UK hires adviser on Northern Rock as options narrow

Britain's government has appointed U.S. investment bank Goldman Sachs to advise it on Northern Rock, a source close to the Treasury said, as the stricken bank told politicians its business was sound.

The bank is advising the UK Treasury on matters relating to a guarantee safeguarding existing deposits at Northern Rock, the source said.

Goldman Sachs are advising HMT on some of the mechanics of the guarantee, should it be required, the source said.

The government last week guaranteed the lender's deposits, leaving it closely involved with the bank's future options. Those options have narrowed as the bank appears unlikely to attract a takeover offer from one of its major domestic rivals.

Matt Ridley, Northern Rock's chairman, meanwhile said in a letter sent to MPs late on Monday that the bank remained profitable and sound, with assets well in excess of liabilities.

Northern Rock has been engulfed in crisis since the Bank of England stepped in to offer emergency funding on September 14 as the lender of last resort, which sparked the first run on the deposits of a major British bank for more than 140 years.

Less than 10 percent of accounts have been closed since the crisis began, however, and savers had been returning, Ridley said in his letter, adding the bank had not lent recklessly.

The bank's priority is to find the best way forward for our customers, our shareholders and our staff, Ridley said, after politicians criticized the bank's plan to pay 60 million to shareholders in dividend.

By 5 a.m. EDT Northern Rock shares were down 2.5 percent at 167.7 pence, down more than 70 percent since the BoE's funding help and valuing the bank at just over 700 million pounds.

SPANISH REPORT

A group of investors headed by a Spanish entrepreneur is interested in buying the bank, Spanish daily El Mundo reported, citing sources close to the entrepreneur's company Nueva Rumasa.

The group wrote to Northern Rock saying Jose Maria Ruiz-Mateos represented a group of Spanish investors and would be interested in acquiring a package of shares large enough to give him direction of the bank, the paper said. Northern Rock had acknowledged receipt of the letter but had not responded, it added.

Northern Rock declined to comment.

Northern Rock has been seen as a likely takeover target since the Bank of England stepped to help. But the major UK banks are not interested in buying it as a credit crunch has made refinancing the mortgage book difficult and costly, and most banks are targeting their capital for faster-growing areas than domestic mortgages, industry sources have said.

If no bidder emerges Northern Rock is likely to consider a break-up, which could include the sale of parcels of its mortgage book, or going into run-off -- gradually winding down its business and mortgage book, sources and analysts have said.

(Additional reporting by Mark Potter in London and Sarah Morris in Madrid)