Reporter: Um, I’ve filed my copy on Rock
Panicked Night Editor: What’s the news?!?!
R: Well there’s this Granite thingy… its called a securitization, or something. It’s big.
PNE: How big?
R: Errr… well I’m not sure, because it’s in the channel islands… or something.
PNE: So it’s small
R: No… well… £9bn, maybe… or something. Oh wait. No. £49bn? That can’t be right. Do they have that much money in the Channel Islands?
PNE: I don’t know, just tell me what the news is and I’ll put it on the front page! It’s not like we’re the Independent. We can’t just stick a headline saying CRUELTY then stick a picture of a dolphin or a whale underneath it.
R: Well actually… there is this Downs Syndrome charity…
- After ‘The Thick of It‘
Political hackery reportage and financial reality are making somewhat uneasy bedfellows. Given the below, you might be forgiven for thinking that the government nationalisation of Rock was in crisis. Given: the government’s own PR on the whole affair has been…wanting.
ROCK NATIONALISATION RUNS INTO £49BN GRANITE BARRIER
ROCK NATIONALISATION IN TURMOIL
TAXPAYERS GET ROCK RUBBISH
So what is the situation with Granite?
If you have the time, and a very secure sense of self, here’s Granite’s prospectus, which explains it all in 400 + pages of legal detail.
Granite is an offshore securitization of Northern Rock assets. Granite has no claim on Rock’s assets. As Banditry writes:
If the Northern Rock debacle has done nothing else, it’s certainly given a lot of people a great opportunity to rant about things they don’t understand. The latest example is Granite, the name used for a collection of Special Purpose Vehicles [*] and associated companies [**] used by Northern Rock.
The whole point of Granite is to be bankruptcy – and legally – remote from its parent – the Rock proper. It’s separate so that the assets it contains, which serve as collateral for the bonds it issues, are ringfenced and guaranteed in the event of a problem with its parent – like a bankruptcy… or a nationalisation.
Nationalising Granite -as some are now calling for – would be both pointless, ridiculously complicated and utterly unnecessary, if not impossible to do.
Rock is simply an administrator – it manages the Granite collateral. Rock has an obligation to “swap” mortgages from the trust with new ones from its own book under two circumstances:
- The borrower of the individual mortgage in question takes out a secured personal loan
- The borrower of the individual mortgage takes a re-draw (assuming it was a flexible mortgage)
There is one further obligation to Granite: Rock must maintain its “minimum seller share” in the Granite trust company.This is basically an equity investment in Granite. It provides a loss cushion to Granite bondholders in the event of a liquidation. The purpose of this cushion is to compensate for bad mortgage collateral in the trust. It’s thus in a way, an overcollateralisation measure. The minimum seller share is equal to about 2 per cent of the total portfolio size, plus a figure derived to represent the potential worst-case value of losses for flexible mortgages (redraws). The calculations for this figure are on page 149 of the prospectus.As can be seen from Granite’s December filing:.Current seller share: £5,851,831,346
Minimum seller share: £3,830,743,182
The minimum seller share is a trigger. If the current seller share falls below it, then Granite may be forced to be wound up. In that event, the (Rock) seller share is technically at risk. But even then, money would only be lost if the (prime, performing) mortgages were sold off for well below par and it would be money lost on an investment already made.
Now the minimum seller share trigger, is, of course, avoided by keeping the actual seller share above it. And as can be seen from the above, that is very much the case.
Rock – and the government – would only have to put extra mortgages and money into Granite in the event that the current seller share decreased by £2bn. That would only happen if Granite issued new bonds.
The taxpayer, in other words, doesn’t have much to fear from Granite.