Most of the country's serious press have called me this afternoon, plus most of its serious news broadcasters. Granite is the theme of the day. And all want to know "how can it be that Granite won't be nationalised?"
The reality is that Granite has no independent existence apart from Northern Rock. Look at the last filed accounts of Granite Master Issuer plc here. They're for the year to 31 December 2006.
Note 19 says the company's ultimate controlling party is Northern Rock plc. This means it is part of the Northern Rock group. We know that. It is in the Northern Rock accounts - note 19 says so. So do the Northern Rock accounts.
Then look at note 4. The company has no employees. It pays Northern Rock to do its admin for it. It cannot stand alone. It has no means to do so.
Also look at its parent company according to the Granite structure plan - that is Granite Finance Holdings Limited. Its accounts are almost meaningless - and (staggeringly) they're unaudited. It's annual return is even less useful. What it says is that of the four directors of this sham two are nominee companies. This is classic tax haven stuff and hardly appropriate for an accountable entity that is part of a plc, let alone a nationalised company. It also says the shareholder is The Law Debenture Intermediary Corporation plc, which we know is untrue: they hold it on trust and no indication is given of that fact and nor is any clue given as to who that trust might be, who its trustees are, where they might be located and what the trust deed might say. We just have to take that on trust (I guess).
The result is that what we have here is an empty shell of a company, utterly dependent upon Northern Rock, and its mere cypher to conduct business at its will. .
Then look at the letter Alastair Darling sent Vince Cable today. It's here. Note what he says:
Absolutely legally correct. And also absolutely wrong. This is Alastair Darling playing the special purpose vehicle, off balance sheet finance game to suit his convenience. And this is the man who aid the Labour Party conference last year:
We need ... [f]ar greater openness and to prevent risky investments being hidden off the balance sheet. Effective supervision for banks, here and across the world.
It's in all our interests to learn from what's happened and we are ready to take the lead and take whatever action is needed. And, we will continue to take that action on the basis of the long term interests of our people and our country.
And now he owns Northern Rock and what does he do? He pretends that its off balance sheet structure is real, and that he is most definitely going to hide behind it. More than that, he's saying that although Northern Rock controls this company it has nothing to do with him and he is not going to nationalise it.
This is straightforward hypocrisy. You can't nationalise Northern Rock and not nationalise Granite. Granite is part of Northern Rock.
And you can't pretend Northern Rock is not responsible for Granite's debts: if it was not then Adam Applegarth (the man really to blame for this mess) would have walked away from Granite last year. But he couldn't, and Northern Rock failed as a result.
Nor can Alastair Darling, and he must know it.
So why is he play acting so badly, and selling all his fine words from last year down the line at the same time? I can offer only one reason . He doesn't want the Granite debt on the government's balance sheet because keeping it off balance sheet will make his boss happy. After all, Gordon Brown does not want the golden rule broken by more than it has to be.
And for that reason alone Alastair Darling is letting the best assets in Northern Rock go, accepting the lower quality debt as the sole security for the debt owing to the taxpayer and is at the same time compromising all his principles by showing himself more than capable of being a balance sheet manipulator.
I am not impressed. Ethics count for all in my book. And I'm left asking if Alastair Darling has any, at all, because what he is doing is dishonest (he is nationalising Granite in truth), unaccountable (he'll live behind an unknown, unaccountable trust facade) and ultimately just an accounting con-trick.
He knows he's accountable for the Granite debt, and is denying it. It doesn't get much lower than that.
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“you can’t pretend Northern Rock is not responsible for Granite’s debts: if it was not then Adam Applegarth (the man really to blame for this mess) would have walked away from Granite last year. But he couldn’t, and Northern Rock failed as a result”
But NR wasn’t brought down by the long-term debt owed to Granite bondholders, it was brought down by the inability to fund the short-term loans that funded the core on-balance-sheet mortgage lending business.
I’m sure I’m not the first to suggest that, instead if SIV, the aconym SpIV would be more appropriate for Granite and its ilk….and perhaps for Mr Darling as well.
John b
Which could not be re-funded by another Granite issue….
Richard
What exactly would nationalising Granite achieve, even if it were legally possible (and it would definitely be a breach of common law). I’ll tell you what. Practically nothing. All it would mean is that if and when Granite is wound up, any remaining cash (if anything, probably in the order of a few thousand pounds) would go to the taxpayer, rather than the nominated charity. How would that benefit the taxpayer, or the charity for that matter? With or without nationalisation, the relationship between Northern Rock, Granite and bondholders is determined by common law and the discretion Northern Rock is granted under the transaction documents. It would have absolutely no material impact.
I’m no expert on public accounting, but judging from the ONS’s previous decisions on securitisation, Granite would be on balance sheet for accounting purposes whether or not it is nationalised, so ethics don’t come into it.
Ginger
Try these:
Transparency
Accountability
Honesty
Clarity
They’re worth having
Granite encompasses none of them – which is why we had the debacle
Failing to address the abuse that fostered that situation allows it to continue
And we’ve seen the cost of that to society
What would nationalising Granite achieve? Most of all, a clean break with the past
Indeed, it would achieve a clean break with the past, namely a long history of non-interference in legally entered contracts. Is that a break you really want just to rid ourselves of of perfectly conventional securitisation?
Again, I’d like to ask you what public ownership of the shares of Granite Finance Holdings, which is what nationalisation actually means, would practically do to improve transparency, accountability, honesty and clarity. The functional relationship between Granite and Northern Rock, and almost certainly the accounting, wouldn’t change one iota.
You seem to be arguing at cross purposes with yourself. On the one hand you say that Granite is a sham – it has no substance. And yet you acknowledge that it is legally separate from Northern Rock. You seem to realise that there is a distinction between consolidation on the basis of control and legal ownership, and yet you insist it means nothing. This is a crucial distinction – if it weren’t legally separate, the structure wouldn’t work. If Northern Rock went bankrupt, its creditors could seize the assets. They can’t. The structure works. This has been tested by the courts (and the markets, for that matter) and approved by parliament.
Do I think the government should have been more upfront? Yes. I’m no defender of Brown or Darling. But to argue that Granite is some kind of fiction, that people, whether it’s charities or investors, are being exploited, is absurd.
It’s surprising that someone who claims to be an expert in tax is commenting on the Granite structure without understanding how securitisations of this type work.
It’s conceptually very simple. Northern Rock sold mortgages worth to the special purpose company for some cash up front, and some cash in the future if the mortgages perform. The company finances its purchase of the mortgages by issuing bonds to the capital markets. Because the company is a special purpose company, and its affairs are so simple, capital markets investors didn’t need to assess the general creditworthiness of Northern Rock and could just look to the quality of the mortgages. The funding was therefore cheaper than if Northern Rock had borrowed itself. If the mortgages perform then access cash (i.e. receipts from the mortgages less interest on the bonds) is returned to Northern Rock as part of the deferred purchase price (and fully taxed). A small amount of profit is retained by the special purpose company.
If you want to understand the detail of what’s going on then have a look at one of the Granite offering circulars – publicly available documents. Your failure to look in the right place does not make these arrangements secretive.
I suspect (without having checked) that nationalisation would make the Granite bonds immediately repayable which, in the current market, would make the Granite vehicle insolvent. This does not seem a particularly great result.
Full disclosure: I am a lawyer who has advised on securitisation arrangements, but has no involvement in Granite or Northern Rock. I am also a member of the Labour Party who has no time for tax avoidance, but this is not that.
Dan
My concern with Granite was nenver about tax – and I never said it was. It’s about governnance and transparency – quite different things.
As far as I read what I’ve said there is nothing inconsistent with what I have written and what you are saying except that as a peson who does not supply these things I do not agree with our (might I say) flippant acceptance of their normality.
Saying casually that I can found out Granite is absurd – when I began telling the story there was almost no one I spoke to – from politicians to ordinary very informed people who was not shocked by secuitisation. Shocked too that something so obviously a sham, charade or it you like fraud (and it is a fraud – but fraud does not per se mean illegal) can happen through abuse of charitable structure for what is absolutely not a charitable purpose and where their is a wholsesale deceit about the governnance structure in place that undermines the credibility of all involved and has to be prejudicial to good governance.
Maybe you can live with that deceit and all the ethical compromises involved and be a member of the Labour Party – I could not.
Most people could not.
Most people like straight dealing. I can nad have read the offer documents – if you look on this site you will find I quote them. But this changes nothing about my beleif that a fiancial architecture built on such flimsy foundation needs to be replaced – and a new ethic needs to be built to replace the one we currently have.
This is what my concern is.
Richard
PS Your claims would be so much more credible if you did not hide behind a single name and the use of a false email address. Why do that, I wonder?