bloggingbuyouts

The U.S. government bailed out Chrysler all the way back in 1979. Nothing quite like it as been seen since then, but the financial sector has not been in as much trouble for decades as it is now.

Over the weekend, the U.K. government decided to take ownership of troubled mortgage company Northern Rock. The financial firm will eventually be sold or taken public again, but the government acted to save it short-term because it was in the public interest for the company not to fail.

The move may be a template for the US government as its struggles with possible collapses at bond insurers and mortgage lenders. It may even be a way for common shareholders to keep some of their equity.

For the full story visit 24/7 Wall St.

British hedge fund RAB Capital has issued a warning about losses it has recently suffered, according to The Financial Times. In the warning, it cited "difficult" trading conditions during November as the cause of its losses. In particular, dramatic declines in the value of its holdings in Northern Rock were to blame.

RAB Capital holds 6.6% of Northern Rock, the British bank that has been hit hard by the global, subprime-driven credit crunch. Back in September, Northern Rock experienced a good old-fashioned bank run, and pictures of customers standing in long lines waiting to withdraw their funds were beamed all over the world. According to the BBC, something like £1 billion was withdrawn from the bank on just one day, September 14, 2007. Northern Rock has substantial subprime exposure, and has received billions in aid from the Bank of England in order to stay afloat.

Interestingly enough, RAB's holdings in Northern Rock are still in the black for the year, up 10%, even with the losses suffered in the last two months. RAB expects to remain profitable on the year.

The blind leading the blind. U.K. mortgage bank Northern Rock has almost gone under. If it were not for funds provided by the government, it might be gone already. But Northern Rock is still looking for help. In a twist of irony, that aid may come from Citigroup (NYSE: C), which has its own problems with mortgage instruments. The big U.S. bank said its earnings would drop 60% for the last quarter, some due to mortgage securities to write-downs.

According to a report in The Telegraph, there are several options being weighed to save Northern Rock. "One possibility being discussed by the Government and the company would see Citigroup, the U.S. bank advising Northern Rock, provide a funding line of up to £10bn to enable the board to run it for the long term."

The British government could also encourage a sale of the mortgage company to a hedge fund. U.S. hedge funds JC Flowers and Cerberus have expressed interest. But, a buyout from one of these firms is likely to be at a very low price that could wipe out public shareholders and some of the companies bonds.

If Citi does make the loan, it will be profiting from the mortgage problems of another company after taking a beating in the same market on its own. It would be a perverse twist of fate.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Perhaps there are not enough good opportunities to "cherry pick" assets among U.S. mortgage lenders, so U.S. buyout firms Cerberus and JC Flowers have gotten approval to deal with the board of Northern Rock (LSE: NRK), the large and troubled U.K. mortgage bank.

The two funds would probably take different approaches. Flowers is interested in having Northern Rock continue to operate, but perhaps with many fewer employees. Cerberus is interest in the bank's assets, which it believes it can get at a discount and then sell off to other institutions.

According to The Telegraph, British authorities "have said Northern Rock is solvent, but sources close to the restructuring warn that it is living on borrowed time."

A buyout of Northern Rock could be a trial for whether similar deals could work in the U.S. There is little hope that the U.S. mortgage market will be better this year and may even stay depressed into 2008. Banks like Accredited Home Lenders (NASDAQ: LEND) are still not out of the woods. And, private equity and hedge fund interests may be the only buyers left for some of these companies.

Douglas A. McIntyre is a partner at 24/7 Wall St.