This looks terribly weird about Granite to me

I thought the whole point of Granite was that it was non-recourse to Northern Rock?

The government\’s exposure to losses at Northern Rock could be increasing by the day after a contract breach by one of the lender\’s subsidiaries put other creditors ahead of the taxpayer in the queue for payment.

Granite, the vehicle that packaged some of Northern Rock\’s mortgages to sell them on to other investors in a process known as securitisation, is being forced to pay back holders of about £26bn of debt first.

It ain\’t (or wasn\’t?) a subsidiary. So where am I wrong here?

7 thoughts on “This looks terribly weird about Granite to me”

  1. The piece is hideously badly written (not a go at the Grauniad in particular, the FT is the only paper that can do this kind of story without messing it up), but I *think* that NR has ended up owning equity in Granite because NR decided not to meet its obligations to Granite (ie it stopped passing on mortgages for securitisation) and hence triggered clauses allowing Granite bondholders to redeem their bonds.

  2. Depends on whether you mean defaulting on NR’s liabilities or not. If so, then definitely not, as it’d’ve caused the (actual, rather than just near) collapse of the UK financial system.

    Otherwise, it wouldn’t have made much difference whether you kept the bank running or gradually closed it down – admin costs of wind-up and merger with someone else vs admin costs of running standalone bank are unlikely to be crazy-different in the medium term, and any saving from the latter is utterly dwarfed by the size of the bank’s assets & liabilities.

  3. yes tim, we accepted all the liabilites onto the Govt. books from Granite. Brilliant, ain’t it?

    there was no way out without defaulting on the bondholders, which was seen as a bad thing with read across to ownership of RBS/Lloyds.

    I posted on this last week. I can’t see how we can avoid a loss of at least £6.5 billion overall…and that is before any further downturn or increase in default rate on mortgages.

  4. Your envelope is broken: the gbp6.5bn figure you’ve calculated assumes that all non-performing loans are 100% written off. Since the UK isn’t Florida, and hence house prices are down 20% rather than 75%, that doesn’t make sense: in reality, NR will repossess and recover the majority of the cash.

    (also, I’m 95% sure you’re not right about Granite liabilities either. Reminds me, I need to do some proper research into the current Granite status, since nobody in the real media seems to be doing so…)

  5. John B – no it doesn’t, it assume a 5% default rate on £60 billion of loans. Cannot assume there will be much to recover – have you seen the price of flats in Manchester and Grimsby…they are not down 20%. Plus you have the costs of repossesion and auction to account for.

  6. NR was primarily targeted at owner-occupiers, though, who don’t usually live in new-build flats and will keep the mortgage up through negative equity if they can. So the figure above is wildly pessimistic unless interest rates soar, in which case [gulp].

    The same data for HBOS, which IIRC went a bit BTL-crazy, would be Chinese-interesting.

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