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National Granite

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:

  1. The borrower of the individual mortgage in question takes out a secured personal loan
  2. 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.

This entry was posted by Sam Jones on Thursday, February 21st, 2008 at 11:29 and is filed under Capital markets. Tagged with , . You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. Feb 21   16:48 Posted by bsb [report]

    thanks Sam, you are certainly one of the few who really understand all this - very rare thing in the media at the moment it seems.

    the Lords have blocked the bill for now and are demanding an immediate independent audit. not sure what they are seeking to achieve with that - auditors recently seem to have been having trouble quantifying the risks around mortgages…

  2. Feb 21   15:16 Posted by Sam Jones [report]

    bsb, I think Mr R Murphy has the wrong end of the stick - and is taking our dear Chancellor somewhat out of context.

    In the quote Murphy refers to (Labour Conf) Darling is talking about regulating off-balance sheet bank conduits - ABCP programmes, SIVs and such like. The kind of structures into which banks park assets to earn a convenient arbitrage on and get them off their balance sheets (Though in the case of many ABCP conduits, banks have a 100% cp backstop)

    Granite is not a conduit. It is a mortgage securitization vehicle (a structure around since the mid 1980s, when traders at Salomon dreamt up a way of converting mortgages into bonds. etc.) There’s nothing “sneaky” about it.

    I think Murphy is also wrong in stating that Granite cant exist independent of Northern Rock. It can. It is designed, in fact, specifically for that purpose - to be bankruptcy remote from its parent.

  3. Feb 21   14:33 Posted by bsb [report]

    check out richard murphys latest post

    http://www.taxresearch.org.uk/Blog/2008/02/20/northern-rock-you-cant-not-nationalise-granite-because-it-has-no-existence-apart-from-northern-rock/

    seems to be saying that, while technically what darling and this article is saying are correct, darling is hiding behind the very same off balance sheet accounting games that he had promised to end

  4. Feb 21   13:50 Posted by Banditry » Blog Archive » Northern Rock again: why Granite isn’t that hard [report]

    […] [***] Technically, there’s a five-year ‘expected maturity’. However, legal maturity isn’t for 25-30 years from loan tate (with the earliest 30-year loans from 1999 falling due in 22 years or so), and that’s the only point when Northern Rock is expected to bail out bondholders if things have gone terribly wrong - except that by then, all the mortgages will have been paid back or written off. The five year ‘expected maturity’ merely means that Northern Rock has to pay trivial (by comparison with asset size) penalties and annoy Granite bondholders a bit - it cannot be compelled to buy the bonds back. This FT blog explains exactly what NR’s residual liabilities to Granite are. […]

  5. Feb 21   13:37 Posted by cabs [report]

    anon, the seller share ranks pari passu with the funding share so everyone gets the same performance. NRK however does put up the reserve fund for the trust (£552m at last count). Northern Rock synthetically bought protection on the reserve fund by issuing two deals called Whinstone.

  6. Feb 21   12:35 Posted by anon [report]

    An equity investment in a vehicle that issues MBS, and the taxpayer has not much to fear?!? If these mortgages default the seller share is the first to go…

  7. Feb 21   12:32 Posted by NotAApplegarth [report]

    Thank heavens ! Finally , a reporter who bothered to read the facts on Granite. I would take this one step further : Granite provides Northern Rock with a very cheap (by current market standards) source of funding for its mortgages. As long as it is not unwound, it provides tremendous value to the Rock and …. for the taxpayer. But reporting that would be just dull would it not. Screaming that Granite is stealing taxpayers money is just so much more fun.

  8. Feb 21   12:26 Posted by stickershock [report]

    Read in one Fixed Income Market Commentary this morning:

    “Yesterday’s Northern Rock debate in the UK Parliament was high comedy. Outraged Tory and Liberal know-nothings demanded to know why an evil New Jersey fund called “Granite” has stolen the best Rock assets. Politics over substance again… but fantastic nonsense to listen to.

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