"Northern Rock"
Blackbird | 28.11.2007 15:31 | Globalisation | Sheffield
Northern Rock, Northern Wreck, Northern Crock, Northern Crook or whatever they're calling it this week was last week leaking deposits at a rate of £200 million per day. Hence the anxiety to get a big brand name on board in the shape of the Virgin conglomerate. And so the zombie staggers on to continue devouring the newly printed money being fed to it by Browns Bank of England.
When New Labour came to power it was joyously announced that the Bank of England was to be granted independence so as to ensure the stability of the economy by safeguarding it from inflation. Now faced with recession and overly stressed banks the BoE has been taken back in house with instructions to flood the economy with newly minted money to keep NR from going bust and blowing a whole in the balance sheets of its creditors.
The trouble is this desperate move is likely to be inflationary and also likely to set up a future run on the pound. Meanwhile the govenrment credit lifeline is only likely to spur NR on to make ever more risky loans in an attempt to dig itself out of the mire it has gotten into.
"Not a single penny of taxpayer's money has went anywhere near Northern Rock. Not a penny. This is what the lender of last resort system is for, and why the BofE has to be very careful how it goes about using it. Why? The money doesn't exist.
The simple fact is, the BofE does not have 24 billion pounds to lend right now. Never has done. At all. It does not go to a cash machine, withdraw and throw that money in Northern Rock's general direction. Doesn't happen.
What Mervyn King does is he simply makes an entry on a ledger, or on a computer screen, probably initially of a modest amount of money, and loans that to Northern Rock. If Northern Rock are good and do as they're told, then the BofE might help them out some more. This sum of money may be up to 24 billion that they have allowed for, but there's no way on Earth NR have blown that amount in real money in two months. Hasn't happened.
This is why the lender of last resort system is so critical, because the BofE is betting with money it hasn't got. It has to be damn sure beforehand things are OK, and that it's on to a sure thing, because what's happening, is that Northern Rock are having to turn this imaginary money into actual, real money, with a penalty on top, by themselves! The BofE has to be sure they can do that, because this cannot be free money. It cannot bail people out."
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/11/rock_needs_1bn.html#commentsanchor
As the mainstream media begins to pry into the world of structured finance it is constantly being surprised by the creepy crawlies it uncovers under the stones set in place by investment bankers and other deviant players. The trouble is the system has become so insanely complex that anyone without a degree in financial engineering is unlikely to be able to get their head round it. Yet at the core of the confusion are good old fashioned scams dressed up in new clothes.
For instance, NR has been using an Enron style special purpose vehicle based offshore to store up to 75% of the loans it was making. This vehicle called Granite Holdings was buying up NRs loans at a discount and then repackaging them for sale to Wall Street as bond issues. So NR gets to profit today from loans extended but unpaid whilst Granite and its investors gets to hold onto the underlying assets and earn interest on them over the longer term. This is a typical example of structured finance whereby a financial institution profits by pocketing the difference between short and long term interest rates. The problem for the government and that big fat liar Alistair Darling is that although Granite is controlled by NR it remains an arms-length entity. This means that NRs creditors will not have legitimate claims on the assets it holds e.g the loans that the government credit is supposed to be secured against. Moreover, if Northern Rock were now to admit defeat and go into administration this would also cause credit ratings agencies to downgrade the Granite bonds potentially causing the government to have to come to the rescue of that as well.
Now the Guardian has done some digging and found out that the Charities Commission are not entirely happy about the fact that the tax breaks enjoyed by Granite seem to have been secured by its imaginary support for a small Downs Syndrome Charity. Yet according to NR this is standard practice in the world of structure finance.
"And at the heart of Granite's operations is a rather peculiar fact: on paper, at least, it had been set up to benefit charities, and in particular a small organisation for children with Down's Syndrome, and their families, which was being run from a semi-detached house on the outskirts of Newcastle.
The bank said the naming of a charity was a standard part of securitisation, the process which the bank had employed to raise funds through Granite. "Any notion of inappropriate use of the charity's name, or impression that the charity may be exploited, is entirely without substance," a spokesman said."
http://www.guardian.co.uk/business/2007/nov/28/northernrock.subprimecrisis
Despite all the hype in the media about Branson and the concerns about small savers and the taxpayer what is really going on is the latest stage of Project Save the Arses of Merrill Lynch/ JP Morgan/Citigroup/HSBC etc. Whatever needs to be done will be done to appease these modern day highwaymen including of course the odd token woman allowed to sit on the board. Witness Browns performance at the CBI in a pathetic attempt to inspire business confidence as the economy continues to spiral down towards.... whatever will be.
The trouble is this desperate move is likely to be inflationary and also likely to set up a future run on the pound. Meanwhile the govenrment credit lifeline is only likely to spur NR on to make ever more risky loans in an attempt to dig itself out of the mire it has gotten into.
"Not a single penny of taxpayer's money has went anywhere near Northern Rock. Not a penny. This is what the lender of last resort system is for, and why the BofE has to be very careful how it goes about using it. Why? The money doesn't exist.
The simple fact is, the BofE does not have 24 billion pounds to lend right now. Never has done. At all. It does not go to a cash machine, withdraw and throw that money in Northern Rock's general direction. Doesn't happen.
What Mervyn King does is he simply makes an entry on a ledger, or on a computer screen, probably initially of a modest amount of money, and loans that to Northern Rock. If Northern Rock are good and do as they're told, then the BofE might help them out some more. This sum of money may be up to 24 billion that they have allowed for, but there's no way on Earth NR have blown that amount in real money in two months. Hasn't happened.
This is why the lender of last resort system is so critical, because the BofE is betting with money it hasn't got. It has to be damn sure beforehand things are OK, and that it's on to a sure thing, because what's happening, is that Northern Rock are having to turn this imaginary money into actual, real money, with a penalty on top, by themselves! The BofE has to be sure they can do that, because this cannot be free money. It cannot bail people out."
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/11/rock_needs_1bn.html#commentsanchor As the mainstream media begins to pry into the world of structured finance it is constantly being surprised by the creepy crawlies it uncovers under the stones set in place by investment bankers and other deviant players. The trouble is the system has become so insanely complex that anyone without a degree in financial engineering is unlikely to be able to get their head round it. Yet at the core of the confusion are good old fashioned scams dressed up in new clothes.
For instance, NR has been using an Enron style special purpose vehicle based offshore to store up to 75% of the loans it was making. This vehicle called Granite Holdings was buying up NRs loans at a discount and then repackaging them for sale to Wall Street as bond issues. So NR gets to profit today from loans extended but unpaid whilst Granite and its investors gets to hold onto the underlying assets and earn interest on them over the longer term. This is a typical example of structured finance whereby a financial institution profits by pocketing the difference between short and long term interest rates. The problem for the government and that big fat liar Alistair Darling is that although Granite is controlled by NR it remains an arms-length entity. This means that NRs creditors will not have legitimate claims on the assets it holds e.g the loans that the government credit is supposed to be secured against. Moreover, if Northern Rock were now to admit defeat and go into administration this would also cause credit ratings agencies to downgrade the Granite bonds potentially causing the government to have to come to the rescue of that as well.
Now the Guardian has done some digging and found out that the Charities Commission are not entirely happy about the fact that the tax breaks enjoyed by Granite seem to have been secured by its imaginary support for a small Downs Syndrome Charity. Yet according to NR this is standard practice in the world of structure finance.
"And at the heart of Granite's operations is a rather peculiar fact: on paper, at least, it had been set up to benefit charities, and in particular a small organisation for children with Down's Syndrome, and their families, which was being run from a semi-detached house on the outskirts of Newcastle.
The bank said the naming of a charity was a standard part of securitisation, the process which the bank had employed to raise funds through Granite. "Any notion of inappropriate use of the charity's name, or impression that the charity may be exploited, is entirely without substance," a spokesman said."
http://www.guardian.co.uk/business/2007/nov/28/northernrock.subprimecrisis Despite all the hype in the media about Branson and the concerns about small savers and the taxpayer what is really going on is the latest stage of Project Save the Arses of Merrill Lynch/ JP Morgan/Citigroup/HSBC etc. Whatever needs to be done will be done to appease these modern day highwaymen including of course the odd token woman allowed to sit on the board. Witness Browns performance at the CBI in a pathetic attempt to inspire business confidence as the economy continues to spiral down towards.... whatever will be.
Blackbird
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