Today at 7.30 am, before the London markets opened the UK Treasury made a most extraordinary and unprecedented announcement. (cue Ride of the Valkyrie)
The guarantees (at the request of thje Directors of Northern Rock plc) have been extended to include :
* all uncollateralised and unsubordinated wholesale deposits and other borrowings which are outside the guarantee arrangements previously announced by HM Treasury;
* all payment obligations of Northern Rock plc under any uncollateralised derivative transactions;
* in respect of all collateralised derivatives, and all wholesale borrowings which are collateralised (including, without limitation, covered bonds of Northern Rock plc), the payment obligations of Northern Rock plc to the extent that those obligations exceed the available proceeds of the realised collateral for the relevant derivative or borrowing; and
* all obligations of Northern Rock plc to make payments on the repurchase of mortgages under the documentation for the "Granite" securitisation programme.
In other words all those items that were excluded in the original gurantee for the company in September.
This extension (it is claimed) meets the "objectives of the Tripartite Authorities of financial stability and the protection of the taxpayer and consumer and for the purposes of Northern Rock plc's credit ratings in respect of the wholesale obligations described above."
Northern Rock plc will pay an appropriate fee for the extension of the guarantee arrangements. Termination will be provided by 3 months notice.
This amounts effectively to Nationalisation as the Bank now gurantees all the companies debts ...totally ...100% ... the complete balnce sheet. As Vincent Cable said on BBC 4" World at One" minutes ago ..."the worst of all possible worlds"
"Prudent" Gordon Brown must of course have been involved in this decision. In front of the Tresury Select Committee (TSC) Lord King said "he didn't want to speculate whether Northern Rock would be nationalised".
Angela Knight of the British Bankers Association told the TSC she didn't think the move "was helpful".
Granite defaults.
Those following this tortuous saga will remember that the "Granite" bonds based on the spurious (if not fraudulent basis) that a trust for the benefit of the NE Downs Syndrome Association administered the bonds issued by NR plc.
They will also remember ..
"See Prospectus Page 6 -" Principal of the offered notes may be repaid earlier than expected if a trigger event or an event of default occurs in respect of these notes."
Well a trigger event did take place .. see SEC filings
"On September 14, 2007, Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc. ("Standard & Poor's") and Fitch Ratings Limited "Fitch") each downgraded Northern Rock's long-term credit ratings from "A+" to "A". On September 17, 2007 and September 19, 2007, respectively, Fitch and Standard & Poor's further downgraded Northern Rock's long-term credit rating from "A" to "A-". The downgrade to "A-" by Fitch constitutes a trigger event under the Funding 2 basis rate swaps entered into in connection with the Granite program, under which Northern Rock acts as Funding 2 basis rate swap provider. For a description of the potential consequences of this trigger event, please see the section entitled "The swap agreements - The Funding 2 basis rate swaps" in the prospectus of Granite Master Issuer plc (the "Company") dated May 17, 2007 and the Funding 2 Basis Rate Swap, which was filed with the Securities and Exchange Commission as Exhibit 10.1 to the Company's Form 8-K dated May 23, 2007. Northern Rock (i.e the Directors Ed.) has indicated that it does not currently propose to take any further action following the trigger event, due to the liquidity provided by the standby liquidity arrangements it has recently agreed with the Bank of England, as described in the preceding paragraph. Fitch has stated that it considers these standby liquidity arrangements of sufficient strength and form as to satisfy the substance of their criteria and does not currently propose to take any negative rating action with respect to any notes issued by Granite Master Issuer plc (the "Company"). Additionally, Moody's Investors Services Limited ("Moody's") has placed its "Aa3" long-term rating of Northern Rock on review "direction uncertain." The short-term credit ratings of Northern Rock remain at A-1 by Standard & Poor's, F1 by Fitch and P-1 by Moody's. "
See SEC Filing
September 14th SEC Filing Ref 333-141533
In other words ...well yes Moody's have downgraded etc but..we...we'll ..er..ignore it.
Curiously so did everyone else.
Why ?
Simply because the prospects of liquidating the fund were too awesome to consider.
What happens when a CDO liquidates
This is evident if you read the Wall Street Journal Page C1 yesterday(17th Dec.) by Karen Richards and Carrick Mollenkamp."CDO Battles : Royal Pain Over who gets what" which details the default and liquidation of the "Sagittarius" fund involving Deutsche Bank,acting as TRustes, Bond Insurere MBIA INc , and Investors Wachovia Corp and UBS AG.
On November 6th Sagittarius a mere US%985 Mn Collateralised Debt Obligation (CDO) triggered a default.
Now as a result Deutsche Bank filed on December 3rd to the Court effectively to ask the ocurt to tell them who to pay (As Trustee it is their job to distribute the funds on default). The reason for their action is that Bond insurere MBIA is claiming prior rights and that Deutsche as Trustee should not distribute any "interest or capital" .. hence UBS whose UBS Absolute Return Bond Fund and UBS Global Bond Fund with a mere US$1.2 Mn holdings of the CDO are involved. Wachovia isn't a party to the filing so far but has CDO holdings in Sagittarius.
Now given that there are ( a guess as know one really knows) some US$600 Bn dodgy CDO's out there ... According to the WSJ article JP Morgan reckon that US$40BN to US$50Bn bonds are due to go belly up by the second Quarter of 2008.
A lawyers breakfast of course. You can hear them in their parlours ..."I love the smell of burning CDO's and SIV's in the morning"
At first the Directors of Northern Rock just blindfolded themselves and now they called in Uncle King and Darling to protect them. And Uncle King and Darling have obliged with our money.
At a cost to the UK of US$200 Bn plus if everything goes tits up. Richard Peston .."In a technical sense, it means that the gross exposure of the taxpayer is more than £100bn. Or to put it another way, the public sector is now directly or indirectly funding all of the Rock's mortgage lending."
This is the most calamitous fuck up imagineable, in which a small bunch of frightened men have, in secret thrown away the tax payers money.... in losses which will exceed the current 30 odd billion sterling in the hole.
Prudent ...my arse.
See also Peston BBC
PS. This move has been claimed by others (not the Treasury) to make Northern Wreck saleable. Please note ..."Termination will be provided by 3 months notice" now which "private" buyer is goung to buy on those terms ? Which market lender will provide them with funds on those terms ?
NOw..who is next in the queue at the BOE wicket gate to ask for loan gurantees...A& L , B & B ?
Click to enlarge
