THIS Tuesday, thousands are expected to troop into Newcas-tle’s Metro Radio Arena, an 11,000-seat venue that has hosted scores of rock concerts. Those attending will not be soothed by sweet music. Instead, it is set to be a rowdy affair as shareholders in Northern Rock get their first public chance to vent their anger over the debacle in which Britain’s fifth-largest mortgage lender has been plunged into financial crisis and now propped up by £24 billion in loans from the Bank of England.

The emergency general meeting is a key event in the high-stakes game of poker between Northern Rock’s board, the bank’s increasingly vocal shareholders and the government.

The meeting – aptly held in the venue where Northern Rock customers decided to convert the group to a publicly listed bank almost 11 years ago – has been called by the rebel hedge funds SRM Global, led by Jon Wood, and RAB Capital, led by Philip Richards. The pair have tabled resolutions in effect to block a sale of the bank on the cheap. Northern Rock’s board, led by chairman Bryan Sanderson, has attacked the resolutions, arguing they could make a sale harder.

The vote alone will not decide the fate of the embattled bank, but it comes at a sensitive time. Last week the chancellor Alistair Darling said he wanted a decision on the bank’s future within the next five weeks.

Meanwhile, Goldman Sachs, the investment bank advising the government and the regulators, is attempting to find a way of financing a bid by Olivant or a rival Virgin-led consortium. Goldman has drawn up a series of financing options that could include repackaging some of the £24 billion lent to Northern Rock into bonds and bringing in reinsurance groups to take over the guarantees needed for the bonds to be sold to investors.

Goldman has also contacted investors in China and the Middle East to help fund a rescue.

Four months after Northern Rock’s dire financial straits emerged, the manoeuvring, bluffs and gambles have left the bank’s fate finely balanced. But who holds the strongest hand?

The government

As Northern Rock’s largest creditor, the government has argu-ably the strongest set of cards. Darling has said that a private sale would be “highly desirable”. But in a stark warning last week he said it “may not be possible” to find a buyer. Darling’s main priority is to defend the interests of taxpayers, who are exposed to the tune of £57 billion through direct loans and guarantees.

The Treasury is keeping all options open, including a sale or nationalisation. Most believe Darling is desperate to avoid full nationalisation – a move that could be seen as a political disaster and damage London’s reputation as a leading financial centre.

The Treasury needs the pieces of the jigsaw to fall into place. If they don’t, its options will dwindle. A private sale has been hampered by the problem of raising huge sums during the current credit crunch.

To break the financing deadlock, the government could agree to a sale of the bank where the bulk of the loans remain outstanding for some time and are repaid when the credit market returns to normal.

A fallback plan would be to keep Northern Rock independent, put in new management – a senior financial-services executive has been lined up as chief executive – with the Treasury taking a minority stake. That could stop shareholders making waves and allow the taxpayer to benefit if Rock is revived and thrives. Packaging up some of the Bank’s loans as bonds would also mean the Treasury would be repaid more quickly than under the Virgin or Olivant proposals.

The big question is whether in the current turmoil there are enough investors willing to snap up the bonds. This independence solution could also include a rights issue that SRM and RAB are likely to back. Another potential Treasury trump card is to nationalise Northern Rock for a short period. The bank could then be bought out and parts of the business sold off.

There are also a couple of wild cards. First is the Treasury’s increasingly strained relations with rebel Northern Rock shareholders. Second, there is the European Commission’s deadline for a private sale to be agreed by mid February.

Northern Rock’s board

The board appears to be under fire from all sides. It has to act in the interests of shareholders, but it also has to take into account the interests of other stakeholders – such as the government, which is the biggest creditor, and the bank’s 6,500 staff.

The board’s stronger cards include the fact that the government has to find a solution. Another is that both Olivant and Virgin appear committed to their bids.

However, if the board loses the vote on the resolutions this week, it will be weakened. This will not be a fatal blow, but the board will have much less room for manoeuvre and its reputation will be dented. Partial nationalisation could be the best of the lousy options. Though this would anger shareholders, the board would have achieved one of its aims – keeping Northern Rock as a viable independent company.

Overall, the board’s hand is poor. Northern Rock and its advisers have been trying to run the auction, but critics said its power has been effectively undercut by the government.

Shareholders SRM and RAB

The two hedge funds behind the emergency meeting are not just being awkward, they see this week’s meeting as vital to prevent action that would “needlessly destroy value in the company”.

Several months ago, the investors unearthed a clause in Britain’s listing laws that they reckoned presented a serious threat to shareholder rights if a company was deemed to be in severe financial difficulty. Worse, it appeared the government as well as directors could declare a company in such as position.

When it comes to the vote, ostensibly the two hedge funds are in a strong position. They own 18% of the company, have public backing from the Swedish investor AP Fund and claim to have other investors on board taking their support to 23%.

Against them is the board, which argues that the resolutions they want are too restrictive. The hedge funds are also mistrusted by some small investors and the public, who accuse them of being opportunists. They could lose the vote.

SRM and RAB have staked millions on the hope that Northern Rock can be rescued. It’s a huge gamble, but they have certainly played their hands aggressively – making the board squirm and forcing the government to take more notice of shareholders.

However, there is a danger that they are the biggest bluffers in the game and have overplayed their hand. Before Christmas, SRM sent a letter to the Treasury warning that it had gained legal advice that if the bank was nationalised at anything less than a fair price for the shares of about 400p it could be a breach of European human-rights laws. The implied threat was long and messy legal action.

The Treasury response has been terse and robust – it will respect human-rights laws, but all options are open.

Could the two sides agree a solution? Only if Rock is rescued and the shareholders retain a majority of the bank.

THE BIDDERS HOLD WEAK HANDS

THE battle to win control of Northern Rock has come down to a fight between Olivant, the investment firm headed by former Abbey chief executive Luqman Arnold, and a consortium led by Sir Richard Branson’s Virgin Group. Both have completed due diligence and last week confirmed they would make serious offers that would include repaying a chunk of the Bank of England’s loans.

Olivant’s trump card is the backing of two leading shareholders, SRM Global and RAB. It wants to put in new management, inject £800m through a £650m rights issue and £150m of its own money, giving it a stake of about 15%.

The major attraction for shareholders is that the rights issue would be at about Northern Rock’s market price, 87¼p on Friday. Olivant is also cleverly offering the government a chance to share in the profits if the bank is revived.

Virgin has the advantage of consumer confidence, a powerful brand and would pump in more money – £1.3 billion, including a rights issue. But its hand is looking weak. Shareholders dislike the deeply discounted rights issue, at about 25p a share, giving Virgin 54% of the bank.

There remain huge weaknesses. Time is against the potential bidders – any more delays could irreparably damage Northern Rock. Virgin and Olivant have also struggled to find financial backers.

The other thorny issue is how to get approval from the European Commission.

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