Respectfully I think just about eberything you have said is complete nonsense.

First of all the charity should have been told for reasons of good governance and because it was named in a public document.

Second, thereafter you assume there is a difference between Northern Rock and the sham that is Granite. There is not. Granite has no staff, and is run entirely by Northern Rock. So your entire logic falls apart: these entities are one and the same thing and you’re suffering from a delusion if you think otherwise.

Richard

Why does the charity need to assent to a trust being set up in their favour?

If I set a trust up for my children or a charity, I don’t need to ask their permission.

You have to look to why the deals are set up in this way, and the mess at Northern Rock is a prime example of why these structures are needed.

1. NR shouldn’t own the mortgages or the assets if they securitise them. Otherwise the bond holders risk not getting their cash back in the event of NR’s bankruptcy.

Solution. Transfer them to another company. Granite.

2. The other company should not be owned by NR too. For the same reason as 1.

Solution. Have it owned by a trust.

3. Granite must endevour to make a proft even if its a small one, otherwise it’s acting ultra vires.

4. Who gets the profits? Can’t be NR for 1 and 2. Its a small profit, so have the trust set up to for a charity.

5. Do the trustees have the skills to run a securitise business? If not get someone in who does.

6. Why Delaware? Same reason as using Channel islands. Channel islands have a lot of experience with trusts and the legal structure associated with this. Same as Delaware.

All of this means that the bond holders are safe from the mess at Northern rock.

Northern Rock did these transactions to get cheaper funding.

1. By over colateralising, they got a higher rating, and a lower interest rate.

2. By securitising, they make a liquid market in their debt, and get a lower interest rate.

3. They get to reuse their capital.

What NR should have done is more of these transactions, then they wouldn’t have been caught by the lack of funding.

However, the sting in the tail of all of this is that little call option. What’s the details on that?

Nick

I profoundly disagree with you

The deceipt in this structure undermines any chance of good governance

See http://www.taxresearch.org.uk/Blog/2007/11/12/northern-rock-the-core-of-the-issue/

Richard

There is nothing wrong or flawed with this structure.

1. The debt (created by the notes issued by Granite to its noteholders) is on balance sheet because Northern Rock controls Granite as accountanting rules define “control”. Even if Northern Rock parent company (or any other group company - to which depositors and shareholders have recourse to) is not liable for the debt.

2. But the holders of the debt do not have recourse to Northern Rock to get back their money if the mortgages default (the note to the accounts makes that clear).

3. Similarly, the holders of the debt are not exposed to Northern Rock if Northern Rock goes bust (other than having to find someone else to service the mortgages).

4. Therefore the holders of the debt demand (and get) a lower rate of interest than if they had lent to Northern Rock - because they are not exposed to Northern Rock’s other businesses.

5. Anyone can say “I hold an asset on trust for X” without X’s consent - whether X is an individual, company or charity (or group of charities).

6. Limited recourse debt owed by a company is always on balance sheet. But other creditors are not affected by limited recourse debt in the same way as ordinary debt. Structural subordination (as opposed to contractual subordination) has a similar effect. If I lend to a holding company and the assets are held by a subsidiary, I’m effectively behind any lender to the subsidiary. However, the accounts would show me in the same position (but legally I am not).
7. Legal ownership and beneficial ownership are two completely separate things. You claim the split is artificial. While that may be the case, if it were wrong or unlawful or contary to regulations, then we would have no charities (which work by dividing legal and beneficial ownership).

This is quite simply all about raising money in the wholesale markets as cheaply as possible. This is done by splitting assets into different baskets. It’s not that complicated.