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Is Northern Rock the UKs Enron?

Northern Rock nationalisation runs into £49bn Granite barrier

An offshore fund with charitable status to raise money for Down’s syndrome sufferers in the North East has emerged as the first potential barrier to the smooth nationalisation of Northern Rock.

The fund, called Granite, owns £49 billion of mortgages that were sold by Northern Rock and moved off-shore to the tax haven of Jersey. Granite, which was set up by Northern Rock to raise cheap money, sold bonds to investors and used the proceeds to issue new mortgages.

But The Times understands that the fund could be in danger if Northern Rock fails to win the new mortgage business needed to keep Granite running smoothly. One source said last night: “If you stop writing new mortgages then Granite dissolves and you have to pay back all the Granite bonds, so that would be the Government shooting itself right in the foot.”

It is understood that if Northern Rock does not keep supplying Granite with new mortgages, the trustees of the fund could call for a “rapid amortisation” of Granite, which would require bondholders to be paid back in full. In that instance it is believed that neither Northern Rock nor the Government would be liable to return the funds. However, at least £6 billion of Granite’s money is understood to have been invested directly into Northern Rock, meaning that the bank — or the Government after nationalisation — would have to repay this debt immediately.

Granite dominated a parliamentary debate on the legislation needed to enable the Government to nationalise the stricken bank yesterday. Liberal Democrat and Conservative MPs demanded that Granite, although a separate company to Northern Rock, be brought into public ownership as well.

They fear that Northern Rock has transferred its best mortgage assets to Granite, leaving the Government’s estimated £25 billion loan to the bank secured only on riskier lending. Alistair Darling, the Chancellor, said that there would be no benefit to the taxpayer in bringing the trust into public ownership and its existence was no barrier to the sale of the bank. He added that the bank owned no shares in Granite and the Government had provided no guarantees to its bondholders.

Mr Darling also hit back at suggestions that the taxpayer had been handed the “rubbish” assets of Northern Rock and the best had gone elsewhere. He said that its balance sheet included high-quality mortgage assets.

The Chancellor’s assurances appeared last night to have saved the whole Bill from possible defeat after a meeting with Vince Cable, whose Lib Dem support is vital to its passage, and appeared to have placated him.

The issue overshadows Gordon Brown’s official visit to Brussels today. He is to lunch with leading EU officials including Neelie Kroes, the Dutch Commissioner in charge of deciding whether the imminent business plan for Northern Rock is lawful.

Northern Rock sold half its mortgages to the Jersey-based trust to fund its expansion, including some of its profitable and high-value loans. But the arrangement was suspended when the Government stepped in to rescue the bank — and Mr Darling said that it would be up to Ron Sandler, the man appointed to run Northern Rock, to decide whether it should continue.
Mr Cable wrote earlier to Mr Darling demanding to know why Granite was not being nationalised. He accused the Government of supporting an “asset-stripping” operation and threatened to withdraw his party’s support for nationalisation. Mr Darling emphasised that Granite was entirely independent of Northern Rock, that its mortgage book was “of good quality and its assets exceed its liabilities”, and that Granite had no claim on the bank’s assets. Even so, ministers face a trial of strength with peers as the Tories and Liberal Democrats insist on greater safeguards to stop Northern Rock from undercutting other banks and building societies. They will also demand greater parliamentary oversight of the bank’s strategy and call for it to be subject to freedom of information laws.

Labour peers were being urged by government whips to attend the Lords and be ready to sit late into the night if Mr Brown uses his Commons majority to overturn defeats in the Lords in a bout of parliamentary “ping pong” between the two Houses.

Lord Lawson of Blaby, the former Chancellor, said that the Rock should be closed to new business and its mortgage book sold off when market conditions improve. He said the Government had chosen to continue running it as a business because it was “sensitive about feelings in the North East”.

Hard facts
What is Granite? Granite is a company set up in 1999 by Northern Rock in the offshore tax haven of Jersey. Its technical name is a special purpose vehicle. Granite was used by the Rock to make extra cash from the mortgages that the bank had sold to UK homeowners. Northern Rock transfers mortgages to Granite, which packages them together to make a financial instrument called a security. Investors buy these securities, which provide them with regular interest payments.

How does Granite operate?Granite uses the interest payments made by the mortgages that it obtained from Northern Rock to cover its payments to the investors. Some of the money that the investors paid for the securities is passed from Granite to the Rock. As people pay off their mortgages regularly, the Rock must keep supplying Granite with new mortgages so that Granite has enough cash to cover its interest payments to investors.

Do other banks have these companies? Many other banks have these vehicles, including Halifax, Bank of Scotland and Barclays. It is particularly common in the US, where almost all mortgages are held within special-purpose vehicles such as Granite. Northern Rock has two other offshore companies, called Dollarite, which holds some of the loans that the Rock has sold to businesses, and Whinstone, a much smaller vehicle.

Who owns Granite? Although the Rock has a legal responsibility to provide Granite with regular infusions of mortgages, it does not own or run the vehicle. They are separate legal entities. In theory the vehicle is owned by a charitible trust that was set up to raise money for a Down’s syndrome charity in the North East.

Why is it causing such concern? There are fears that Northern Rock has moved its least-risky mortgages to Granite, leaving the most risky lending on its own balance sheet. Because Granite is a separate company, if the Rock defaulted on its estimated £25 billion government loan, the Government would not be able to access Granite’s mortgages to sell to pay off the debt. If no new mortgages are put into Granite, the bondholders will have to be repaid.

Philip Webster, Greg Hurst and Siobhan Kennedy
The Times online
http://www.timesonline.co.uk/

Abba "Money*Money"Money!

Northern Rocks Granite (Jersey) under Charity Commission Investigation!

A twisty trail: from Northern Rock to Jersey to a tiny charity

Northern Rock is facing a Charity Commission investigation after it emerged that the bank exploited the name of a charity for disabled children while creating an elaborate financial arrangement for maximising profits from home loans.

The inquiries will centre on the bank's unusual structure. For while Northern Rock appeared to be a uncomplicated mortgage lender employing thousands of people in the north of England, three-quarters of its key assets are owned by a Jersey-based offshore trust called Granite.
And at the heart of Granite's operations is a rather peculiar fact: on paper, at least, it had been set up to benefit charities, and in particular a small organisation for children with Down's Syndrome, and their families, which was being run from a semi-detached house on the outskirts of Newcastle.

Even more peculiar, perhaps, is the fact that nobody at Northern Rock bothered to tell the children's charity that it was a beneficiary, and the charity never received a penny from Granite.
For seven years, Down's Syndrome North East (DSNE) raised small sums of money as best it could. There was £125 from a man who cycled across the United States, children at a primary school in Middlesbrough chipped in £100, and the North East Ladies' Luncheon raised £750. And the whole time, the volunteers who kept the charity running were unaware that it was supposed to be the beneficiary of a trust which had raised £71bn on the international financial markets and which enjoyed a turnover of £1.8bn last year.

After the Guardian asked Northern Rock for an explanation, the bank apologised to DSNE for what it described as an "oversight" and promised the charity that it would receive a donation in the future. The bank then told the Guardian that the charity might receive a payment - but only if its trust was wound up.

The extraordinary arrangement which saw one of Britain's fastest-growing banks help itself to the name of a tiny charity began in December 2000, when Northern Rock set up a network of trusts called Granite.

The network's labyrinthine structure allowed Northern Rock to take advantage of the British public's growing hunger for cheap home loans - although it was a structure that was eventually to splinter and almost collapse under the weight of the worldwide credit squeeze.
Before that happened, however, Granite raised £71bn of funds for the bank through 24 separate bond issues, all backed by the bank's £58bn worth of residential mortgages.

The Granite trusts were not owned by Northern Rock, but were nevertheless controlled by the bank. This meant the bank could include the billions of mortgage assets on its balance sheet - making it appear that much bigger and more profitable - while having no direct responsibilities to the bond holders who bought the securities backed by those mortgages.

But it appears that Granite's trust status may hinge upon a charitable purpose. And this is where DSNE came in. By May 2005, a Granite prospectus was telling potential investors from Wall Street, the City and the rest of the financial world: "The entire issued share capital of (Granite Finance) Holdings is held on trust by a professional trust company under the terms of a discretionary trust for the benefit of one or more charities.

Any profits received by Holdings, after payment of the costs and expenses of Holdings, will be paid for the benefit of the Down's Syndrome North East Association (UK) and for other charitable purposes selected at the discretion of the professional trust company. The payments on your notes will not be affected by this arrangement."

The Charity Commission said yesterday that it would attempt to establish why DSNE's name was used by Northern Rock. "We need to get to the bottom of exactly what has happened here," a spokeswoman said.

Last night, with Sir Richard Branson's attempt to rescue Northern Rock still hanging in the balance, the bank was bracing itself for accusations that it had committed an act of corporate identity theft by making use of DSNE's name without the charity's knowledge.

There was anger among MPs, with one describing Northern Rock's actions as "unforgivable". Jim Cousins, Labour MP for Newcastle upon Tyne Central and a member of the Treasury select committee, said: "It is clearly right that the Charity Commission investigates. It is completely unforgivable that when the charity was nominated as a potential beneficiary, somebody didn't go to them explaining the whole situation, and reassuring them that the charity was not at risk in some way."

DSNE operates from a semi-detached house in Hazlerigg, two miles from Gosforth, the Newcastle suburb where Northern Rock is developing its new £35m headquarters. During the year ending March 31 2006 it had an income of £85,997. On the other hand, two operating companies owned by Granite Finance Holdings had a combined turnover of £1.8bn during 2006, although its net profits were recorded as just £28,000.

There is nothing illegal about the Granite operation, but the trustees of DSNE were surprised when they discovered how Northern Rock had used its name. Approached by the Guardian on Monday afternoon, the trustees issued a statement which read: "We are investigating why our charity appears to have been named as a beneficiary of a trust without our consent. We have definitely not received any money from Northern Rock or affiliated companies, except for a one-off donation from a staff collection in 2001. Currently we have not received notification that any funds are being raised or collected by Northern Rock or affiliated companies on our behalf."

By Monday evening, after being asked by the Guardian for an explanation, Northern Rock had assured DSNE that it would receive a donation at some point in the future. The charity issued a fresh statement which repeated that it had not received a penny from Granite, although it did receive a one-off donation of £40,000 from Northern Rock staff following a fund-raising initiative six years ago.

It added: "The charity was picked as beneficiary through its position as one of Northern Rock's named corporate charities in 2001. The company failed to inform us of this future beneficiary status at the time, but has since apologised for the oversight and fully assured us that this nomination was made for genuine charitable reasons only."

Although the statement added that no money is likely to be forthcoming from Granite "until some time in the future" the trustees "are reassured by the explanations that there was a genuine communication oversight".

Despite this assurance, it appears that the charity will receive nothing until Granite is wound up. A spokesman for Northern Rock said the charity would be paid only "at a point in the future when the programme ends, should any income remain in Granite after the payment of costs and expenses".

The bank said the naming of a charity was a standard part of securitisation, the process which the bank had employed to raise funds through Granite. "Any notion of inappropriate use of the charity's name, or impression that the charity may be exploited, is entirely without substance," a spokesman said.

Ian Cobain and Ian Griffiths
The Guardian,
Wednesday November 28 2007


Its Only Fools and Horses!

Sandler faces Northern Rock funding quandary

The nationalisation of Northern Rock will not include the £50bn off-balance sheet vehicle called Granite which funds half of the Newcastle-based lender's mortgages.

The latest news and analysis from the banking and financial services sectorIf Granite were to go under, the state-owned Northern Rock would be at the bottom of the queue of creditors, meaning taxpayers could face a £5.5bn loss. The Government yesterday confirmed that Granite, which is a Jersey-based trust, would not be covered by the nationalisation legislation.

Mr Sandler could decide to liquidate Granite, which funds half of Northern Rock's mortgages
The Conservatives warned the revelation meant the move was risky for the taxpayer.
Northern Rock set up Granite to fund about half its mortgage book. It owns an 11.5pc stake worth about £5.5bn.

As the bank is set to pass into public hands as early as Friday, that liability will pass to the taxpayer, the Conservatives pointed out.

Granite is unlikely to collapse but its existence puts Northern Rock's incoming executive chairman, Ron Sandler, in a difficult position. He has to strike a balance between shrinking the bank fast so assets can be freed up to repay the Government's £25bn loan, and keeping Granite funded.

Investors in Granite have bought bonds which mature at certain points and are invested in mortgage assets.

Mortgages which get paid off or moved to a rival company have to be replaced in a process known as "feeding the beast". Granite's bonds range in quality from triple A through to below B, but most of the vehicle is invested in high quality mortgages.

Therefore, as mortgages in Granite are paid off, Northern Rock must either replace them with the good mortgages from the rest of its portfolio, or go out into the market to win new customers with a low risk profile.

Alternatively, Mr Sandler could decide to liquidate Granite. Sandy Chen, an analyst at Panmure, said the move might make sense. "It would shrink the size of the book and if you are bearish about the UK mortgage market, it might make sense to sell now rather than later." Liquidation would only work if Northern Rock thought it could make enough money to repay all the bondholders and cover its own shareholding.

Separately, Northern Rock will scrap its Together mortgage, the 125pc loan it used to ramp-up its new lending in 2006 and the first half of 2007.

Meanwhile, Northern Rock has yet to publish its 2007 results.
The bank had said they would be published by the end of March, but it is now unclear whether, as a nationalised entity, it will have to unveil its performance during the crisis period of the past six months.

By Katherine Griffiths, Financial Services EditorLast Updated: 1:05am GMT 21/02/2008Telegraph telegraph.co.uk

The Jersey Enron!

UK denies it nationalised ‘rubbish’ mortgages

UK denies it nationalised ‘rubbish’ mortgagesBy George Parker and Peter Thal Larsen
Published: February 20 2008 22:01 Last updated: February 20 2008 22:01

Financial Times,London,UK, ft.com

Gordon Brown on Wednesday denied the government was nationalising “rubbish” mortgages at Northern Rock after it became clear that over a third of the bank’s assets will remain outside state control in Granite, its Jersey-based trust.

Conservatives claimed Granite’s assets of £45bn included some of the best quality Northern Rock mortgages, leaving the taxpayer exposed to more risky loans on the remainder of the bank’s £110bn balance sheet.

The exclusion of Granite, Northern Rock’s special purpose financing vehicle, from the nationalisation stunned many MPs and left the government scrabbling to explain the relationship between the nationalised Rock and its Jersey offshoot.

Mr Brown argues the government is not exposed to Granite, a separate legal entity, and denies the special vehicle has creamed off the best Northern Rock mortgages to raise finance on the bond market.

“This will have no effect on the sale of Northern Rock to a private buyer,” Mr Brown told the Commons.

Available data do not support opposition claims Granite has the Rock’s best mortgages. They show its mortgages have an average loan size of £117,263, while the weighted average size of the loan to the value of the property is 77.05 per cent.

That is higher than Northern Rock’s last reported average ratio of 60 per cent, suggesting the rest of the bank’s book is of higher quality than the mortgages in Granite, although the figures could be distorted by the Rock’s rapid expansion.

On Wednesday, George Osborne, shadow chancellor, insisted that Northern Rock would have sold on its best mortgages, leaving the taxpayer with what critics have called “rubbish” loans.
Alistair Darling, chancellor, wrote to Vincent Cable, Liberal Democrat Treasury spokesman, to try to maintain his support for nationalisation. “The government has not provided any guarantee arrangements to Granite bondholders,” Mr Darling told him. “Contrary to some suggestions, the Financial Services Authority advises that Northern Rock’s mortgage book is of good quality and its assets exceed its liabilities.”

Mr Cable said he was satisfied it would be legally impossible to nationalise Granite, but said it was highly likely Northern Rock would have hived off its best mortgages to the Jersey trust to raise finance at the cheapest rate.

The Lib Dem deputy leader also questioned government assurances that Northern Rock was not obliged to replenish Granite with new mortgages in future.

The complexities of Northern Rock’s financing arrangements provided further ammunition for Mr Osborne’s claim that parliament needs more time to study the emergency bill to nationalise the bank.

That bill could become law tonight, but Tories and Liberal Democrats are pressing for amendments to ensure a nationalised Rock does not distort banking competition.

The Treasury indicated it could accept that amendment, but will resist an amendment to subject the bank to scrutiny under the Freedom of Information Act.

Shareholders in Northern Rock on Wednesday expressed dismay at the basis on which their compensation will be calculated. A draft order published by the Treasury says an independent valuer will calculate a price based on the assumption that the bank is unable to continue as a going concern and is in administration. That implies shareholders will receive little or nothing.

Its not Northern Rock but Jersey Rock!

The Northern Rocks Theme Song!

Elvis Presley,Jailhouse Rock!