This is an extraordinary fiddle (as far as I understand it) to get rid of a bank that is totally screwed up. Northern Rock is state-owned and therefore to most people this would mean that that all its assets - good, bad and indifferent - belonged to the state.
By a sleight of hand worthy of the most practised card-sharper it divides the bank into two - a good bank and a bad bank. It continues to own the good bank until it can find a buyer while washing its hands of the bad bank and all its debts, which by definition is insolvent. Of course it will still own it but won’t be unduly concerned at what happens. There must be some very dodgy lawyers around the Treasury who’ve invented a new category of ‘partial bankruptcy’.
If I’m being just cynical or have got it wrong I’m sure somebody will tell me!
--------------------------------------
This extraordinary scenario comes after the posting I sent out earlier “A bank that is haemorrhaging money” . In that the treasury spokesman said they were in no hurry, Vince cable for the LibDems said a quick sale would be a bad deal, the Tory spokesman said ‘Treasury planning "quick and dirty" Rock sell off’.
That’s all the parties saying there’s no hurry though “quick and dirty” seems to fit in with my reading of it.
And a top businessman who tried to buy Northern Rock has said that taxpayers face a "long wait" before they see a return from the nationalised bank.
Perhaps the government thinks that because it’s August we won’t notice. They could be right that it’s a good time for a crafty mega fiddle
Christina
TELEGRAPH 5.8.09
UK government plans a great escape from Northern Rock
Taxpayer could get away almost unscathed, says Philip Aldrick
By Philip Aldrick, Banking Editor
Standard & Poor's, the credit rating agency, isn't often the bearer of good news. For the taxpayer, though, S&P's decision on Tuesday to slash the credit rating on Northern Rock's subordinated debt by a remarkable "eight notches" should have set hearts round the country racing.
The implication is that the bill for Northern Rock's bad debts won't be picked up by the Government, but by those faceless City institutions that hold £2bn worth of the nationalised lender's "subordinated notes" and "reserve capital instruments".
The market has been expecting it. Northern Rock's bonds have been trading at a massive discount since it unveiled plans to restructure into a good bank, "BankCo", and a bad bank, "AssetCo", earlier this year. But S&P's downgrade is the closest thing yet to a confirmation that the state won't take the hit.
"
[Of all the banks], we see the greatest vulnerability in Northern Rock due to its planned legal and capital restructuring," S&P wrote, after cutting its "sub-debt" rating to B-. "Its lower tier-2 issues are intended [for] 'AssetCo' and will, in our opinion, be vulnerable to both the performance of that entity and the Government's intentions regarding the servicing of those bonds."
Could it be that the Northern Rock saga will have a happy ending for the taxpayer? A profitable exit is still a long way off, but losses are beginning to look a lot less likely than before.
Last year, the Government unveiled plans to inject £3bn of taxpayer capital into Northern Rock to keep it afloat. Since then, the mortgage book has performed so disastrously and the bank has lost so much money that it now has negative capital of £794m. With £26.2bn of risk-weighted assets, it would need £2bn to meet current 8pc core tier-one regulatory requirements on capital had they not been waived for the lender. The £3bn of taxpayer money would have almost vanished in a single hit.
Faced with both political and economic damage, the Government got its advisers and Northern Rock's board to put their thinking caps on. The solution they've devised is pretty smart, so long as you are not a "sub-debt" holder.
By splitting the bank up, less capital is required. And by using tier-two capital before taxpayer equity, a route unavailable but for the separation, the first £2bn of losses will be borne by current investors. "This is a good news story about saving the taxpayer money," Gary Hoffman, Northern Rock chief executive, said about the restructuring, which he hopes will win EU approval in the autumn.
It is even conceivable that the taxpayer will not have to inject the full £3bn, despite the economy's more desperate state than when the money was pledged. "This minimises it. Less than £3bn will be used," Mr Hoffman said. To debtholders' despair, he added: "Tier-two capital can be used for the AssetCo."
Under the plan, the vast majority of Northern Rock's assets, about £80bn – including £50bn of rubbish mortgages, will go into 'AssetCo' and be wound down. Its £18.4bn of retail deposits and £10bn of good mortgages, plus £10bn of cash provided initially by the state, will constitute 'BankCo'. Over time, BankCo's cash will be converted into new mortgage lending – making it a stand-alone, self-funding business.
'AssetCo' will be treated as a "regulated mortgage lender", a legal status distinct from a deposit taker that requires capital of just 1pc. 'BankCo' will be regulated like any normal bank, with requirements of 8pc. The upshot is that far less capital will be required in total.
Cleaned up and self-funding, 'BankCo' is expected to attract a bunch of offers. The Government is keen to sell it before the election, to complete the "good news story", but the success of a sale will depend on whether the offers are good enough. If the taxpayer puts £1.5bn of capital into 'BankCo', it will only recover the money through the sale. At that level, a £1.5bn bid would only see the taxpayer break-even.
Surprisingly, Mr Hoffman is optimistic that 'AssetCo' will find a buyer. The process would take longer, because 'AssetCo' will be funded by the taxpayer and be complicated by the £30bn Granite securitisation vehicle and £9.5bn covered bonds, but a price might be struck that would deliver a decent yield. With so much bad lending, 'AssetCo' will almost certainly need state capital to absorb losses – though probably less than £1bn.
The cost of the plan will be an increase in the £14.5bn loan from the state. But a loan is preferable to a capital injection. The Government has already made £1.52bn in "interest and fees" on its emergency funding for the bank, for example. Turning a profit on Northern Rock still looks foolishly optimistic – this is a bank, after all, with 39pc of its borrowers in negative equity – but escaping without a loss would be success indeed. [It sounds fraudulent to me! -cs]
Posts
