Northern Rock plc - Down’s Syndrome North East Association (UK) - Granite "securitisation" and the duties of the Directors of Northern Wreck- a puzzle
At 4.45 pm BST it was announced that Northern Rock Directors have stopped payment of the Interim dividend. The Directors are believed to have now bowed to pressure from the Financial Services Authority and the Treasury not to make the payment of £ 59. It is expected to confirm the decision later today.WHY DID IT TAKE SO FUCKING LONG ???
You might at some time have picked up a Prospectus (but it's unlikely)...
TF ? Well it's an offer for a series of notes that pay interest which is determined by referral to the USD LIBOR rate. These are complicated bits of paper and the prospectus is 344 pages long and requires a 43 page Glossary of defined terms - Pages 297 - 340 ..... for example an "insolvency event" takes 3 pages (297-281) to explain. (read all 344 page pdf here) .. and a good tax accountant, corporate lawyer, plenty of stiff drinks and lot of time. (click to enlarge)
You can save all that if you consult Richard Murphy, Accountant, sometime writer on tax affairs for the Observer who has appeared in BBC radio and television documentaries on taxation issues at his website - or at least a post entitled "Northern Rock - The Questions Needing Answers" posted on Monday September 17th. This provides you a detailed and lucid, (and thankfully) brief explanation of how these bits of paper slot into the Balance Sheet (or not as the case may be) of Northern Rock plc representing, as they do £40 Bn worth of mortgages held by customers of Northern Bank plc.
Briefly , Granite Finance Holdings and a clutch of subsidiaries of that entity is owned by a body called The Law Debenture Intermediary Corporation plc which is a Law Debenture Company which has offices in London, NewYork,Delaware,HongKong,the Channel Islands and the Cayman islands and they work very hard with their teams of lawyers and financial prestifigitators to provide what the wizards of international finance call "special purpose vehicles".
Granite and all within it is owned by them and NOT Northern Bank plc. but it does so as a Trustee and it acts as a Trustee you might be astonished to find, if you have a mortgage on your sweet little 3 bed semi in Nuneaton , as follows..
The entire issued share capital of 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. The professional trust company is not affiliated with the seller - as the prospectus says (Page 47 of pdf) ..
The entire issued share capital of Holdings is held on trust by a rofessional trust company under the terms of a discretionary trust for the benefit of one or more charities. The professional trust company is not affiliated with the seller. 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.
However the 2006 Accounts state..
Basis of consolidation
The financial information of the Group incorporates the assets, liabilities, and results of Northern Rock plc and its subsidiary undertakings (including Special Purpose Entities). Entities are regarded as subsidiaries where the Group has the power to govern financial and operating policies so as to obtain benefits from their activities. Inter-company transactions and balances are eliminated upon consolidation.
In other words that trust is not real says Paul Murphy - Northern Rock plc controls Holdings, but pretends not to via complex legal structures for certain purposes to try to avoid some of the risk of ownership arising from doing so, no doubt. It is a legal charade.
Which goes along way to explaining why when the HM Treasury announced their gurantee arrangements on Thursday 20th September they excluded -
"The arrangements would not cover other debt instruments including:
1. Covered bonds
2. Securities issued under the “Granite” securitisation programme
3. Subordinated and other hybrid capital instruments. "
Paul Murphy says that this exposes three thing ..
a) An abuse of the charity involved, who (he stresses) need not even have given their assent to be used in this way;
b) A contempt for those who take the real risk on financial markets, which is at the end of the day as this fiasco is showing, you and me and the government;
c) The construction of an arrival device to ensure that as few people as possible, almost certainly the Northern Rock directors included, know just how this deal works. I guarantee you it’s a tiny number that do.
And it’s this wholly artificial construction, seeking to shift liability and to avoid responsibility and abusing common sense decency with regard to the abuse of charity to achieve commercial aims that is pulling Northern Rock down.
After some further pondering / reading Paul posted again on 21st September entitled Northern Rock - those in the queue were right
He raises a beguilingly simple question :
Why did Northern Rock create such a complicated structure for its debt?
The answer is this:
So that it could put the claims of its depositors below those of the City if anything went wrong with the company.
He goes on to point out forcibly that the fact is ,that if Northern Wreck did fail to find a buyer , and go down , the 40% of securitised loans in the Granite companies and £30 odd billion in the ‘wholesale’ and ‘covered’ notes (excluded from the Treasury guarantee remember) would all have a prior claim against the assets because of the way in which they were constructed.
The people guaranteed to lose were the ordinary depositors of Northern Rock.
Because of the absurdly low capital structure of this so called bank following its demutualisation a decade ago whilst the shareholders were always high risk takers in this game, they were vastly outnumbered in value by the depositors. Did those depositors know quite how much risk they were taking when lending funds to such an organisation?
So Paul explains the depositors were actually at massive risk - and he says the shocking thing is no-one was told this...
1) The FSA did not say this - well not out loud and in public;
2) The Bank of England have not said this - well not out loud and in public;
3) The Treasury have not said this - well not out loud and in public. In fact, they went out of their way to say the exact opposite for several days.
The reality must be that each of these knew that the depositors in this organisation were being exposed to excessive and unreasonable risk because its directors had exposed them to it, deliberately.
Chairman Matt Ridley (£315,000 pa.) wrote to MP's yesterday (Full text here) like a good Geordie whinger he says..."We have not been a reckless lender."...."The board is well aware of its responsibility to its many shareholders..." ..." Our 6,300 staff have worked extraordinarily hard".. no doubt they have and will continue to do so in fear of their future employment (Un burdened like the CEO with a £2.3 Mn Pension Pot) ... but not a mention of their responsibility and concerns for their depositors.
In a final flourish he writes ..."our priority is to find the best way forward for our customers, our shareholders and our staff." ... and presumably the depositors must shift the best they can with the half cock and as yet still undefined Government guarantee.
The frightening thing is that this "structured finance" is happening every day, every where in this global financial world. Banks everywhere have been involved in this massive carousel of complicated entities by which they aseek to reap the rewards and avoid the risks.
Slowly the whole hocus pocus falling apart ... Bear Stearns before the New York Bankruptcy Court and Judge Lifland discovered that their 2 bankrupt Hedge Funds Bear Stearns High- Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd., 07-12384, and its sister Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 07-12383 could not seek protection U.S. lawsuits because Judge Lifland said ..
"The only adhesive connection with the Cayman Islands that the funds have is the fact that they are registered there,'' ... "There are no employees or managers in the Cayman Islands, " he added in his written judgement," the investment manager for the funds is located in New York, the administrator that runs the back-office operations of the funds is in the United States along with the funds' books and records, and prior to the commencement of the foreign proceeding, all of the funds' liquid assets were located in the United States.''
Page 48 of the Granite prospectus states that ..
The mortgages trustee
Granite Finance Trustees Limited is a private limited company incorporated in Jersey,
Channel Islands. Its registered office is at 22 Grenville Street, St. Helier, Jersey JE4 8PX.
Granite Finance Trustee Limited is a subsidiary of Granite Finance Holdings Limited - which is described above who hold the shares in trust for - Down’s Syndrome North East Association (UK) .
Material Jersey (Channel Islands) tax considerations (prospectus page 283)
Tax status of the mortgages trustee and the mortgages trust
It is the opinion of Jersey (Channel Islands) tax counsel that the mortgages trustee
will be resident in Jersey for taxation purposes and will be liable to income tax in Jersey at a rate of 20% in respect of the profits it makes from acting as trustee of the mortgages trust. The mortgages trustee will not be liable for any income tax in Jersey in respect of any income it receives in its capacity as mortgages trustee on behalf of the beneficiaries of the mortgages trust.
Down's Syndrome North East
Down’s Syndrome North East are a charitable, parent led volunteer organisation with a membership of over 300 families - they had a website - www.DownsSyndromeNorthEast.org. which is closed and used to have a contact 0191 5250233 or a defunct e-mail adress RachelBarron@DownsSyndromeNorthEast.org.uk
This information was obtained from the Easter 2007 Easter Network News letter ther will be more later ... this is what Matt Ridley said to MP's in his letter to them yesterday ..
The board is well aware of its responsibility to its many shareholders, including tens of thousands of small shareholders, as well as to our largest shareholder, the charitable Northern Rock Foundation, to which we give a unique 5% of pre-tax profits to support good causes in the North East, especially those working on social deprivation.
Like £2 Mn a year to Newcastle United etc.,... Rugby ....