Private equity firm eyes Northern Rock

Northern Rock shares have risen by around 10% in early trading following reports that a US private equity group JC Flowers has set aside £15bn to purchase the stricken bank.

Reports say Chris Flowers, who runs the fund, wants to keep the troubled bank whole rather than split it up.

Last month Northern Rock had to ask the Bank of England for emergency funding as a result of the sub prime credit crisis.

Since news of the liquidity crisis broke, Northern Rock shares have lost around 80% of their value. Trading at around £12 per share at the beginning of the year.

While Northern Rock’s business itself was sound, the bank relied heavily on short-term credit to run its day-to-day operations. When the credit markets seized up during the summer, the company had to ask the Bank of England for help.

News of the exceptional capital injection triggered a rare run on a UK bank, with thousands of customers descending on the bank to withdraw their funds.

The run ended only after the government promised to guarantee the deposits of all savers.

On Wednesday, both the Financial Times and the Daily Telegraph said JC Flowers had been given access to Northern Rock’s books last week, to assess the bank’s financial health in more detail.

The Sunday Times reported US investment funds Cerberus and JC Flowers had gained the green light to meet with Northern Rock’s board.

Global markets has been severely rocked by a weakening in the US housing sector, notably in the sub-prime mortgage market, which lends to risky borrowers.

With rising interest rates in the US, increasing numbers of people have defaulted on loans, failing to meet mortgage payments.

This hit all banks who needed credit to run their operations, including Northern Rock.