Northern Rock Soars on Buyout Hopes

Stricken by the credit crisis, the British lender draws interest from U.S. private equity firms, and its shares rise about 9%

Northern Rock shares rose yesterday on hopes of a deal to save or sell the mortgage lender as the banking industry took aim at the regulatory confusion surrounding its near collapse.

The US private investment firms JC Flowers and Cerberus are known to be looking at Northern Rock's books. The rival buyout houses Apollo and Blackstone are also said to be interested in the company.

Citigroup is talking to the bank about funding options that could see the American giant offer up to £10bn to support Northern Rock on its own or if it was bought.

The British Bankers' Association took aim at banking regulators over their handling of the Northern Rock crisis and the credit crunch that triggered it. The lobby group called for a review of the three-way split on banking oversight, and said that more information was needed about how the Bank of England, the Financial Services Authority and the Treasury worked together in the crisis.

"It is, however, without doubt that the authorities could have better managed the communications aspects of offering reassurance to the markets," the BBA said. "We notably mention the Bank of England and the FSA's refusal to comment until some days later."

The BBA said the authorities need to clear up whether European laws prevented a confid-ential rescue of Northern Rock. The Bank of England's Governor, Mervyn King, has said that the European Union's Market Abuse Directive ruled out a "covert rescue", but the EU has denied this.

The BBA also criticised the Bank of England's handling of the credit crunch. The lobby group argued that the rate charged for using the Bank of England's standing facility should be lower, the Bank should accept a wider range of collateral for its loans, and the £10bn auctions of three-month funds by the Bank should be made permanent.

"Had the Bank acted in this vein at the beginning of September, many of the problems affecting the money markets in general and Northern Rock in particular might have been mitigated," the BBA said.

The Prime Minister said he was concerned about potential job losses at Northern Rock, which employs about 5,500 people in Labour's Northern heartland. At his monthly press conference, Gordon Brown said: "Obviously I am concerned about the hundreds, thousands of jobs of those people... I hope we can work out a means so that the people who have jobs, deposits, savings and mortgages at Northern Rock can be guaranteed."

Northern Rock shares rose 8.8 per cent to 172.5p.

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