Patrick Wintour, Phillip Inman and Jill Treanor
The Guardian,Thursday February 21 2008
Plans to nationalise Northern Rock were thrown into confusion last night when it emerged that ministers are leaving £40bn of the bank's best mortgages in a private offshore trust. As the government moved to push emergency legislation through parliament, it was revealed that the offshore firm Granite, which holds half of the bank's best secured mortgages, is not being nationalised as part of the rescue package.
The Granite issue is likely to be at the centre of an inquiry to be announced by the National Audit Office into the government's handling of the much-criticised rescue plan.
Treasury officials and ministers spent yesterday battling to explain the contractual relationship between Granite and Northern Rock. Granite has been used as a vehicle to raise billions from the international capital markets, deploying the Rock's mortgage book as collateral.
Yet ministers made no reference to the offshore trust, nor its implications for the taxpayer, when it made its dramatic nationalisation announcement on Sunday. The significance of the omission only became clear during the emergency debate in the Commons on Tuesday. The existence of Granite was first brought to public attention by the Guardian last November.
Yesterday, senior peers, including the former chancellor Lord Lawson, expressed astonishment that ministers were at a loss to explain at the outset of the Lords debate the contractual relationship between Granite and the Rock. In the Commons David Cameron accused Gordon Brown of showing "less openness than Fidel Castro" while the Liberal Democrat spokesman Vince Cable, a supporter of the Rock's nationalisation, suggested an Exocet may have gone through the government plan. The leftwing Labour MP John McDonnell, one of the first MPs to raise the issue, claimed the nationalisation programme could not proceed without the issue being addressed.
The chancellor, Alistair Darling, met Cable yesterday in an attempt to reassure him and retain vital Liberal Democrat support. Cable came away unconvinced. Granite accounts for almost half of Northern Rock's book of mortgage loans. It began reselling the lender's mortgage loans more than 10 years ago after the City relaxed rules on the way banks could raise capital.
Northern Rock resold its mortgages, at first in small volumes, to overseas banks and pension funds. It used the money to grow rapidly and by last year was packaging up almost £5bn of mortgages every three months to resell through Granite.
When the lender collapsed in September, the Granite vehicle was the largest of its type in Europe. City experts said Granite would need to be fed with up to £3bn of fresh mortgages this year to replace loans redeemed by customers taking their business elsewhere. Critics claimed that if the Rock failed to continue to service the trust and Granite collapsed as a result, bondholders and the stability of the financial system would suffer and there would be a damaging impact on the Rock itself, since it has £5bn wrapped up in Granite.
The row makes it more likely that peers will force through big changes to the government's rushed nationalisation plan when they vote on key amendments today. It is likely that ministers will accept the bank must be regulated by the Office of Fair Trading.
Shadow chancellor George Osborne said the situation proved that the taxpayer would "come last" under the move. "Now everyone knows that the way Northern Rock and Granite will operate under nationalisation leaves the taxpayers saddled with all the bad debts, with Granite taking the best mortgages," he said.
The Conservatives claimed: "The contract between Northern Rock and Granite means that whenever Granite is short of assets, for instance when customers pay back their mortgage, Northern Rock has to top up Granite."
In a letter last night, Darling insisted the arrangement had no implications for the taxpayer, or the eventual chances of selling the Rock to a private buyer. Darling said: "Granite and Granite only is liable to its bondholders under any scenario. The government has not provided any guarantee arrangements to bondholders under any scenario. There would be no benefit to the taxpayer in seeking to bring Granite into public ownership."
He said it was a matter for the new Northern Rock management team to assess its future commercial arrangements with Granite.
