Bore down into Northern Rock - deep, deep, deep…keep going - and you eventually come to this:
Granite, the immense, £50bn synthetic financial structure upon which the the stricken mortgage bank is perched, is itself balanced on a charity, the Down’s Syndrome Association North East (UK).
That will come as a surprise to many - and it certainly has to the Down’s Syndrome Association North East (UK), a family support group run by about 300 parent volunteers. The charity’s trustees have issued a statement:
In connection with the current problems of Northern Rock, we would like to assure our members and supporters that Down’s Syndrome North East (DSNE) has not been knowingly involved in any misuse of money. We are investigating why our charity appears to have been named as a beneficiary of a Trust without our consent. We have definitely not received any money from Northern Rock or affiliated companies, except for a one-off donation from a staff collection in 2001. Currently we have not received notification that any funds are being raised or collected by Northern Rock or affiliated companies on our behalf.
As is widely known, Northern Rock has been funding itself through a securitisation vehicle called Granite Finance Holdings, which has issued paper worth up to £50bn. Under a mind-boggingly complex scheme, Granite is not owned by Rock, but by a business services group called the Law Debenture Corporation, acting as trustee. Granite’s beneficial ownership is described 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.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.
All this was dug up three weeks ago by Richard Murphy, a tax expert and forensic accountant, who runs his own blog.
While a piece on the matter subsequently appeared in Private Eye, he finds it staggering that no one in the mainstream media has seized on these details — and, reading through his detailed explanations of how Granite operates, we tend to see his point.
A charity’s name and status has been used without its consent to create an opaque financial monstrosity. Those doing the structuring presumably banked substantial fees - but not a penny of this has flowed through to the Down’s kids involved.
Murphy (no relation) declares the Granite structure to be a sham, where Northern Rock actually controls Granite, but pretends not to via a set of complex legal structures. He calls this three things:
a) An abuse of the charity involved, who (I stress) 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.
Murphy’s full excavation work can be read here and the full Granite prospectus is available here.
Perhaps those who profited from Granite should reach into their pockets. Lead underwriters on the Granite programme were Lehman Brothers, Merrill Lynch, and UBS. Underwriters were Barclays Capital, Citigroup, JP Morgan and Morgan Stanley.
