Can Goldman Sachs' "Midas Touch" Rescue Troubled Northern Rock From Nationalization?

Implications: The UK's Government has asked Goldman Sachs to find new financial backers who are prepared to back a private sector solution and put together a financing package to rescue Northern Rock. The two rival bidders, Virgin Money and Olivant's funding problems may jeopardize their proposals because lending banks are demanding bidders to put up at least $1.8-$2.1 billion of equity capital as a cushion to absorb the initial effects of a possible housing slump and the UK's deteriorating housing market could make it difficult for Northern Rock to stave off nationalization. Northern Rock holds over 87,000 residential mortgages on its books and 10% of those are now considered high risk. The bulk of Northern Rock's mortgages are good, however, the lower quality mortgages are driving down Northern Rock's valuation and if market conditions don't improve, nationalization may be the only option left for Northern Rock as the bank continues to lose deposits and market value.

Analysis: Northern Rock is banking on Goldman Sachs' "midas touch" to pull them out of a potential fate of nationalization, if a deal can't get done soon. Add to the equation Citigroup, Deutsche Bank and RBS who have offered to infuse $15-$22 billion into Northern Rock, however, Goldman Sachs has the Government's backing to find an alternative funding syndicate to rescue Northern Rock. Olivant and Virgin Money, the current bidders have been struggling to find credible bids for the deal and the financing to take over the bank and repay $57 billion of taxpayer backed loans, including loans from the Bank of England.

1.  The Treasury is having to revalue Northern Rock's assets to reflect the prospect of the decline in property prices and the rising levels of mortgages in arrears, which has made it tricky to determine Northern Rock's true value

2.  Northern Rock's two largest investors SRM Global and RAB Capital will likely wield influence at the special extraordinary shareholder meeting on January 15, 2008, to convince shareholders to consider credible bids and/or alternatives that will add shareholder value and prevent Northern Rock from nationalization, however, alternate proposals may not be ready in time for the January 15th scheduled meeting

Takeaway:  The week of 1.7.08 may determine if Goldman Sachs has the "midas touch" to pull together an alternate funding syndicate that could rescue Northern Rock from nationalization and help stabilize its book. Goldman was able to sidestep the credit crunch in the U.S. by making timely bets on the subprime market in the U.S. and the UK Government and Northern Rock's supporters are banking on Goldman to "close the deal."