The Sharks are Circling at Northern Rock

It looks like Northern Rock's woe's are just beginning with three of the most aggressive funds plotting to break up the company. Reports suggest that the break-up of the bank would generate hundreds of millions for the funds and leave very little for the shareholders.

Former Goldman Sachs trader, Chris Flowers is among the group looking at a possible deal for the bank. It is also said that Cerberus (the vulture fund that owns Chrysler) and Citadel are among the group circling the stricken financial services company.

The deal would see Northern Rock's mortgage book, worth £100bn plus, divided up amongst the funds but shareholders would come out of it 'penniless' according to the Telegraph.

The markets, recently, have thrown up huge opportunities for funds to snap up under performing securitized mortgage books from struggling banks at below face value. Holding them until maturity would reap huge profits for the funds concerned.

After having loaned NRK £3bn last week a market commentator said "The Bank of England has been trying to get someone to make a bid with no success at all this week. The easiest thing to do is to buy a lot of the assets. It's much more likely to happen this way."

The funds have yet to approach the Northern Rock board, which has spent the week scrabbling to find a new source of financing.

The management of NRK are in a catch 22 position as, obviously, a deal that gave no value on the equity, which a few months ago was worth £5bn, is not something the board would be happy to take. Their options, however, are becoming more limited by the day.

The problems we see here are that this is not some company that makes widgets in some far off land that has little impact on the collective consciousness of the UK public. This is a bank that little old ladies have their savings in. Any aggressive move against the bank will surely be spun by the 'Red Top' tabloids as some sort of 'rich getting richer' scheme at the expense of the little guy. With the fact also that there are depositor guarantees (increased to £100,000) the funds are on shaky ground and could look like they are profiting at the taxpayers expense, not to mention the shareholders.

We could see an old fashioned situation where the aggressive funds are seen as hostile takeovers merchants intent on breaking the company up for profit. RAB capital headed the call from management for hedge funds to buy into the company, by buying 6% of the equity a classic 'white knight move'.

Whomever gets hold of this firm better make sure that the spin they put on this is better than Tony Blair losing a by-election because the political fallout could be huge for the fund that gets it wrong. It is the kind of thing that brought the raiders of the 80's to the attention of the regulators and politicians and ultimately lead to the dismantling of much of the Junk Bond industry.

The bottom line here, in my opinion, is that the winner in this could ultimately end up as the loser through more regulation and politically motivated moves to curb the accesses of the hedge fund industry. If I was a politician looking to make my name, I would be circling this deal, licking my lips at having an arrogant hedge fund manager explaining his billion dollar salary while seeing pictures of little old ladies with placards outside the Houses of Parliament because they have lost thousands investing in NRK.

What is required is nerves of steal, flesh eating lawyers and a very, very fluffy PR company that can turn this particular lemon, for the hedge funds, into lemonade.