationalisation at all costs, and some private buyers still want to mount a rescue, but the fate of the beleaguered high-street mortgage lender rests in the hands of the Government. Northern Rock – and the City – can only hold its breath

Leading City bankers and fund managers are still pushing for a private sale of Northern Rock, the troubled high-street mortgage lender, in a last-ditch attempt to prevent nationalisation.

The chairman of one of the UK's biggest high-street banks said: "What we want is for Gordon Brown or Mervyn King and Northern Rock executives and a group of senior bankers to be locked up together in a room and put together an old-style rescue, even if it means breaking it up. That will be the way to get value. It can be done on the right terms if the Government can guarantee these short-term loans the Bank has had to make to keep it afloat."

Gordon Brown, the Prime Minister, ruled out administration last week but admitted nationalisation may be the only option unless a buyer can be found. Goldman Sachs, the US investment bank advising the Government on its options, has given the Government plans for converting the Bank of England's loans into bonds as a way of guaranteeing them for a potential buyer. But this plan needs clearance from Brussels because it could be interpreted as state aid and could scupper any sale.

Northern Rock appointed Paul Thompson, former chief executive of life insurer Resolution, as a non-executive director on Friday. He is likely to become chief executive if Northern Rock can stay independent. Northern Rock's chairman, Bryan Sanderson, said Thompson would work on the bank's strategic review, due in February. A government decision on nationalisation could come this weekend.

Sir Richard Branson's Virgin group and Luqman Arnold's Olivant are still interested in a rescue. Virgin has offered to issue shares at a heavily diluted 25p in return for a 54 per cent stake in Rock, while Olivant is proposing a rights issue at the current price in return for a 15 per cent stake. Virgin's terms have not found favour with shareholders until now but it is believed to be considering revising its terms, which could allow existing shareholders to take up new equity. Rock's shares closed on Friday at 64.5p. Hedge funds RAB Capital and SRM, the biggest investors, with 18 per cent, have tried to stop Virgin's offer. Legal & General owns 4.7 per cent while Lazard owns 3 per cent and Barclays 3 per cent. Schroders also has a small stake. Analysts suggested that if Northern Rock is nationalised they expect a Railtrack-style class action from shareholders. Senior bankers said there were other potential bidders interested in Rock which has an £87bn mortgage book and savings on deposit of £24.3bn.

Robin Ashby, the head of the Northern Rock Small Shareholders' Group, is against nationalisation. "We want a private solution in which the shareholders participate," he said. "We don't think nationalisation is the right answer, and certainly not now when the directors of the bank are conducting a strategic review."

But Liberal Democrat Treasury spokesman Vince Cable said the idea that Northern Rock can arrange a rescue package, not involving nationalisation, is a triumph of hope over reality. "There aren't any alternatives to nationalisation. A private sale is just a fantasy, so temporary public ownership is the best solution," he said. "Hard-headed people realise that either it will have to go into administration or the Government will have to take it over."

Investors' shareholdings in Northern Rock would be worthless had the Government not intervened, he said. "In reality, the Government will want to avoid a legal action" if it is nationalised.

Nicola Horlick, fund manager Bramdean Asset Management
"Nationalisation seems to be the most sensible route to follow at this stage. Shareholders must accept that equity is risk capital and when things go wrong, you can lose every penny"

Peter Meinertzhagen, recently retired chairman of ABN Amro Hoare Govett
"Northern Rock could and should still be sold if a private buyer can be found. However, if the bank is going to be nationalised then equity shareholders do have certain rights"

Ian McCafferty, the CBI's chief economic adviser
A private sector outcome would still be the best solution as long as it protects depositors' funds and ensures taxpayers get their money back. In the current climate, this is clearly not proving easy

Ruth Lea, economic adviser and director, Arbuthnot Banking Group
Rock's problems could have been settled in September behind closed doors with Lloyds TSB, with little or no cost to the British taxpayer ... immediate nationalisation now seems the least worst strategy

Robin Ashby, head of the Northern Rock Small Shareholders' Group
We don't think [nationalisation] is the right answer... At 65p each the shares are not at a fair value and they are actually being depressed by the Government's talk of nationalisation

David Currie, head of UK investment banking at Investec
I can see both sides, though my view is that the Government reacted late and is, therefore, overplaying what they should do... I don't see why one bank should be helped out and others not

Vince CableLiberal Democrat Treasury spokesman
At the very onset of the crisis I took the view that the Government should not be in the business of bailing out banks. But the issue now is how do we [taxpayers] get the money back?