Speechless.
I don’t know what to say. It seems this morning a big brouhaha has erupted over a “private offshore trust” (…oooohhh maximum scariness and implied skullduggery…) that holds £50bn of Northern Rock’s “best” mortgages…
Nationalizing Northern Rock – however much they mucked up so far in the timing and execution of that – is the only sensible thing the Brown/Darling duo have done on the economic front since taking office. So not being very sympathetically inclined to them at this time, one would hope that the opposition would take a page out of Barrack Obama’s book and be pragmatic and honest when holding the goverment to account over the (important) details of execution. Instead we get a shrill, even hysterical response from the Tories and a good dose of the same from the press.
Granite – the main securitization vehicle (and main wholesale funding mechanism) for Northern Rock – is not exactly a secret. And there is nothing mysterious or – as far as I know – untoward about it. Anyone vaguely knowledgeble about the bank would be completely aware of it. This is not some dodgy Enron-esque SPV… And the fact that it is ring-fenced from the rest of the bank is (a) totally normal and (b) no big deal. Let me qualify (b) – yes, the rest of Northern Rock’s balance sheet is probably weaker for it – but duh, that’s one of the reasons they needed to be rescued in the first place…and given that the credit markets have seized up, on balance it is not obvious that it would help anyone (taxpayers) to bring it back on balance sheet forcibly (anyone want to buy £50bn extra gilts?). (Not to mention the bullet through the heart that would be for the credibility of the UK financial system and rule of law…) The price paid for the bank should reflect the contractual relationship between Granite and Northern Rock.
A final word, this last bit is where I’m a bit mystified as to the arguments of SRM and RAB as to the remaining equity value of the bank. They seem to think that it is worth quite a bit. Rather than go to court and fight it out, why doesn’t the Government offer them a right of first refusal on what ever deal ends up getting proposed. So for example, if the government decides to offer 10p / share, let any other (qualified, with proof of committed finance) buyer have the option of buying it at that price instead. …including the debt without any government guarantee. Not a level playing field? Sure it is. You just need a big strong balance sheet and access to credit markets in that sort of size. It is not the Government’s fault that SRM/RAB probably don’t fit that bill. If we’ve got to where we are, I suspect it is because nobody that does (have the capacity to marshall tens of billions of pounds of finance) thinks it is a particularly good way to spend it and so the government has to step in to mop up the pieces. As a UK taxpayer, I will be looking very carefully at the price the Government pays for the equity, especially if it is much above nil. And then I would hope that they work hard to re-finance it and flip it as quickly as optimizes their IRR, like any good private equity firm worth it’s salt. In this vein, rather than Ron Sandler or perhaps alongside him, I wouldn’t mind seeing Wilbur Ross or someone like him minding the shop.
