Granite and the masters of the Master Trusts - exploiting loopholes with the City lawyers

Guido points via his stringer BOF2BS to the involvement of blue chip City/ Canary Wharf lawyers Allen & Overy in February 2005 in arranging the Granite master issuer's £20bn programme . The team - "led by securitisation partner Kiwi Angela Clist, (pic) with assistance from associate Sanjay Sethi. US advise (sic) was provided by partner Christopher Bernard and associate Daniel Rubin, whilst partner Richard Tredgett advised on the derivatives aspects of the transaction, assited by Niharika Patel.

Tax advice was provided by partner Mark Brailsford, aided by associates Adam Blakemore and Daniel Lewin. Real Estate advice was given by partner Daniel McKimm. Allen & Overy's Trustee Group, led by Simon Hill and Malcolm Charles, separately advised the Bank of New York as Trustee.

Sidley Austin Brown & Wood advised the originator Northern Rock plc - a huge firm with 1,700 lawyers practicing in 15 U.S. and international cities and 61 partners solely involved in "Structured Finance and Securitization" . The firm was Ranked Top Issuer Counsel for U.S. Debt, Equity and Equity-Related Deals for 2006 by Thomson Financial (as it was in previous years). It is interesting to note that Sidley advised in that one year on 548 deals worth $374.1 billion in deal value representing a market share of 10.7 percent (ie total market in 2006 was US$3.7 trillion -ish) . The firm also ranked number three as underwriter’s counsel in the same category with $257.3 billion in deal value from 429 offerings representing a market share of 7.2 percent.

The legal bill for that stellar array of transatlantic talent must have made your eyes water - and would have probably paid off a few mortgages.

What is worthy of note is what A & O proudly declare ;

1. "The SEC registered deal was the first UK securitisation to obtain a shelf registration in the US." - Mr Applegarth and his criminal crew was always pushing the envelope. e.g July 24th FSA approve new Basle II arrangements, July 26th divvy increased by 30% under altered capital requirments - disregarding profits rise of 0.2% for 6 months after mortgages issued rose 47%

2. "A novel aspect of this deal is the Granite Master Issuer plc's ability to issue debt of any rating provided that the senior debt is always sufficiently supported by a requisite level of subordinated debt. This "de-linked" feature will allow Northern Rock to exploit better pricing on subordinated debt opportunistically and is a first in the UK RMBS (Residential Mortgage-Backed Security ) market." - Mr Applegarth and his criminal crew pushing the envelope again.

Forbes have a site that provides information for investors called Investopedia, under "Mortgage Backed Security " it offers this explanation ..." When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business. An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. Instead, the bank acts as a middleman between the home buyer and the investment markets. "

Therefore it is interesting to note that Northern Wreck from midnight Thursday 21st February 2007 has scrapped its "Together" loans, which offered first-time buyers a mortgage for up to 95 % of their property's value and a personal loan of up to 30% on top.

Abbey, Alliance & Leicester, Coventry Building Society and Godiva mortgages (and probably everyone else by now) had all ceased offering their their versions of the Northern Rock Together loan on Tuesday. John McFall the Chairman of the Treasury Committeewhich had produced after 5 months the report "The Run on the Rock" in contributing wise words in the NR Nationalisation debate on Tuesday February 19th Hansard Col 191 said ;

"Probably a gratuitous request to the new management is for it to ensure that the Together mortgage, with a 125 per cent. loan to value, is no part of the company in the future. A statement to that effect from the management would reassure the rest of the market."

It is also interesting to note that glamorous, perky, pert, slim Yvette Cooper, whilst vilified generally is evidently not as stupid as she appears and managed to place her elegant and well manicured finger on a very pertinent point supplied by the devils in the Treasury who had provided her Lord and Master Darling with a "Technical Note" for the constant irritant to the Gubment Vince Cable.

On Thursday 21st February our fragrant Yvette, stood up straightened her skirt, smiled her charming smile and said amidst discussions of "Granite" ;

Yvette Cooper: The hon. Gentleman cites the technical note, but has not read the subsequent sentence, which clearly states:

“There remain high quality assets on Northern Rock’s balance sheet, as well as Granite’s.”

It also states:

“It is a commercial decision for Northern Rock whether to provide new mortgage assets to the Granite financing vehicle or whether to allow the vehicle to run-off in an orderly way.”

Which is not a point that seems to have hit home in any commentary made then or subsequently . Having due regard to the galactic talents that gave birth to Granite one only has to wonder about the written decision of New York Judge Lifland in August.

Bear Stearns had two funds that got creamed in so-called collateralized debt obligations, or CDOs, backed by home-loan bonds and other "assets" , they were"Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 07-12383 " which raised US $642 million on the launch last last summer.

A sister and less ambitiously titled fund was - " Bear Stearns High- Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd., 07-12384.

In August Judge Lifland in the S. Bankruptcy Court, Southern District of New York (Manhattan) refused to grant protection from U.S. lawsuits for Bear Stearns Cos.' two bankrupt hedge funds, finding the Cayman Islands wasn't the proper jurisdiction for them to liquidate assets.``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.''

Is it the intention of HMG to tell the bondholders (or at least not to discourage the Directors of NR to make a "commercial decision" ) to seek redress in the Courts of Jersey ? (or in less legal terminology - Go fuck yourselves) ... and thus test the structures brought to birth at such great cost by Angela Clist, Allen & Overy and Sidley Austin Brown & Wood and Uncle Tom Cobbleigh and all for the benefit of the NE Children's Downs Syndrome Association ?

Only time will tell as the mysteries of Allen & Overy's handiwork, Granite Master Trust , and the..."first UK securitisation to obtain a shelf registration in the US" unfold over the coming months and years.

NB A & O had previously done such deals Allen & Overy Advises on Granite Mortgages 03-3 PLC20 October 2003 - Allen & Overy (led by Salim Nathoo ) had advised Barclays Capital, JP Morgan and Lehman Brothers on Northern Rock's seventh securitisation using its master trust - These transactions follow similar deals under Northern Rock's residential mortgage master trust in March and September 2002 and in January 2003, in which Allen & Overy also acted for the managers and underwriters.

Those further interested in the fascinating subject of Master Trusts and RMBS markets can profit by reading Prof. Ian Giddy New York University " The asset securitization technique, offer originators a cheaper source of funding and investors a superior return. Not only does securitization transform illiquid assets into tradable securities, but it also manages to transform risk by means of the separation of good financial assets from a company or financial institution with little loss of revenue. The assets, once separated from the originator, are employed as backing for high-quality securities designed to appeal to investors."

The Use of the Master Trust Structure in Asset-Backed Securities - Master trusts mark new era for European ABS (December 01 2000 ) which extensively quotes Ms Clist on RMBS.....Giddy says "The solution that Schroder Salomon Smith Barney ( SSSB ) and Allen & Overy came up with was the use of a master trust. Master trusts were first used for automobile loan securitization in the US, and then adopted recently by credit card companies for their issues. But the Bank of Scotland deal was the first deal to apply it to the MBS market. " ....

"The tiny but very significant loophole SSSB (and A & O) has found through this is that by repackaging the master trust certificate in another trust..."

Yvette Cooper, you understand had / has a complete grasp of the Granite Master Trust structure and it's significance.

No doot tha'll be a canny few of they re-possessiions like , doon the Scotlan' Ro' tha noos. "Fetch me a pint canny lass ..and ah'll read that agin' "

UPDATE : Saturday 11.00 GMT BBC4 The Weeek in Westminster has just had fellow Lord Barnett, Lord Patel's MP from yesterday year, shrewd Jewish Manchester Accontant and EX chief secretary to the Treasury under James Callaghan in the 70's , author of the long standing Barnett Formula explaining how in the House of Lords the Whips scurried round with copies of the letter and "Technical Note" (On which the fragrant Yvette waxed so lyrical) from Darling to Vincent Cable - and confessing he couldn't understand it.

He was joined by the slim and elegant Ex Chancellor Lord Lawson (and father of cook Nigella) in roundly criticising both the haste and the evident lack of transparency of the Nationalisation Legislation.