Northern Rock .. Apocalypse (almost) Now

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

Another week older and deeeeeeper in debt.... NR plumbs new depths of reckless borrowing

The Bank of England's (BoE) weekly accounts - the Bank Return, showed £2.9Bn, "other assets" which the chicken entrail readers and soothsayers of Bishopsgate claim represents further emergency / panic borrowings by Northern Rock (NR).

Now, 3 weeks after NR went to the BoE for support, it owes nearly £11 Bn. - equivalent to 45% of its deposit base at the end-June ( and probably more as the private / domestic lenders draw down their deposits and move them elsewhere). The Financial Times (FT) calculates that NR has £ 14 Bn. of short-term and medium-term notes that require refinancing in the second half of their financial year year.

Apparently however the company is considered solvent. The crooks are still at the helm.

Those who still follow these matters will be interested in a thoughtful article last week in the FT which carefully explained the "Granite" securitisation system.

NR's main (not the only one) securitisation vehicle is called Granite Master Issuer. (Granite - Rock solid - Geddit ?)

This trust is a "revolving facility" - new mortgages written by Northern Rock are constantly being pumped into Granite, which is required to maintain a certain level of mortgage assets - as some mortgages mature.

The trust has 3 beneficiaries:
1 . The vehicle called Funding One
2. The vehicle called Funding Two
3. Northern Rock itself.

If certain "triggers" are breached ,the trust will be wound down and go into early amortisation.

Many of the triggers are related to the credit quality of the mortgage book – if mortgage arrears were to increase dramatically, for example, this would trigger a wind down.

However, the trust would also be wound down if it breaches non-asset related triggers – such as Northern Rock becoming insolvent.

The government has insisted that Northern Rock is solvent. (As do the dishonest Directors)

However, some investors in Northern Rock are concerned that the value of the bank is now dropping sharply.

Some of the senior note holders in NR bonds have formally appointed London lawyers to represent their interests in the event that the bank turns out to be insolvent, or is sold to outside parties at a loss.

If the trust is wound down, bondholders with notes issued from the Funding One and Funding Two vehicles get paid in full before anyone else. 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." and see Page 57 about redemption of notes ..."For more information on the redemption of the notes, including a description of asset trigger events and non-asset trigger events, see ‘‘The mortgages trust – Cash management of trust property – principal receipts’’ and ‘‘Cashflows’’. See also ‘‘– Payment priority and ranking of the notes’’.

So far, rating agencies such as Standard & Poor's have said that no triggers have been breached by Granite.... this filing made on 20th September (but presented on 14th) to the Securities and Exchange Commission in New York is therefeore more than a curiosity....

"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. "

The original can be consulted at the SEC records here

The "trigger" event has happened but well we'll drag our brogues on that one shall we boys, as long as old Uncle Mervyn and Cousin Alastair and Grandad Gordy keep popping cash into the till... and anyway it's all Fitch's and Moody's fault .....

To repeat what the FT said ..."Some of the senior note holders in NR bonds have formally appointed London lawyers "..... hardly surprising.

Late Breaking News

The Treasury have announced .."The Chancellor of the Exchequer Alistair Darling will present the Pre-Budget Report and the outcome of the Comprehensive Spending Review to the House of Commons on Tuesday 9th October at 3:45pm." Sky also report ..."The Chancellor is promising to learn lessons from the recent Northern Rock crisis." Ho.Ho.Ho.

"Northern Rock's asset quality remains good - Fitch " Forbes 12.26 BST

Yvette Copper lies, King prepared his defence and the exact nature of the assets we now own (especially Granite) are amazingly no clearer

It is impossible to fully grasp the complexities of the legislation for the rushed nationalisation of Northern Wreck (although who would argue with AK see earpiece here) but Famous for 15 Megapixels points us all to the remarks made by the fragrant, elfinesque, and frightfully beautiful Yvette Cooper who regularly exchanges bodily fluids with her well endowed Balls who no doubt populates the intimiacies of the longeurs of post coital triste with wise and witty enecdotes about life in Gordon's Treasury. ... and little good it has done her pretty little head.

Therefore it is worth noting what Hansard records the ignorant haughty bitch saying yesterday....

"Banks stopped lending to each other in the normal way and Northern Rock, owing to its business model, could not get the money that it needed to keep going. The action that we took last autumn was widely supported at the time. The Government stepped in and effectively saved Northern Rock."

Up to a point Lord (Cooper)Copper... the way the shares dropped £1 on the day the NR interims were produced July 26th when the Directors had voted a 33% rise in the divvy, on the back of profits rising less than 1% on nett lending up by 47.3% a suggests that prudent bankers may well have had other and very specific reasons for not lending to Northern Wreck other than "Banks stopp(ing)ed lending to each other in the normal way" - inter bank lending was continuing but at punitive (and temporarily excessively high LIBOR rates).

Northern Wreck had in fact telegraphed their problems well before September 9th when the BOE intervened and had approached Lord King as early as August 11th/12th (BBC Radio 4 Today repeat of File on 4 Interview interview) for the odd £30Bn.well before LIBOR rates had taken off. (BBC4 Today Interview 6th November which you can hear here) which you will find is curiously truncated from the transcript here to make the timetable of events less clear.

SANTS (CEO of FSA) : " ....we immediately identified that there was a potential possible risk here to Northern Rock, and proactively engaged with them as part of our group of firms that we were moving to a crisis management mode."

PESTON: So did you contact them, as it were?

SANTS: We contacted them.
...

KING (BOE) ...bit by bit the funding, the wholesale funding to Northern Rock started to ebb away. [Note it did not STOP]

PESTON: So how much did you estimate at that stage Northern Rock was likely to have to find let’s say by the end of the year, as it were, in terms of the borrowings that they’d made from the money markets that were simply not being replaced?

KING: Well, we thought that it was of the order of about £30 billion was the amount that they would have to find. It became clear quite quickly that the bulk of that funding – say £20 billion to £25 billion or £30 billion would have to come from the Bank of England. So it became clear that Northern Rock required a very very large sum of money.
.....

KING: On the weekend ( 25/26 Aug) before we granted the facility to Northern Rock, I was asked whether, if a certain retail high street bank were to make an offer or a bid for Northern Rock, whether we would be prepared to lend that bank £30 billion at bank rate for about two years. And I think what that did was to demonstrate that our original view, that it was not possible to save Northern Rock without a large injection of money on that scale was clearly right ......

On the other point that Vince Cable raises about Granite - this was addressed by ex Treasury Minister Ken Clarke just as the clock chimed midnight last night and ended discussion in the quaint way these things are done in the Palace of Varieties Westminster. On the Division the Ayes =293 and the Noes and Malcontents = 167 and off it goes to the other place.

This was what the slim, lissom, nubile renaissance woman Yvette Cooper said ...
...and this is what the Cty savvy gent who evidently understands these things said

..and for these members of the opublic who cannot understand how Granite appears on the Balance Sheet as an asset but is a Trust whose beneficiaris the NE Downs Syndrome Group is beyond us ... but I smell a large roomful of lawyers (see Times beloe) getting ready to Hoover up very substabntial sums of dosh over many years, ready to make Jarndyce v Jarndyce look like a Sunday School PicNic. (But see newer post Saturday, February 23, 2008 Granite and the masters of the Master Trusts - exploiting loopholes with the City lawyers )

One wonders what Fitch and Co are doing to put a credit rating on Granite today ? See their report on Covered Bonds yesterday.

Late Breaking News
Public left with only 'rubbish' of Northern debts claims MP Scotsman (Edinburgh Evening News)

"However, during the Commons debate Mr Cable said Treasury Chief Secretary Yvette Cooper appeared not to know what was happening to the bank's best mortgages.He said: "What we are now being told is that in some way this has now been hived off to the benefit of a person or persons unknown, apparently, to the minister."What is going on here appears to be not public ownership of Northern Rock but an asset-stripping operation designed to benefit whoever, we don't know."This is a very serious development."

"A Treasury spokeswoman today said it was "simply wrong" to say that all the high quality mortgages are in Granite. She said: "Northern Rock does not sell all its high quality mortgages to Granite; it retains a substantial volume of high quality mortgages on its own balance sheet.Speaking outside the Commons, Labour's John McDonnell, said he had written to Chancellor Alistair Darling asking for an immediate statement."

See also BBC Online ..."Chancellor Alistair Darling has moved to calm fears about the nationalisation of Northern Rock after it emerged the bank's best assets would stay private.
Mr Darling said taxpayers would not benefit from the nationalisation of a firm holding £45bn of Northern Rock's most profitable mortgages. "

The Times Northern Rock advisers facing fees showdown -" Merrill Lynch, Citigroup and Blackstone – are holding out for their full share of £75 million in agreed fees, despite the fact that the Government did not follow their advice to sell the bank. “The reality of it is that they all had letters that had a base amount and a ‘success’ amount,” one source said.
The base amount = £50 million, with £25 million “success” fee."

"The Government is already on the hook to pay a fee of between £15 million and £20 million to its own advisers, Goldman Sachs and the legal firm Slaughter and May." ..."The Treasury has also agreed to pay £5 million to each bidding team to cover the costs of their banking advisers, lawyers and accountants."

If you understand who own Granite, NEDSA, the BOE/taxpayers/ or someone else .. please let us know.

UPDATE : 23rd September If arrived from links elsewhere please also go to see newer post Saturday, February 23, 2008 Granite and the masters of the Master Trusts - exploiting loopholes with the City lawyers )

Prudence defenestrated as Darling / Gordy agree to BOA bailing out reckless lenders at Northern Rock ........

There are two tests of solvency ;

1. Inability to pay debts as they become due.

2. Insufficient assets to cover liabilities.

Northern Rock borrows money wholesale and lends it to people to buy houses. Due to the interbank rate now exceeding Base Rate by over 1 % their sums don't add up. They are insolvent.(Banner above from their website Main page)

So the BOE has arranged as the Lender of the Last resort to lend them money at a "penal rate" of 1 % over base rate - which is in fact lower than the current Market Rate to "tide them over", during these entirely forseaable and foreseen conditions.

The BOE statement issued at 0700 says ; (see impact on NR share price)

The decision to authorise was made by the Chancellor on the basis of recommendations by the Governor of the Bank of England and the Chairman of the Financial Services Authority in accordance with the framework set out in the published Memorandum of Understanding between the Bank, FSA and HM Treasury.

The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book. The decision to provide a liquidity support facility to Northern Rock reflects the difficulties that it has had in accessing longer term funding and the mortgage securitisation market, on which Northern Rock is particularly reliant.

Northern Rock have issued a simultaneous statement ;

STATEMENT ON MARKET CONDITIONS AND TRADING UPDATE
14 SEPTEMBER 2007

It has now become clear that the global credit and liquidity markets have not recovered .....Northern Rock has taken action to preserve liquidity and to maintain margins on its current loan book, while modifying its lending approach to avoid writing new business that is unprofitable in current conditions. (Trans : We've stuck up mortgage rates)

Although Northern Rock expects ....

its new lending volumes to increase once the wholesale funding markets return to more normal volumes and prices, it must now plan on the basis that the wholesale funding markets will not return to historic levels in the short to medium term.(Trans : didn't see this comin g but by Christ it's a big one)

While Northern Rock has continued to raise new funds,

...these have been mainly in the short term wholesale debt markets and the amounts raised have not allowed Northern Rock to refinance maturing liabilities as well as to write new business at previous levels.(Trans : Business has come to grinding halt)

So how did we get into this position ? well...

" In the first 8 months of the year, Northern Rock’s total net lending was up 43% over the same period in 2006, with net residential lending up 55%." and they claim the quality of those loans based on recent historical past is good - 3 month arrears in the residential book were 0.47% at the end of August half the industry average and 1.2% on the standalone unsecured book. Together this was about 0.9% of loans.

Of course we made some dodgyt investments but don't we all and relying on Credit Rating Agencies (and when this all blows over they have some questions to answer)

"As announced on 20 August 2007, Northern Rock only has a £75 million direct exposure to the US sub-prime market which is all rated AAA, and a £200 million exposure to the US CDO market, within which there is indirect exposure to US sub-prime.

We also have £325 million of investments in a number of Structured Investment Vehicles (SIVs)of which £305 million is bank sponsored. Included in the £200 million of CDOs referred to above is a modest exposure of £22 million of SIV Lites.(rans : There is a fair crock of shit at the back of the cupboard)"

Adam J Applegarth, Chief Executive of Northern Rock, comments;

“We are seeing extreme conditions in global liquidity, which have impacted on world markets. As a result, we have taken prudent action to rein back our lending until markets normalise.

So the brief outline is - the CEO of the major company lending money for housebuying blames it all on , "extreme conditions in global liquidity" which is in NO way related to us expanding our book by 55% in the first 8 months of the year.(Trans : Handing out fistfuls of money to anyone who walked through the door)

It is , "albeit disappointing, that our profits will be affected" - any sensible analysis shows that their £588 Mn profits are actually going to be wiped out. Not only this year, but next year as well.(Trans : We are up for sale)

Now the Financial Services Authority ," judges that Northern Rock is solvent" - so the BOA and Treasury have by resorting to their prior arranged financial legerdermain, shifted responsibility for judging that problem off their shoulders and waving their TRi-partite MOU have told the Chancellor that he needs to authorise the Bank to act as LOLR - and they have managed to extract a promise that ....

"In its role as lender of last resort, the Bank of England stands ready to make available facilities in comparable circumstances, where institutions face short-term liquidity difficulties.(Trans : Barclays, Bradford & Bingley, RBOS the door is open, Fill Ya boots) "

Even briefer - "it's not us Gordon, it's that terrible world liquidity crisis, which none of us saw coming, and we in the City want your authority to bail out the first boat load of reckless lenders ... and there will be more to come" Strange how the shareholders saw what was coming.

Prudence ?





See also Aliance and leicester down 5% on opening and below 900 , was at 1200 in June.

The FSA, Insolvency, Shadow Directors, and how the Bank of England fucked up BIG style over Northern Rock - Tip to get to head of Queue on Monday

On Friday morning a Statement was issued by the Financial Services Authority and posted on their website Friday 15th September - note the date of issue ....

Liquidity support facility for Northern Rock Plc Tripartite Authorities Statement 14 September 2007
The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.

This was followed later in the day by a further statement as the queues built up during Friday

FSA statement on Northern Rock PLC and market conditions
14 September 2007

Commenting on the statement made by the tripartite authorities this morning in relation to Northern Rock, the chairman of the FSA, Callum McCarthy, said:

"The FSA's judgement on Northern Rock is that we believe it is solvent, meets all capital requirements and has a good quality loan book.

This was followed by (note date change)

FSA Statement: Northern Rock
15 September 2007

The FSA reiterates that it judges Northern Rock to be solvent and that savers can continue to deposit (!) and withdraw funds.

Callum McCarthy, chairman of the FSA, said:

"To be absolutely clear, if we believed that Northern Rock was not solvent, we would not have allowed it to remain open for business.

The FSA could NOT close the company's business , the most it could do is to suspend the share quote until the companies affairs were put in order pending a re-quote or sale to third party(ies).

There are two tests of solvency ;

1. Inability to pay debts as they become due.
2. Insufficient assets to cover liabilities.

Northern Rock borrows money wholesale and lends it to people to buy houses. Due to the interbank rate (LIBOR) now exceeding Base Rate by over 1 % their sums don't add up. Loans are due for repayment and cannot be replaced = without recuorse to the BOE. Can they pay their debts as they become due ? - NO . Then they are insolvent.

In UK law, the people who decide that a company is solvent / insolvent are the Directors. When they judge themselves insolvent they are obliged by Company Law, to undertake certain legally prescribed steps, which effectively places control of the company out of their hands - into those of receivers, administrators.

If the BOE hadn't stumped up, the Directors would have had to file for Administrators to be called in. Period.

If the BOE hadn't stumped up, the Directors could not continue in business as they had lost their ability (and confidence of lenders) to raise capital to continue to fund their loans. Period.

That is the simple, clear, transparent unvarnished TRUTH.

It is not the duty of the FSA to determine solvency / insolvency, they do not have the time, staff, expertise, legal / statutory responsibity. Their only source of information is the Directors the Company.

Furthermore that was then , this is now. Withdrawals , by person , post or by the badly functioning website will have reduced their asset base - with little prospect that the situtation will only worsen as time passes.

Regardless of the funds provided by the BOE which simply increases their liabilities - and it is likely (the terms of their funds have not been published) are payable on demand and have no term agreed.

Furthermore it is inscreasngly evidence that these funds held by NR ...

"As announced on 20 August 2007, Northern Rock only has a £75 million direct exposure to the US sub-prime market which is all rated AAA, and a £200 million
exposure to the US CDO market, within which there is indirect exposure to US sub-prime.

We also have £325 million of investments in a number of Structured Investment Vehicles (SIVs)of which £305 million is bank sponsored. Included in the £200 million of CDOs referred to above is a modest exposure of £22 million of SIV "Lites

... are a Northern CRrock of shite and at best can be priced at 10 cents on the, dollar wiping out any profits for this Financial Year.

There is evidently little room for cutting capital / labour costs as they have to simply manage 20% of the mortgages in the UK and operate on the narrowest of margins at the best of times.

The Sunday blats claim that major banks have turned up their noses at a take over, they can simply pick up any business as it falls.

The FSA have 4 Statutory objectives two of which are ;

1 . Market confidence: maintaining confidence in the financial system; public awareness: promoting public understanding of the financial system;
2. Consumer protection: securing the appropriate degree of protection for consumers;

It is evident that the FSA have made claims which are patently dishonest - they have claimed Northern Rock is solvent (although these statement have become less emphatic and more convoluted "if we believed that Northern Rock was not solvent, we would not have allowed it to remain open for business. " .. presumably as they now realise their folly of overstatement.).

It is not their job to either determine insolvency or to give comfort to Directors, or to make public statements to that effect.

It is significant that the Board have not made a public statement that they are trading whilst solvent / insolvent.

Even Angela Knight, chief executive of the British Bankers' Association trod carefully and chose her words well (and advisedly) ..."This isn't about solvency, this is about a short-term problem that the Northern Rock has in getting liquidity _ that is, getting some cash from the normal interbank lending market."

The Tri-partite Authority couldn't have fucked this up more royally - Tommorrow the queues will be bigger, the dumb ox of a CEO, Adam Applegarth will vaguely blame those damn yanqis and claim "Business as normal" and Westminster's headless chickens with no or little understanding (or experience - except Vince Cable of the Lib Dems who talks 100% common sense) of banking or business will alternately wring their hands and cry Woe! Woe ! Sharp mortgage holders will take a holiday for payments, safe that they can withold payments whilst the ordure hits the airconditioning and pay up as and when requested - icreasing liquidity problems.

There is a very good case for claiming that the FSA have acted as Shadow Directors and falsely made statements - knowing them to be false, that have encouraged or instructed the Directors to continue trading whilst insolvent. Director's responsibility is to the company and not to the shareholders. Directors have an obligation to act in the company's best interests.

By acting as they did the FSA have acted against the interests of the company. If the company had filed for Administration as required under the Companies Act the disposal of assets would have been orderly and at a cost that truly reflected the value of those assets.

Their action - even if it was sanctioned / approved / made jointly by the MOU , the BOE , The Treasury , the Chancellor of the Exchequer and Prime Minister was illegal.

Nowthe BOE have to find a buyer, the big banks have turned up their noses , the truffle hounds from the vulture funds will be sniffing the air - the same people who have gobbled up the closed pension funds. The FSA can explain how this result squares with their objective of ..."Market confidence: maintaining confidence in the financial system".

How to get to the head of the queue in the morning.

Dress like the lady in the picture. Service will be guaranteed

Northern Rock plc given £7.75 Bn. of tax payers dosh by thrifty, prudent Scots, Brown + Darling - technically a loan but actually thrown away

The guys who claim experience, expertise and technical skill in examining financial entrails, have determined that a close study of the Bank of England's weekly figures say that £7.75 Bn. classified under the heading 'other assets' is equivalent to (ish) the BoE's support to Northern Rock - massively up from last week's figure of £ 2.9 Bn.

Making more money from Fiction than J.K.Rowling and the Bloomsbury group

Well Simon Ward, a bright, fresh faced, economist at New Star Asset Management, says so and everyone is grasping at this mind boggling quantity of tax payer's hard earned disapperaing forever down the ever widening and deepening black hole that is Northern Rock's work of fiction , their Balance Sheet . The press report that, " Northern Rock could not be reached for comment."

Northern Rock's increasingly grubby shares closed down today at 180p today.
On the 15 September 2007 the Financial Services Authority issued a statement headed - "The FSA reiterates that it judges Northern Rock to be solvent and that savers can continue to deposit and withdraw funds."

Now one can reasonably assume that the Directors of NR having borrowed nearly £8BN. (and probably more by now) haven't just sat round and looked at it. Presumably they needed it to pay some pressing creditors like folks who previously lent them money ... and don't want to reapet the exciting experience.

Northern Rock plc is insolvent

Call me old fashioned but one of the tests of insolvency is when, "the company cannot pay it's debts as they fall due" .... so how can the NSA insist , "that it judges Northern Rock to be solvent ". remembering of course that declaring companies insolvent is not their job , nor do they have the staff or authorisation to decide such things and make such ex cathedra statements.

The sole judges of insolvency of a company whilst trading are the Directors, but by any measure they are clearly incapable of paying their debts as they fall due without recourse to the tax payer.... and it is evident that there are noready buyers in the market.

Snake oil merchants make grab for assets

Furthermore according to a report in today's Financial Times today, "creditors holding Northern Rock's tier two debt are forming a committee to protect their interests in any restructuring or insolvency, amid fresh concerns over the bank's viability." That's the holders of Granite securitised notes, covered bonds etc., etc., with their multi country, multi company , curiously Byzantine layers of companies, trustees, detailed in their weighty and impenetrable prospectuses (ii ?). (Even more dosh for M'learned friends in the pin stripe trousers)

Rather late in the day it has filtered through, from the silent boardroom of Northern Wreck , emptier than the trophy room of Newcastle United, that last week the company distributed almost £40 mln stg in dividends to holders of preference shares just before cancelling the dividend to ordinary shareholders.

Pic is of the beautiful, delightfully athletic, and artistic gymnast Alina Kabaeva who can do remarkable things with balls and ribbons accompanied by music and the Russian President, Mr Putin, with whom I would be delighted to discuss the complex world of global finance especially in relation to the beautiful country of Uzbekistan.

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

Northern Rock Directors are crooks - guilty of preparing false accounts and trading whilst insolvent

Northern Rock shares closed today at 257 p. per share. In the last Financial year they earned 94.6 pence per share - that is a yield of 37%. and a Price / earnings ration of 2.72.

This a company whose CEO claims on the company website that it "remain(s) a well-managed company and continue(s) to be a safe place for your savings, loans and mortgages."

"I want" he says,"to make it emphatically clear to all Northern Rock customers that we are open for business as usual."

This is self evident bollocks. It is a lie.The company is not only insolvent, but it is evident that the last year's accounts are mis-stated and the profits overstated proably by at least £500 MN which is represent the cupboard full of dodgy valueless Financial instruments....

"As announced on 20 August 2007, Northern Rock only has a £75 million direct exposure to the US sub-prime market which is all rated AAA, and a £200 million
exposure to the US CDO market, within which there is indirect exposure to US sub-prime.

We also have £325 million of investments in a number of Structured Investment Vehicles (SIVs)of which £305 million is bank sponsored. Included in the £200 million of CDOs referred to above is a modest exposure of £22 million of SIV Lites."

It is highly likely also, that the mortgage portfolio has a nightmare clutch of overvalued properties, many the product of this spring's manic sales drive to conceal their threadbare balance sheet. Many lent on the most dubious security. It is a fair guess that the total book is wholly unprofitable now and in the near future, however many of our golden duckets King throws at them.

Even now with the somersaulting Governor's pledge of pissing even more money up the walls of the City Bankers Parlours no-one wants even a piece , a sliver, a chip of Northern Rock.

The first impression was, that Adam J. Applegarth, Chief Executive was simply an over promoted, overpaid wanker. He isn't , he is a crook and so are the rest of the Board of Directors who are collectively guilty of preparing and issuing false accounts and trading whilst insolvent.

Far from declaring the company solvent ,the FSA should be getting the bastards disquakified and locked up.

There is undoubtedly a strong case for prosecuting the Bank of England, The FSA and the Treasury as well as the Chancellor of the Exchequer personally for acting as Shadow Directors and making false assurance to shareholders and depositors concerning the affairs of the company - resulting in massive financial losses.


UPDATE 0048 20th Sept

This note by Robert Peston on his BBC Blog has appeared - timed at early 2000hrs BST

IMPORTANT UPDATE: 19:59 The Bank of England has now told me that individual banks can only apply for £1.5bn each under the £10bn facility. It says that Northern Rock would have needed far greater funds - and that if this finance had been provided three weeks ago or so, the liquidity would not have eliminated the Rock's funding difficulties.

It is slightly odd that the Bank should divulge this to me now, because it failed to provide this detail (or any answer at all) when I asked this afternoon whether what it announced today could have provided succour to Northern Rock. So although the Bank of England has changed course in respect of the way it is prepared to tackle the crisis in the money markets, it is sticking to the position that it has no regrets about the way that it provided its initial support to Northern Rock.


If the above statement is correct (and there is no reason to doubt it) It is evident that the situation is a great deal worse than was at first understood. It is also evident that the Bank / FSA / Treasury are not providing information which can affect the share price in the appropriate and legal way.
It is further evidence that the company was insolvent prior to the first announcments made about BOE funding for the company.

The shares must be immediately suspended.The Directors must make a statement on insolvency and Administrators brought in to run the company.

Northern Rock plc - Down’s Syndrome North East Association (UK) - Granite "securitisation" and the duties of the Directors of Northern Wreck- a puzzle

STOP PRESS
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 ???
Daily Telegraph

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 ....

Miss Ryan of Bloomberg - filleting Mervyn King and exposing the rotteness at the heart of the City

We wrote about Mervyn King's Press Conference (Sept 8th ) when he released his statement for the House of Commons Treasury Committee which he appears before today. ...

It took a shrewd American lady scribbler from Bloomberg to remind my Lord King with a sharp question ..

"Hello, Jennifer Ryan from Bloomberg News. I wondered if you could elaborate a bit on the extent to which the volatility in financial markets is complicating your forecasts. And also if you could discuss what kinds of concerns you have about the availability of credit going forward, both to businesses for investment purposes and to households?"

So Mervyn slaps the bitch down with some firmly worded clear observations that make it clear that they have 3 jobs to do ..

1 "The first is that monetary policy is set to meet the inflation target."

2."...interest rates are not a policy instrument for protecting unwise lenders from the consequences of their past decisions." ( Evidently not having read (or ignored)Walter Bagehot's views onthe topic in Lombard Street pub. 1862)

3." .....a central bank, obviously always monitors all the time and regularly whether or not there are risks to the stability of the financial system as a whole and whether there are any systemic risks posed by problems arising in particular institutions or markets."

Here we go again , monitoring something over which they have neither influence nor control, and there is even more of this bland wisdom of the elderly ... for Miss Ryan.

"we cannot be sure, no one can be sure at this stage whether what we're seeing so far foreshadows a more disruptive movement in financial markets or whether it's the sign of a gradual easing of pressure that allows credit spreads to return to more normal and sensible levels. That remains to be seen. I don't pretend to be able to know what will happen but we'll be ready to respond to it."

Ho.Ho.Ho. "I don't pretend to be able to know what will happen but we'll be ready to respond to it."

It is now evident that Mervyn was not jesting when he said he didn't know what will happen to the sharp minded Ms. Ryan. (It does occur to us that it took a lousy Yank to expose the Court of King King - the UK scribblers having long since settled down to hoovering up and correcting the Government's Press releases.)

Readers are directed to what we said on Thursday last week September 13, 2007 Bank of England is out of control... ... in the sense that the BOE is not IN control.

"Prudent savers will be moving their deposit accounts out of Northern Rock in the morning... where to ? Try Santander AKA Abbey"

Which is precisely what happened..... now many Billions later, the Directors of Northern Rock are still unsuccessfully hawking their bag of ordure round the golden pavements of the City.

It is now evident there is almost no price that is acceptable to potential buyers - and the BOE cannot offer their undiluted support to any private company. The consequences for ;

1. Mortgage Holders in the Northern Rock
2. Shareholders in Northern Rock
3. Employees of Northern Rock

The Housing market and its many suppliers has been forced in to turmoil by the dishonest, deceitful and illegal attempts to shore up the crooks who ran Northern Rock into the ground.

On the 7th it looked like Mervyn was going to hold out ... now he has evidently caved in to political pressure. His premature de-fenestration will of course solve nothing although it may feed the frenzy and a few baying scribblers.

"I don't pretend to be able to know what will happen but we'll be ready to respond to it." is what he said on the 7th the response is there for all to see, mervyn has stood on his head, done a U turn , swept aside all his prudent and cautious policy statements - Miss Ryan exposed his nonsense and the rank dishonesty that is at the heart of the City and it's Golden Square Mile.

We all now have to live with the consequences of his failure. For a long time.

PS it is interesting to see ..."Freshfields Bruckhaus Deringer has grabbed a high-profile role advising Northern Rock on the crisis that has engulfed the embattled UK mortgage lender" - the hyenas and vultures gather to pick over the corpse. - "Freshfields cashes in on Northern Rock crisis "- Author: caroline.grimshaw@legalweek.com in legalweek.com
Adam and his co-conspirators are going to need all the legal help they can get.

Northern Wreck try to gag the Press, Comment, and knowledge of their Memorandum of Sale.

On Tuesday we reported that FT Alphaville had posted the memorandum sent to potential purchasers of Northern Wreck.

As a result of this posting the High Court ruled at around at around 6.50pm on Tuesday 14th for Northern Rock Directors, that the FT are injuncted against revealing the contents of this memorandum. This temporary injunction runs until Tuesday when full evidence in the case will be heard.

Initially Northern Rock sought an injunction which would prevent the whole of the media from reporting anything about the sale memorandum.

Northern Rock wanted the injunction to prevent publication of the names of those who had been provided with the sale memorandum, notwithstanding the fact that names of potential bidders have already been widely published.

Northern Rock also sought an order that would have prevented disclosure of the fact that it had obtained an injunction. The FT resisted this and the order was refused.

Northern Rock intended that an injunction should be obtained anonymously, but this was also unsuccessful.

In view of the fact that the hearing went on so late, the judge granted a temporary injunction lasting seven days in order to preserve the position until he could hear full evidence. The FT argued that there was a substantial public interest in the story and that it was extremely important that shareholders were entitled to know where they stand. The Judge took the view that at an emergency hearing he would give priority to the fact that the sale memorandum contained a written confidentiality undertaking entered into by the original recipients of the document, and that he would protect this pending a full hearing of all the evidence.

Northern Wreck published the following on their website...

NORTHERN ROCK ANNOUNCEMENT

Northern Rock Plc (the “Company”) announces that it is aware that a confidential memorandum sent to parties with a potential interest in all or part of the Company under strict confidentiality obligations has unfortunately been leaked to a newspaper group. The memorandum appeared on a website controlled by that group.In order to protect the integrity of the information which has been provided to potential purchasers and to help ensure it can implement its strategic review in a way designed to achieve the best outcome for the Company and its stakeholders, including shareholders, creditors, customers and employees, the Company has obtained an injunction restricting publication of the information contained in the memorandum.

The Company believes that further speculative reporting based on the illustrative information in the memorandum may jeopardise the complex discussions and negotiations taking place in connection with its strategic review.It has been reported that the memorandum included certain illustrative transaction structures and financial information prepared in connection with the Company’s strategic review.

As was made clear by the memorandum the financial information was prepared solely to illustrate the potential financial impact of these transaction structures on the Company’s business.None of the information reported as being in the memorandum should be viewed as guidance to the market as to future outcomes of the strategic review or as an accurate representation of future results.

The memorandum was not prepared with a view to public disclosure or in compliance with rules, guidelines or policies relating to public disclosure.Announcements regarding the outcome of the strategic review will be made as and when appropriate and any information that is material will be published at that time. There can be no certainty that the discussions taking place with interested parties will lead to an offer for the Company or for all or any part of its business.

The Company confirms that the existing deposit guarantee arrangements announced by HM Treasury and the revised facilities agreed with the Bank of England announced on 9 October 2007 remain in place.

Lord Patel has copies of the memorandum and will shortly post them. The significant parts were dealt with in the post on Tuesday. However the whole thing is available we now discover as a pdf file at http://www.banks-implode.com/NR-Secret-Memo.pdf

If you are still foolish enough to own shares, get rid.... Now at all time low of 133p.

The behaviour of the Directors of NR , the BOE, Darling FSA is outrageous and in many respects criminal . The market in NR shares is totally false and dishonest.

Alastair Darling and his Amazing Bank of England / Northern Rock / Newcastle United Sinking Fund - Amazing Pictures

Here at Patel Towers as we have been emptying the Piggy Bank's to send off to the Bear Stearns Survival Fund ,we have been trying to evaluate 2 seperate bits of econ omic information ...

1 .Mr Philip Hammond (Runnymede & Weybridge. Con. ) asked Chancellor of the Exchequer in Parliament this week.

"what estimate he has made of the annual value of new mortgages that Northern Rock will need to originate in order to prevent a non-asset covenant breach occurring of the Granite securitisation vehicles."

To which Angela Eagle (Parliamentary Secretary, HM Treasury) gave the very , very carefuly worded reply, "The sale of mortgages from Northern Rock into Granite is a commercial decision for Northern Rock. The estimated value of mortgages that Northern Rock would need to sell into Granite in order to avoid a non-asset trigger is a commercially sensitive matter."

2. Financial Times Headline 12/3/08 Treasury looks to reduce N Rock debt to £14bn

"Northern Rock’s management, led by Ron Sandler, is expected to shrink the lender’s balance sheet, allowing it to repay the government debt within two to three years. The Treasury stressed that the £14bn figure was a forecast and could change in the future."

This suggests that the mortgage book will be rduced by about £10-11 Bn. This will be done by telling mortgage holders when their term expires that rates will rise - effectively they don't want their business - a polite financial Fuck Off - take your business somewhere else.

Now some 80% (ish) of mortgagees are responsible people, they have a very sizeable chunk of their earnings tied up in the house they live in or rent out. They willsimply move an and their solid credit history of unbroken payments will move onto the books of another bank - B & B, A & L, HBOS etc., who will not charge usorious rates.

BOE / NR will then be left with those mortgage holders with a rotten payments history , strewn with "payments holidays" bounced cheques, failed Direct debits - at the bottom end of what we bankers like to call "credit quality".

Unsurprisingly these will include many , many of those "lie to buy" mortgages where people self declared ... they will include the funny money 125% mortgages ... many if not most will have no equity and by walking away will look on their mortgage payments as an alternative way of having paid rent.

Of course it will affect their credit status...but that was bogus anyway so what have they to lose?

This will have several effects.

1. Family problems , splits, divorces, broken homes.
2. Boost to rental property.
3. Intense pressure on public housing and social servcies.
4. Huge increase in foreclosures (especially in Labour held NE seats) which will help drive market prices down.
5. Which Lowers the asset value of the mortage held by the Bank of England / Northern Wreck / Newcastle United.
6. Mr Branson was right, NR is a broken Brand and with unrealistic mortgage rates cannot generate enough new business to "in order to prevent a non-asset covenant breach occurring of the Granite securitisation vehicles"
7. Which will lead to a " a non-asset covenant breach occurring of the Granite securitisation vehicles"
8. Which will cause what Angela Eagle and the authors of the Granite prospectus ***calls a "non-asset trigger " - about which she is coy as it is "a commercially sensitive matter".

Too fucking right it is, because if that happens, Granite want to return the Assets (?) and say, "Please may we have our money back" ... and there is £40 Bn. of Granite Bonds that can be "triggered".

Or in more technical terms this would (what we bankers call) breach "triggers" ,the trust will be wound down and go into early amortisation. (We want our money back) Many of the triggers are related to the credit quality of the mortgage book – if mortgage arrears were to increase dramatically, for example, this would trigger a wind down.... .oooooh ...er.

*** 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) ..

Looks like Gordon "Prudence " Brown and Alistair "Stability" Darling are on to a winner there then.

We'll pass that one by for you again ...

"Northern Rock’s management, led by Ron Sandler, is expected to shrink the lender’s balance sheet, allowing it to repay the government debt within two to three years. The Treasury stressed that the £14bn figure was a forecast and could change in the future."

Could change in the future! You can put your fucking mortgage on it.

NEXT WEEK - Star attraction Montigue Tigg is joined by Alastair Darling to launch the Anglo-Bengalee Disinterested Loan and Life Assurance Company along with Jonas Chuzzlewit and Mr Pecksniff.

Roll Up! Roll Up! Bring me yer widders n'orphans!

Northern Rock - Dividend excess ... all helped along merrily by the Fucking Stupid Authority

A study of The Commons Select Committee on Northern Rock will produce many fascinating nuggets as obervers and commentators trawl through it's pages - and many more no doubt will remain hidden. Here is just one fascinating insight the report affords into the ways the crooks ran Northern Rock.

Lord Patel has been fascinated with the Interim results of Northern Rock for some time. The Directors were able to very swiftly produce accounts on July 25th 2007 for the 6 month period to 30th June 2007 (showing a profit rise period on period of 0.7%) and declare an increase in dividend of 30.3%.

That they were able to do this was due to the adoption of what is called the Basel II "advanced" regulatory rules controlling requirements for capital adequacy.

The Basel Committee on Banking Supervision explains the 2 ways that are available to banks under the Internal Ratings-Based Approach of managing credit risk ;

1. Foundation - banks provide their own estimates of PD [probability of default] and rely on supervisory estimates for other risk components.

2. Advanced - banks provide more of their own estimates of PD [probability of default], LGD [loss given default] and EAD [Exposure at default], and their own calculation of M [Effective maturity], subject to meeting minimum standards.

The "Advanced" route adopted by the Directors of Northern Rock requires a waiver from the FSA (Financial Services Authority Handbook, BIPRU 1.3, Applications for Advanced Approaches ) - which was approved by the FSA on 29th June 2007 -Northern Rock's Interim Results, for six months until 30 June 2007 and the consequences of this important waiver are explained on p 14/15 of the Interim results..

Take a deep breath here...

Capital Management and Basle II

On 29 June 2007, we received notification of approval by the FSA of our Basle II waiver application. Our regulatory capital requirements, comprising both Pillar I and Pillar II, are therefore calculated under Basle II with effect from that date.

We have adopted the Retail Internal Ratings Based (IRB) approach for our residential and personal unsecured loans, the Foundation IRB approach for our treasury portfolios and the Standardised approach for commercial loans and operational risk.

The implementation of Basle II results in our Pillar I risk weighted assets at 30 June 2007 falling from around £33.9 billion under Basle I to £18.9 billion under Basle II, a reduction of some 44%. The risk weighting for our residential mortgages reduces to mid-teens %, treasury assets to around half of Basle I requirements, also around mid teens %, reflecting the low risk nature of these portfolios and personal unsecured loans to slightly below Basle I requirements.

Under Pillar II, the Group is required to hold capital to cover risks other than credit and operational risk and for risks not wholly captured under Pillar I. Overall, Pillar II capital is expected to amount to around 40% of our total capital requirements, including the effect of transitional adjustments that place a floor on capital requirements in the first three years of implementation.

This floor is calculated as 8% of Basle I risk weighted assets less collective provisions, multiplied by 95% in 2007, 90% in 2008 and 80% in 2009.

We continue to treat securitised assets as “off balance sheet” for regulatory capital purposes, resulting in deductions from both Tier 1 and Tier 2 capital for the first loss piece retained by Northern Rock. ****

Deductions are also equally made from Tier 1 and Tier 2 capital in respect of the excess of expected losses over provisions, whereas under Basle I Tier 2 capital benefited from the add back of collective provisions.

The introduction of Basle II, together with the planned disposal of capital inefficient assets and continued capital management such as the Whinstone programme results in an anticipated regulatory capital surplus over the next 3 to 4 years. This surplus will enable the reduction of previously planned subordinated debt issues and permit capital repatriation of up to £300 to £400 million over this period. Such repatriation will follow the release of capital as a result of asset disposals and will ensure that available capital is sufficient to support existing rating agency credit ratings and maintain an appropriate mix of Tier 1 and Tier 2 capital.

During the first half of 2007 we issued $650 million (£328 million equivalent) of Upper Tier 2 subordinated debt.

Or as CEO "Shagger" Applegarth , in between visits to the buy to let department, could more simply explain this recklessness with the shareholders funds in answer to Question 135 when he met the Select committee ..

" ....when you get your Basel II approval, the relative risk weighting of certain assets in your balance sheet changes. So what we had, because of the quality of the loan book, was you saw our risk weighting for residential mortgages come down from 50% to 15%. That clearly required less capital behind it, so that links to why we were able to increase the dividend.."

It is a reasonable assumption that to the Directors "We continue to treat securitised assets as “off balance sheet” for regulatory capital purposes, resulting in deductions from both Tier 1 and Tier 2 capital for the first loss piece retained by Northern Rock." meant - we can now pretend that we don't need to have capital to back up Granite and all that other other SIV shit.

..and therefore we can now pay out a dividend increase of 30.4% 3 days after the FSA gave us waiver approval. Luvvly Jubbly. Trebles all round and Adam is off to the Presidential Suite in the Four Seasons Hotel in Washington with Amanda Smithson to shag his brains out.

Hopwever 2 weeks later, by August 7/8/9 th the Directors were having a chat with Mervyn's minions about raising the odd £30Bn. (See BBC Radio 4 interview with the King of the Bank) simply to keep the business going ... and eventually they had to ditch the interim divvy entirely.

Incidentally to Question Q 220 Chairman of the FSA Sir Callum McCarthy ( 64 on February 29th) who it was announced on January 12th, just ahead of the report's publication that he would be "standing down" in September) strongly rejected the notion that the Basel II waiver process was a "a box-ticking exercise".

The next section of the report after the above is Section 46.

It commences, " The problems affecting Northern Rock were those of liquidity and funding, rather than solvency" ... too fucking right, the Directors were pissing away all the money on divvies they couldn't properly fund ... a liquidity problem that resulted in insolvency... ie. they could not pay their debts as they fell due... but of course the CEO had unloaded his shares at the top of the market i January ... the divvy was just another ploy to suck in the mug punters.

Dark secrets lurk somewhere in this unholy and (to the taxpayer) every, very, expensive mess.

******** Although the "Highlights" Press release can boldly claim "Total underlying assets of £113.0 billion - an increase of 28.3% from June 2006 ,underlying assets of £88.0 billion. Statutory assets of £113.5 billion, growth of 27.8% . Capital assets - now you see them, now you don't need to count them in under Basel II **** and all approved by the FSA !!!!