Northern Rocky: could the Lib Dems withdraw their support?

Storm clouds are gathering over a highly technical -- but potentially very important -- aspect of Northern Rock's nationalisation which could throw Alistair Darling's plan seriously off course.

Shortly before midnight in the Commons chamber, it emerged that the legislation to nationalise the stricken bank excluded the offshore company, Granite, which controls £40 billion of the bank's mortgages. Opposition parties say these are some of the bank's most secure assets. This has allowed Vince Cable to say that Northern Rock has been left with "rubbish" assets and he is now threatening to withdraw his support for the bill pending further clarifications from the Treasury.

This could be problematic politically: any alliance between the Lib Dems and Tories in the Lords has the potential to delay the bill and force big amendments. It is also a possible financial problem: Granite, which repackages mortgages into bonds and sells them on, relies on millions of pounds a year from Northern Rock to service them. What happens if Northern Rock is run down and unable to supply this money, however? But according to Downing Street at 4pm, no money has been paid to Granite since the Bank of England guarantees in December.

Even basic facts are murky. My eagle-eyed colleague Peter Riddell has pointed out seemingly basic contradictions: Yvette Cooper last night in the Commons said Granite is not covered by government guarantees. "It is not being taken into public ownership and it is not, in fact, owned by Northern Rock, so it is not part of the taxpayer's exposure and he has never been so." Yet a Treasury press release from December said the government guarantees were extended to "all obligations of Northern Rock plc to make payments on the repurchase of mortgages under the documentation for the "Granite" securitisation programme." There may be answeres to these questions, but they need to come quickly.

In plain English, this may mean the public is exposed to even greater liability, and could delay the government's timetable.

Update: Andy takes us to task in comments:

This is a storm in a teacup stirred up by people too lazy to do research. The Granite documentation is available to all on the SEC's website, and shows what nonsense most of the comment is. Northern Rock earns money from Granite, it doesn't have to pay it anything. Granite was set up as a long-term funding vehicle into which Rock can sell mortgages on a regular basis. If it doesn't sell enough mortgages, the programme terminates and the bonds get repaid gradually from the repayments on the mortgages. There is no claim on Rock or on the taxpayer. So the nationalised Rock doesn't own the mortgages in Granite (although it does make money from them in fees from managing them and income over what is required to pay the bonds), but the quid pro quo is that it, and the government, is off the hook for the bonds. Securitisation isn't the easiest finance technique to get one's mind around, but politicians and journalists should at least try before engaging in scaremongering.

Comments

[Andrew Hall]

Fudging the figures always comes back to haunt you. I agree the Government needs to clarify the position and quickly, there is political capital to be made by the Tories here in addition to the loss of Lib Dem support.

[Mike Sheridan]

I watched Yvettte (Shout) Cooper on Newsnight last night.

She is clearly out of her depth and could not understand the difference between the risks taken on by her government in backing 100% of NR and the process of administration proposed by the Philip Hammond her Conservative shadow.

His proposals leave the shareholders and bondholders exposed while the business is managed down by the administrator aka Bank of England.

Today we learn that the government may have blundered into guaranteeing £110bn of risk while controlling £60bn of "dodgy" assets - the rest being in a tax haven!

Brilliant!

I suggest the merchant bankers and lawyers fees are witheld until this is sorted out - someone has clearly dropped the ball.

Who would that be do you think?

Brown, Darling, Cooper, FSA...anyone else?

[richard]

Who owns Granite.

[Peter]

Only surprise from this Government would be, just for once, that they told the truth from the outset.

[Brian Golden]

The institutional incompetence displayed throughout the NR saga has been shameful, with the bank run only the peak. I'm not surprised further stupidity is in evidence.

The best that can be said is that the UK has a vibrant press that allows this to be exposed.

[richard]

With NR's business plan under so much criticism and with no apparent fall-back position I am sure that NR's auditors would have been signalling this as a high risk strategy in the notes to the accounts. Does anyone know what was or wasn't said by the auditors, whose first duty is to the shareholders.

[BagginsAtSea]

Seems to me that some people do not read the Eye. The Granite fiasco was seen coming some considerable time ago within the organ

[Andy]

This is a storm in a teacup stirred up by people too lazy to do research. The Granite documentation is available to all on the SEC's website, and shows what nonsense most of the comment is. Northern Rock earns money from Granite, it doesn't have to pay it anything. Granite was set up as a long-term funding vehicle into which Rock can sell mortgages on a regular basis. If it doesn't sell enough mortgages, the programme terminates and the bonds get repaid gradually from the repayments on the mortgages. There is no claim on Rock or on the taxpayer. So the nationalised Rock doesn't own the mortgages in Granite (although it does make money from them in fees from managing them and income over what is required to pay the bonds), but the quid pro quo is that it, and the government, is off the hook for the bonds.

Securitisation isn't the easiest finance technique to get one's mind around, but politicians and journalists should at least try before engaging in scaremongering.

[KW]

One aspect of Northern Wreck that I have yet to see discussed is the ability of a bank owned by the taxpayer to offer above average market rates on savings and bonds Until nationalisation they were offering top of the market rates, is this now fair competition?. Could one of the big four take out an injunction to prevent this.