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Sunday, 20 January 2008

Do they really think we are that stupid?

My unerring sense of financial impropriety was triggered when I read the story here in the FT and the story here in the Telegraph.

The Telegraph article says that the Treasury will get a repayment of £25 billion, but in return the Treasury will have to give a guarantee in favour of an SPV to support a bond issue for ... £25 billion. And they think that is good value for tax payers? At best it replaces one amount at risk with the same amount in a different form. In practice the government, or tax payer, is probably worse off, because rather than being repaid as soon as the credit markets allowed Northern Rock to resume borrowing, now the government will be on the hook until the bonds are repaid.

Worse than that, it looks as from the rather garbled DT report, that the government's security will be limited to the mortgage assets in the SPV rather than the entirety of the assets of Northern Rock. Presumably any purchaser of Northern Rock will get the company without any obligation to counter-indemnify the government for losses on the SPV.

But doesn't this look a little like state aid? Read this EU press release, which says that any loans or guarantees can only be given for a period of six months. How do the government think they will get round that? To avoid giving long term state aid to the bank, their "solution" must be to separate the SPV from the "bad" bank. That would seem to confirm the assumptions above about limiting recourse to the rest of NR's assets.

It also looks as though they have been consulting heavily with their accounting/ reporting/ advisers on a suitable presentation to pull the wool over the EU's eyes. No doubt the financial advisers will be heavily rewarded, and the government will announce that there is no support to Northern Rock, and the support to the SPV isw off balance sheet because .... they say it is. The track record of the government in taking assets of the balance sheet has been unexemplary, so why stop now?

So the government proposes to blackmail the current shareholders into virtually giving away their shares to Branson or Olivant, one of whom will walk away with the free lunch of a derisked portfolio and a gurantee for their depositors, while the government will be taking the risk on £25 billion of mortgages.

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