The Times has reported that:
The Securities and Exchange Commission, the US financial regulator, is understood to be conducting an investigation into Citigroup's accounting of its use of structured investment vehicles, or SIVs.
As I disclosed, it was these structures that helped bring down Northern Rock.
Now it's time for these structures, usually located off balance sheet and in tax havens but with the capacity to bring down banks, to be put on the record. But don't expect it to be pretty. These things are based on deceit. That, after all is what off balance sheet accounting is. And deceit is never pretty.
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Northern Rock’s Granite SPV is not a SIV. Granite sits on Northern Rocks balance sheet. SIVs are off balance sheet. That is a big difference.
There was no deceit at Northern Rock, just rotten asset / liability management and a flakey business model.
I mildly disagree – Granite is an SPV, unusual only because it wis on balance sheet, but an SPV none the less.
And I dispute there was no deceit – if there wasn’t why were so many people suprised at the mechanism used?
And why did Adam Applegarth have to apologise for it, very publicly?
Richard
Granite is a securitisation vehicle and like most others it sits on balance sheet. This was nothing unusual.
Who was surprised by the use of Granite? Every bank in the Western world uses securitisations to manage their funding. It would not be a surprise to anyone with even a basic knowledge of the banking industry (clearly that excludes our politicians).
Why was there deceit? Nothing was hidden. In your earlier post you copied the relevant note to the accounts describing the securitised assets. If you could find the information so could anyone else with a copy of their accounts (it took me two minutes).
When did Applegarth apologise for using Granite? He apologised for bankrupting his company, not for using securitisations. Had he opted to fund more of his balance sheet via securitisation it is possible his bank would still be solvent.
You have confused SIVs and securitisation vehicles like Granite. SIVs sit off balance sheet. They fund short term to buy long-term assets. SIVs smell of Enron and accounting rules need to be tightened, but Granite was not a SIV.
It doesnt make a very interesting conspiracy theory, but Northern Rock’s failure was simply the result of incompetent management.
Roger
All you succeed in proving is a) the arrogance of bankers and b) how far you are removed from reality.
Richard
Richard, have you ever acknowledged that other people have a valid point of view?
re off balance sheet vehicles, you make an interesting point – perhaps you should have a conversation with a certain Gordon Brown about this – as he seems to love off balance sheet!
Alastair
You bet I’ve agreed I’m wrong – often. Only a fool thinks he’s right all the time.
But, equally I don’t concede to keep people happy, especially when no evidence is offered to make me change my mind
Richard
I will post a reminder here to some who have sought to post here.
Anyone using this site is welcome to disagree with me – but if your comment is personal or abusive it will be deleted before being posted.
If you can’t argue with facts, please do not bother to argue.
OK Richard, but Roger is quite right – securitisation is common in the banking world – if you think there is something wrong with it then please do tell. The off or on balance sheet argument is actually a red herring, to which confusion IFRS has added as it seeks to change the rules. The Granite thing muddies the waters even more, but had nothing to do with Northern Rock’s problems. Bad management decisions and the timing of the credit crunch screwed up their liquidity, and it sounds like a regulatory cock up screwed up their rescue, and both things together, combined with the madnesss of crowds, caused the run on the bank. The only link with SIVs is that the timing of the credit crunch scupperred their next securitisation. In what way is this disconnected from reality?
BTW I think you will find that it is lawyers who exhibit arrogance!
Alasatair
My problem is simple – the Northern Rock SPVs and all SIVs are works of fiction. It so happened that Northern Rock kept its SPVs on balance sheet. Others are off balance sheet, but the structure of both are similar. The structure is designd to suggest the SIV is beyond the control of the companies promoting them, which is not true. They claim to be owned by trusts with charitable intent – which are always a sham.
My concern is simple – because these structues are a sham they create an acceptance of a lack of accountability and transparency, which is what they are promoted for. As such they undermine the credibility of the whole reporting process of financial institutions that use them and promote the whole idea that deceit and non-disclosure is acceptbale.
It is not.
My suggestion that those who think these structures acceptable were out of touch with reality is that amongst the non financial community the idea that people can pretend that structures owned by sham trusts do not need to account for what they do and can disappear from view is seen as fraudulent. But in the City it is seen as normal.
Down here in the Fens we agree with the idea that this is fraud. It is.
And let’s be clear. This fraud did allow Northern Rock to issue debt in a prejudicial way. Granite had a AAA rating, Northern Rock had a much lower status. So the SPV dumped a known problem in Northern Rock onto the market, and all through use of a sham.
And society is now paying the cost.
How can you justify them in that case?
Richard
“And let’s be clear. This fraud did allow Northern Rock to issue debt in a prejudicial way. Granite had a AAA rating, Northern Rock had a much lower status. So the SPV dumped a known problem in Northern Rock onto the market, and all through use of a sham.”
You should take more care Richard – publishing untruths like these can have unfortunate consequences.
Let me be clear: fraud does not necessarily mean criminality. It means misrepresentation made for gain. In my opinion the Granite structure was a misrepresentation of the nature of the economic transactions that were really taking place. That can also be called a sham, which is a description of a pretence. The result was Granite secured a lower cost of financing than Northern Rock could have done. So we’re back to the definition of a fraud.
That is my honestly held opinion – based upon objective evidence. Please tell me what is wrong with that? More than that, tell me what is factually wrong with the suggestion made.
Richard,
What is factually incorrect is to state that Northern Rock was brought down by SIVs. Had you made the same point about IKB I would have agreed, but Northern Rock’s position was very different.
The differences between SIVs and securitisation vehicles like Granite are considerable and you should not confuse them.
SIVs sit off balance sheet. I agree that this is a fiction, since the sponsoring banks usually provide liquidity guarantees which means that the risk never leaves the balance sheet of the bank. Public information on SIVs is available but you have to know where to look.
SIVs usually hold long term assets which they fund short term. That is why they rapidly ran into liquidity problems in the crisis.
Securitisation vehicles like Granite are different. They often sit on balance sheet with matched funding and usually are a genuine risk transfer. The SPV is required to ring fence a pool of assets against which the funding is secured. There is nothing sinister about this.
Funding via a securitisation is cheaper than unsecured borrowing (on a like for like duration) because it is secured on a segregated pool of assets (i.e. prime mortgages for Granite), and is not exposed to the banks other riskier activities (e.g. trading). Securitisations are also used by many non-financial companies (e.g. receivables factoring is very similar).
Northern Rock failed because it used too much short term (on balance sheet) funding. Had it used more longer term funding, including securitisations, it might still be in business today. Far from being a fraud, Northern Rock was a good old fashioned run on a bank with the bank unable to meet its liabilities (to depositors and other short term lenders) because too many of its assets were illiquid and long-term.
[…] way I have called that charade a fraud. I have specifically applied that term to the Granite structure that Northern Rock used, but in so […]