Can Christopher Flowers save Northern Rock?

published 16 October 2007

"There's nothing Christopher Flowers likes more than a good old-fashioned banking crisis," says The Observer: he has built his reputation and multibillion-dollar fortune on them. Now the retiring 50-year-old, with his wire-framed spectacles and quizzical demeanour, could make a killing on both sides of the Atlantic. In the US, he's battling to cut the price of a deal to buy Sallie Mae, troubled guarantor of America's student loans. In Britain, his private-equity firm is one of several "circling the remains of Northern Rock". Can he pull it off?

If it was down to reputation alone, Flowers has it in the bag, commanding a strong following on Wall Street and in the City. He is one of the few buy-out specialists to focus solely on financial groups and has enriched many powerful backers in the process. As an "earnest, young" Goldman Sachs banker in the 1990s, he spent so much time travelling, colleagues joked the bank's corporate jet should be named "Air Flowers", says the FT. A decade on, his deal-making has taken him to Tokyo, Hamburg, The Hague, Alabama and now Newcastle-upon-Tyne. If he lands Northern Rock, expect rapid action. Flowers "demands results and fast", says The Observer. He is used to "doubling his money in no more than a couple of years".

The son of a US naval officer turned Harvard professor, Flowers is highly driven. "He's a geek really, everything is about the profit and loss for him," says a colleague. A school boy chess champion, he keeps a board in his office to play out strategies. Considered a wit in private, Flowers' public image is austere: many were surprised when he and his doctor wife Mary spent $53m on a townhouse in Manhattan's Upper East Side, formerly owned by the flashy Safra banking dynasty. Mick Jagger, Jerry Hall and Andy Warhol have all partied there, but there'll be "no such rock and roll hedonism" for Flowers. As a teenager, he had a "dark and brooding side": in his high school year-book, he wrote a homage to Joseph Conrad's Heart of Darkness. But he never let melodrama get in the way of his ascent. Graduating from Harvard with a magna cum laude in maths, he joined Goldman in 1979, becoming one of the youngest-ever partners at 31. "He was talked about as a possible future leader," says the FT. But in 1998, "a furious round of blood-letting" lead to his departure, making him "doubly hungry to prove himself".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

The deal that established Flowers as a global power-monger was his audacious gamble on the near-bankrupt Japanese Long Term Credit Bank (LTCB), which was hobbled by bad debts after the Japanese housing bubble burst in 1989. Flowers and private-equity house Ripplewood bought the bank for $1.2bn in 2000. It's hard to overestimate the impact on the highly incestuous Japanese banking industry, says The Economist. "It was a massive cultural event." LCTB was "at the core of power in Japan", yet "foreigners were suddenly inside the temple". Flowers renamed the bank Shinsei (Reborn), it floated within four years for $7bn and he made over $1bn.

Observers feared Shinsei would be run into the ground, says the FT. Yet its headcount rose as it entered new areas ("distinctly reassuring" for Northern Rock). "There is a style of investing that is much more adversarial, but it doesn't work for me," says Flowers. His could be the recipe that ends Britain's biggest banking crisis in decades.

Can Christopher Flowers really save Northern Rock?

Christopher Flowers' reputation precedes him; but winning "Northern Wreck" will demand "all his financial wizardry", says The Sunday Times. His £15bn war-chest on its own is unlikely to be enough. Northern Rock's market value has dived from £5bn in February to around £700m. But a new owner will have to find nearly £30bn to refinance its loans. And the competition looks tough: several other buy-out firms, including Cerberus and Lone Star, are in the fray and Citigroup, which has raised £10bn in funding, has yet to declare how it will deploy it. Also, "if the credit markets recover, the funding issues may look less dangerous" and some big UK banks may emerge as bidders.

That scenario became more likely following the Government's latest "spectacularly generous" rescue package, says Mike Verdin on Breakingviews. The Bank of England has now committed to accepting all the bank's assets including its notorious 125% mortgages as future collateral. This gives the bank breathing space "to negotiate the best possible price... rather than accept the first offer on the table". It may even be able to retain its independence. Flowers will certainly need all his guile to win the day, says The Observer. But he has several points in his favour. His experience in the tricky political waters of Japan will come in handy in Westminster and "he has been savvy enough to appeal to the grass roots" in Tyneside. While rivals such as Cerberus are bent on chopping up the bank and flogging off its parts, Flowers has been careful to stress "that he has every intention of keeping Northern Rock in one piece and nursing it back to health". Time will tell.