RAB Capital boss backs Northern Rock and raises stake to 6.6%

If the government is going to let Northern Rock die, it will play straight into the hands of those with short positions who are likely then to turn their attentions to the likes of Bradford & Bingley and Alliance & Leicester.

This is the view of RAB Capital chief executive and co-founder Philip Richards who believes that the Newcastle-based bank does not deserve the sad end that many are predicting.

'It is a new danger for our banking system that shorts can add to the panic in any situation where a bank seeks assistance,' Richards argues in a letter to the Financial Times. 'It must be a mistake, and morally questionable, to leave them richer and bolder for the next time.'

There is a political side to the point he makes. Although the Northeast is strong territory for the government, its success in a general election could be affected if Northern Rock disappears, a point made on Thursday when Labour lost a seat to the Conservatives in a by-election on Sunderland Council.

At a time when many hedge funds are going short on Northern Rock (NRK), RAB Capital's highly successful special situations fund, which Richards runs, has bought another 2.5 million shares taking the total to over 28 million and increasing its holding to 6.66%.

The stake is around 4% of the fund which specialises in oil and gas investments along with minerals and precious metals. In the nine months to the end of August it had increased in value by 19%.

There has been so much shorting in the shares of the troubled Newcastle-based bank that there are no more left to make it possible, so the value of the holding could rise in the short term. Today the shares are down 9.75p to 183.75p.

Citywire calls to Richards were not immediately returned on Friday. Although Northern Rock ran into trouble by borrowing short and lending long, the RAB boss argues in his letter that this is the main purpose of banking.

'Arguably it is the most important foundation of a modern, prosperous economy,' he wrote. 'Nobody who needs a 20-year mortgage, or industrial loan, wants to wait in vain for a 20-year depositor to be found.

'Therefore, a central bank is charged to be lender of last resort because this asset/liability mismatch is always at risk of detonating in the banking system.