Downing Street Says » Northern Rock

Asked about the firm Granite, the Prime Minister’s Spokesman (PMS) said that Vince Cable had written to the Chancellor and that the Chancellor would be replying to that letter, and making it public, shortly. The PMS went on to explain that Granite was a financing vehicle that was used by Northern Rock to raise money. The way it operated was that Northern Rock sold lumps of mortgages to Granite and Granite paid for the purchase of these by issuing bonds, with the maturity of the bonds roughly matching the maturity of the mortgages. Granite was a separate commercial and legal entity; it was not owned by Northern Rock; this was a longstanding commercial relationship which stretched back to 1999. The key things were that since the Bank of England started providing financial support to Northern Rock, no new mortgage assets had been transferred to the Granite trust; the investors in Granite did not have any claim on Northern Rock’s assets, as it was a separate self-standing financial entity; the existence of Granite did not prevent the onward sale of Northern Rock in the future and the key thing was that tax payers’ liabilities were secured against Northern Rock’s assets. All this information would be included in the Chancellor’s letter.

Asked if the PMS could run through the technicalities again, the PMS repeated that Granite was a separate financial entity; it bought mortgages off Northern Rock and it paid for that by issuing bonds into the market place. It was not the case that all of the good assets had been taken out of Northern Rock and were now sitting in a pot somewhere else; Granite had assets as well as liabilities. We were not nationalising Granite, as it was a separate, privately owned entity. Its assets were larger than its liabilities so it was solvent. It was actually more straightforward than it would seem to be.

Asked who owned Granite, the PMS replied that it was a private company and went on to say that it was not for him or Government to answer those sorts of questions about a privately owned company. We did not provide any guarantees to Granite; we were not underwriting Granite; it was a separate commercial and legal entity.

Put that every time one of the mortgages was redeemed another mortgage had to be put in and asked if Northern Rock were obligated to continue doing that, the PMS replied no; Northern Rock’s future relationship with Granite was a commercial decision for Ron Sandler. No mortgages had been transferred to Granite since the Bank of England started providing support to Northern Rock six months ago.

Put that it made no difference to Northern Rock if Granite collapsed or defaulted, the PMS replied that the Government had provided no guarantees to Granite.

Asked if that meant that the figure of £100billion liability remained unchanged, the PMS replied that we had never used that figure. We were not responsible for the mortgages held by Granite. Equally, we did not underwrite their liabilities.

Asked for the value of the mortgages, the PMS replied that he was not in a position to say that on the record, as it was a private company; it was not for him to comment on the value of the assets and liabilities of a private company that was not guaranteed by the Government.

Asked about Ken’s Clarke comment last night that Granite got the best mortgages and Northern Rock got the worst, the PMS said that that was not his understanding; Northern Rock had a high quality mortgage book.

Put that Granite needed a monthly sum from Northern Rock to keep the whole thing ticking over, the PMS repeated that there had been no transfers of mortgages to Granite since the Bank of England started providing support for Northern Rock six months ago.

Asked if that meant that Granite had to go elsewhere for money, the PMS replied that quite what they did was a matter for them as it was a separate commercial entity.

Asked if the 800, 000 mortgages on Northern Rock’s books had anything to do with Granite, the PMS explained that what happened was that Northern Rock essentially securitised part of its mortgage book and sold that onto Granite.

Asked if that meant that Northern Rock still had 800, 000 mortgages, the PMS replied that he did not know the number of mortgages Northern Rock had.

Asked to comment on Nick Dunn’s remarks regarding Northern Rock and Granite, the PMS replied that his understanding of the situation was that what Nick Dunn had suggested was not the case; Granite’s assets were matched by its liabilities; as its mortgage book matured, it paid off its bonds and it declined in size, unless Northern Rock decided that it wanted to transfer mortgages into Granite in the future. That, however, would be a commercial decision for Northern Rock going forward.

Put that it would not be a problem for the taxpayer if Granite went to a bad place, the PMS said that we had provided no guarantees to Granite.

Asked who the victims would be if Granite went belly-up, the PMS replied that it would be whoever the creditors of Granite were.

Asked if that had implications for the stability of the financial market, the PMS replied that that raised all sorts of hypothetical questions about circumstances, that in all probability would not happen.

Put that Northern Rock had nothing to do with Granite at all apart from the fact that they used to know each other, the PMS said that the question of whether or not Northern Rock transferred mortgages to Granite going forward, was a commercial decision for Ron Sandler to take.

Asked what the contractual relationship was between Northern Rock and Granite, the PMS replied that he did not have the precise details of the contractual relationship; it was a question that should be addressed to the Treasury or Northern Rock.

Put that the Treasury announcement on December 18th mentioned Granite, the PMS replied that it was his understanding that there were no public guarantees to Granite. Any decision about any future transfers of mortgages, from Northern Rock to Granite, was a matter for Northern Rock. It would be best to check with the Treasury for details.

Asked if Northern Rock had a seller’s share in Granite, the PMS said he did not know the answer to that; his understanding was that Northern Rock did not have shares in Granite but he was not sure whether or not there was some inwardness to the question that he did not understand. It was best to speak to the Treasury.

Put that the Conservatives had claimed that Northern Rock had a seller’s share in Granite and that if Granite defaulted, that seller’s share would worth nothing and would cost the tax payer, the PMS said that the briefing he had from the Treasury said that Granite was not owned by Northern Rock but it was best to check with them for details.

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» Wednesday, February 20, 2008

Northern Rock

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