Northern Rock PLC (subsidiary of Bank of England) - Endgame

It is necessary to ask, "was the much vaunted Ballsian Tri-Partite FSA/Treasury /BOE arrangment designed to produce the massive mess that is Northern Rock to which the tax payer is exposed to the tune of (say) £56 Mn?"

If it wasn't, how on earth have we got this far ? ... and now as the City "advisors", a motley group of lawyers, bankers and snake oil providers slink back into the shadows burdened with their fat fees, small shareholders (no doubt many of them also small (ex if they have any sense) depositors) will lose something like £250 Mn as nationalisation is being locked in with legislation.

In advance of the Northern Rock Extraordinary General Meeting next Tuesday 15th January called by hedge funds, SRM Global Advisers and RAB Capital, which together hold more than 17% of Northern Rock shares, the Directors have agreed to sell it's "Lifetime" portfolio of equity release mortgages to J P Morgan Chase for £2.25 billion($4.3 billion) about 2 % of the bank’s assets.

J P Morgan paid 2.25% more than the assets’ balance sheet value (say the Directors) and earned net interest income of £34 million during the 12 months to 30 June 2007,. The calculated gross profit, some £50 Mn, will no doubt to be offset by what accountants call a balancing item of a similiar amount for fees, disbursements etc., to Sacks of Gold for their efforts in making the sale.

In an extrordinary arrangement agreed with J P Morgan, Northern Rock will continue to service the Lifetime Portfolio and and continue to originate Lifetime loans.

Equity releases are a specialist market where the owner sells the property in advance of death (hence Lifetime) to release capital with title reverting on death to the mortgagor - unexciting but with virtually guranteed yield calculated on death tables - and therefore highly saleable. Unlike the uncollateralised mortages with 125% gross value including a cash loan mainly to young people without an established employment or credit history.

The remaining capital element from the sale of £2.3 Bn. (ish) (it is said) will offset the Bank of Englands current £56 Bn exposure for loan guarantees, loan interest, and provision of working capital.

Against this the Daily Telegraph report today that Citigroup, Deutsche Bank and Royal Bank of Scotland, who have been poring over Northern Rock's books for several months have thrown in the towel and that they cannot lend up to £15bn to a bidder on terms that would be acceptable to bidders such as the preposterous Virgin crew or Olivant.

They have also reported within the last hour that Ron Sandler CBE, the former head of insurance market Lloyd's of London and CEO of natWest, will be made Chairman of Northern Rock if it has to be nationalised . He says he was first contacted about the role by Treasury advisers last November, with appointment as provisional chairman finalised last month. Sandler was chosen by chancellor Gordon Brown to conduct a review of Britain's savings industry which reported in 2002 - which criticised the complexity of many financial products.

The late (and admirable, feisty ) Sheila McKechnie, Director, Consumers' Association at the time said, presciently , "There are some fundamental challenges here for industry, FSA and the government. The litmus test will be whether the industry and the regulatory regime are fit to meet them and whether Sandler's sensible recommendations become a reality for all consumers."

The Financial Times today also report that Sacks of Gold have proosed that part of the Bank loan can be converted into bonds, which can then be sold to investors - although they admit these would be unsaleable if they could not depend on government support for its current credit rating. Northern Rock could then decide to lay off some of the potential risk with a specialist insurer.

As Richard Murphy says of this proposal " ...this is not a solution to a problem; it’s a typical merchant bankers attempt to repackage a financial product with a margin for themselves. Which is the reason why we had the whole sub prime crisis in the first place."

Meanwhile in the financial centre of sunny Switerland ...

UBS, Switzerland’s largest bank, and another one running out of funds because if umprident lending, is also holding an extraordinary shareholder meeting on Feb. 27 in Basel at which stockholders will vote on a planned capital increase as part of a US$11.8 billion investment by the Singapore Investment Corporation and an unidentified Middle Eastern investor.

.. and elsewhere

Ex Northern Rock CEO, tall, debonair, fun loving, Adam Applegarth is frollicking in Mediterranean sunshine and spending more time with his money and his investment in the buy to let department ... who sports three sparkling diamonds in a fetching navel ornament surrounded by a fascinating tattoo that reads ..."Northern Rocks". (Thanks to Toni's mole in the ladies changing rooms at Bannatynes , Newcastle Quayside Fitness Centre )

Pensions


It appears that NR pensioners pension fundn is underfunded anywhere between 3100Mn and £200 Mn. Surprise, Surprise... "Black Hole" Times