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.
