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Virgin takes lead in Rock rescue Battle for Rock is two-horse race
(about 1 hour later)
Sir Richard Branson's Virgin Group has become the favourite to take control of Northern Rock after its main rival pulled out of the race. Sir Richard Branson's Virgin Group and Northern Rock's own board have both made rescue offers for the bank.
In a surprise move, Olivant said it would not submit a plan, because it has not been able to come up with a deal that met its "investment criteria". They are the only two parties to submit proposals to the Treasury after investment fund Olivant pulled out before the end of Monday's deadline.
The other rescue proposal for the bank has come from its own board. While Virgin will inject more cash into the bank - £1.5bn compared to £500m from the Rock board - the in-house offer has gained shareholder backing.
Virgin is the frontrunner as it plans to inject £1.5bn into the bank, while the Rock's bosses propose just £500m. It is not yet known when the government will announce the winning proposal.
Interested parties have until the end of Monday to submit their proposals to the Treasury. 'Stabilise'
The government has said it favours a private sector rescue for Northern Rock, which has received £55bn of financial assistance from the Bank of England.
It has also underlined that it wants taxpayers repaid as fully and quickly as possible.
'Taxpayers protected'
The BBC understands that the Olivant investment fund pulled out of a rescue because the government wanted its loans to Northern Rock repaid within three years.
We have made a proposal that seeks to stabilize the company and rebuild it as a trusted and thriving institution under the Virgin brand Virgin Group's Brian Pitman
Olivant was planning on repaying those government-backed bonds over five years, and was only told about the three year time limit late on Friday.
The BBC's business editor Robert Peston said that Olivant withdrawing its proposal was "very bad news for Northern Rock and very bad news for the Treasury".
"The prospects of getting an acceptable deal for taxpayers would have been much higher if they'd had something of a competition," he said.
Under the terms of its rescue plan, Virgin will inject £1.25bn into Northern Rock and take a stake of 55% in the firm.Under the terms of its rescue plan, Virgin will inject £1.25bn into Northern Rock and take a stake of 55% in the firm.
The equity will be a mix of cash, and new shares, the group said.
The Treasury's hardball tactics will have serious consequences for the bank and for the mortgage market Read Robert Peston's blogThe Treasury's hardball tactics will have serious consequences for the bank and for the mortgage market Read Robert Peston's blog
"We have made a proposal that seeks to stabilize the company and rebuild it as a trusted and thriving institution under the Virgin brand with a long-term future," said Brian Pitman, one of the main figures associated with Virgin's offer. The equity will be a mix of cash, and new shares, the group said.
"We have made a proposal that seeks to stabilise the company and rebuild it as a trusted and thriving institution under the Virgin brand with a long-term future," said Brian Pitman, one of the main figures associated with Virgin's offer.
He added that the plan would "see taxpayers interests protected and give existing shareholders the opportunity to invest alongside, and at the same subscription price, as the Virgin Consortium".He added that the plan would "see taxpayers interests protected and give existing shareholders the opportunity to invest alongside, and at the same subscription price, as the Virgin Consortium".
'Strong solution'
Northern Rock's managers said their proposal included raising at least £500m, reducing the assets on the bank's balance sheet, and reorganising its operations.Northern Rock's managers said their proposal included raising at least £500m, reducing the assets on the bank's balance sheet, and reorganising its operations.
"The board believes the restructuring proposal, once implemented in full, will result in an independent, well-capitalized, low cost and significantly lower risk mortgage and savings bank," it said in a statement. Is nationalisation still on the cards? class="" href="http://www.bbc.co.uk/blogs/newsnight/2008/02/are_the_two_remaining_northern_rock_bids_enough_to.html">Read Paul Mason's blog
While it is offering to inject just one-third of the new funds proposed by Virgin, the in-house bid has already secured the backing of Northern Rock's second largest shareholder - RAB Capital.
A spokesman for RAB Capital said the offer from Northern Rock's management was the "only one strong and independent solution".
Northern Rock has so far received £55bn of financial assistance from the Bank of England, which the government wants to see repaid as fully and quickly as possible.
The BBC understands that the Olivant investment fund pulled out of a rescue because the government wanted its loans to Northern Rock repaid within three years.
Olivant was planning on repaying those government-backed bonds over five years, and was only told about the three year time limit late on Friday.
The investment fund said only that because it had not been able to come up with a deal that met its "investment criteria".
The BBC's business editor Robert Peston said that Olivant withdrawing its proposal was "very bad news for Northern Rock and very bad news for the Treasury".
"The prospects of getting an acceptable deal for taxpayers would have been much higher if they'd had something of a competition," he said.
Credit crunchCredit crunch
Northern Rock got itself into financial difficulties because its business model left it ill-prepared for the global credit crunch.Northern Rock got itself into financial difficulties because its business model left it ill-prepared for the global credit crunch.
Unlike the great majority of UK banks, Northern Rock relied heavily upon borrowing funds from the wholesale money markets to fund its mortgage business, rather than the usual method of mostly using savers' deposits.Unlike the great majority of UK banks, Northern Rock relied heavily upon borrowing funds from the wholesale money markets to fund its mortgage business, rather than the usual method of mostly using savers' deposits.
When the credit crunch hit, Northern Rock suddenly found it could not secure the cheap funds it needed, as credit was either unavailable or markedly more expensive.When the credit crunch hit, Northern Rock suddenly found it could not secure the cheap funds it needed, as credit was either unavailable or markedly more expensive.
A recent report into the collapse of Northern Rock by the House of Commons Treasury Committee was highly critical of the UK financial watchdog, the FSA.A recent report into the collapse of Northern Rock by the House of Commons Treasury Committee was highly critical of the UK financial watchdog, the FSA.
While the report said Northern Rock's senior managers had been most at fault, it said the FSA had been guilty of a "systematic failure of duty" in not preventing the bank's "reckless" business plan.While the report said Northern Rock's senior managers had been most at fault, it said the FSA had been guilty of a "systematic failure of duty" in not preventing the bank's "reckless" business plan.