AIG In For Northern Rock

by Stewart Douglas

Story link: AIG In For Northern Rock

Northern Rock has today been targeted by a consortium of equity investors, looking to capitalise on the depressed share prices in wake of the dire credit shortage the lender has encountered over the last few weeks.

The group led by Virgin also includes notable insurance firm AIG, who have pledged significant resources to purchase a stake in the flailing company. Should the takeover follow through the bank will be rebranded Virgin Money, in line with the rest of the Virgin group of companies.

Under Richard Branson’s Virgin proposal the consortium will share ownership of the majority shareholding, with the promise of an immediate cash injection to clear the existing backlog of short term debt and liquidity problems.

The Northern Rock liquidity crisis of recent weeks was spawned by a somewhat reckless mismanagement of credit, which saw it invest heavily in the risky US subprime mortgage sector.

By borrowing heavily from competing banks to invest in loans on the subprime market, Northern Rock was quick to feel the heat when central interest rates increased, leading to a growth in the number of foreclosures which consequently tied up much of the bank’s liquid assets.

After an emergency request to the Bank of England for temporary funding the value of Northern Rock shares diminished significantly, and consumers withdrawals hit an all time high.

Whilst Virgin and AIG have announced their interest it is currently unclear the extent of the company they intend to acquire, and additionally whether or not they will plump for a full takeover deal.

A further decision towards the proposed investment will be announced early next week, with the group poised to gain access to the company accounts. AIG are expected in any event to acquire a minority shareholding in their own right, as an investment opportunity in the wake of the subsiding credit crisis at the bank.