The posts are a little, um, technical and I’m not at all sure that Murphy has fully supported his conclusions but, even though I think there are some gaps that need filling in, what he has put up indicates outrageous behaviour on the part of Northern Rock’s management…
If you look at Northern Rock’s statement of assets and liabilities for 31st December 2006 (its most recent accounts), its assets comprised…
- Liquid assets 13%
- Residential Mortgages 77%
- Other stuff 10%
If you look at Northern Rock’s liabilities for the same period they comprised…
- Bonds 46%
- Wholesale Funding 24%
- Depositors’ Cash 22%
- Share Capital 4%
- Bits and bobs 4%
The outrageous part comes from the fact that the bonds, and maybe the wholesale funding (though I can’t see where Murphy demonstrates that) get first call on the residential mortgages in Northern Rock’s books as security in the event of liquidation.
And that seems to have been achieved, at least in part, by issuing the bonds via a supremely shady and complex structure of shell companies referred to by HM Treasury as the 'Granite' securitisation programme.
The inclusion of a holding trust in the Granite structure which purportedly benefits a Down's Syndrome charity is a nice, if somewhat twisted, touch...
I’m not pretending for a second to understand how the 'Granite' securitisation programme operates. However, at least one of its possible purposes is to ensure that the financiers who lent money to Northern Rock via Granite get first call on Northern Rock’s assets in the event of the company going bust.
So, here’s the funny thing. If Northern Rock does go bust it is very likely that the depositors sit only just below the shareholders in the pecking order for bearing any loss.
And the shareholders stake can only absorb 4% of any loss on the break up and sale of Northern Rock’s assets.
And, generally speaking, fire sales usually command an ever so slightly higher discount than 4%
And then it would be the depositors' turn
And the anonymous people who really fund, really benefit from and probably really control the bank through Granite are nice and safe behind a big fat financial buffer provided by mug punters
I’ve tried to keep things simple but putting it crudely…
- Northern Rock shares are probably worth fuck all, unless you’re daft enough to believe that intangible assets such as the Northern Rock brand or the commercial acumen of its crack, integrity-packed management team are worth something on their own
- Until the moment when HM’s Government gave an explicit guarantee to back depositors’ cash, those depositors queuing outside the branches were 100% doing the right thing
- Northern Rock’s management team may have employed some seriously grubby and, more to the point, poorly disclosed devices to separate depositors from their money in the event of serious difficulty
The last point is potentially the scariest as it’s hard to believe that Northern Rock is the only retail bank out there with this kind of shit in place. If people get wise to what Northern Rock was up to the next logical step is to find out which other banks have done something similar and yank deposits out of them as well, pdq
Hmmm, that could be fun
Let's all play the 'Hunt the thinly capitalised bank with shady, complex offshore funding arrangements and start a catastrophic bank run' game
It’s also worth pondering upon the fact that ordinary cash depositors are the only fuckers out there dumb enough to lend commercial institutions money without demanding either security or a level of return commensurate with a risky, unsecured loan.
When Northern Rock lends money to people, for instance, it demands their house deeds in exchange. On the other hand, the ordinary people who lend money to Northern Rock via their deposits are given a pretty little book with their name and some numbers printed in it in exchange for their money...
How fucking stupid is that?