These organisations actually have people employed with financial qualifications in working out what to do with their money. And it’s not like they haven’t been burned before by the collapse of a dodgy bank that just happened to be the highest interest payer (if it is in fact possible to work in local government finance without being told about the BCCI collapse and its knock-on effect for councils, then there’s a systemic problem in that everyone in the entire industry is completely inept).

It’s unfortunate that local taxpayers can’t recover the missing assets from the idiots in question, and the councillors who’ve singularly failed to oversee them (and who, I’m willing to stake near-Landsbanki-style amounts of money, will be more or less equally drawn from the ranks of the major parties).

Update: The Daily Mash calls it right: “oh fuck, we meant ‘Luxembourg’”…

Sorry, Icesave investors. On the plus side, my point about the daftness of transferring money to Irish banks is made rather conclusively.

Oh, and while I’m clarifying – I’m in the lucky position where my savings (just about) go over the protected limit, and I’ve had them split between several accounts to diversify risk even before the current crisis started. While I think it’s likely that a crash – especially if it’s of a real bank, rather than ultra-high-interest online chancers – will bring full protection, it might not, so get transferring now if you’ve still got over £50k with one institution.

Relatedly, Seth Freedman has a piece in the Guardian, wondering why people who chose to sign up for ultra-high interest rates with a ropey over-leveraged bank should be bailed out at the expense of the poor and the prudent – and he has a good point. It’s fair for the government to fully compensate savers in banks that a reasonable person would see as ’safe’ [*], but hard to justify going over the clearly stated FSCS limits for people who’re choosing to gain an extra 2% interest in exchange for investing in, say, the First Bank of Nigeria rather than Lloyds TSB.

Looking to the longer term, and today’s liquidity-for-shares UK bank nationalisation announcement, my dad has a piece up on Liberal Conspiracy arguing that liquidity bail-outs are a terrible idea, as the crisis would otherwise be an excellent opportunity to get rid of the parasitical bastards at the major investment banks and end the toll they’ve exacted on the global economy ever since the Depression. If my dad were Mark Steel, that’d be unsurprising; since he’s been a stockbroker for 30 years and is currently head of investment banking for a broking firm, it’s a little more interesting…

[*] there’s a difference between savers in Northern Rock or HBOS, and Icesave or First Bank of Nigeria here. Northern Rock was originally a safe, conservative institution that made itself unsafe without most of its customers noticing, while HBOS did something similar (with less ineptitude and worse luck). On the other hand, Landsbanki was a foreign investment bank that nobody in the UK had ever heard of, and that was massively over-extended when Icesave started – and FBN is actually a reasonably good institution by local standards that appears to be holding up well, but hello! it’s a fucking Nigerian bank!

Update 8/10: Darling has copped out slightly. Rightly, he’s agreed to pay the €20,000 that the Icelandic government should have covered to Icesave savers; and rightly, he’s frozen Landsbanki’s remaining UK assets in the hope of recovering some money to offset against the compensation. Wrongly, he’s also covering deposits over £50k, which should have been written off to “if you’re that stupid then you don’t deserve to have 2x the average annual wage in cash”. Still, it’s more evidence for my “put the deposits in whatever goddamn bank you choose and you’re still safe” theory…

1) keep the 21% basic tax rate; abolish tax credits; and use the money saved by abolishing the 10p band to raise the personal allowance;

2) abolish NI and raise the basic and higher tax rates to compensate [this helps part-time workers, who don't earn enough to pay income tax but are currently forced to pay NI anyway];

3) assume an acceptable public sector deficit level of 5% this year and 8% for 2009. Keep spending flat as a % of GDP and use any “surplus” cash to further raise the income tax threshold

4) Bring in a few daft-but-populist-and-fairly-cheap things: halt post office closures (even though nobody uses them, they clearly have talisman value to Middle England); bring back matrons (this probably involves renaming ’senior charge nurses’ to ‘matrons’ or similar); raise the state pension by a few bob; accept that the justice system is too beholden to the tabloids to get prison numbers down so build more (small, local) prisons; etc.

5) change the electoral system to make sure the Tories don’t get as much power as Labour had if they win: introduce some kind of PR (probably a Scottish Parliament kind of thing), create more elected mayors, devolve more central responsibilities to local authorities, give the GLA the same responsibilities as the Welsh Assembly (double-bonus: short-term, you look statesmanlike for handing power over to Boris; long-term, you get even more PR benefits when he messes up…)

However, I don’t think they’ll be anywhere near enough. There’s a small possibility that David Cameron is the Tories’ Neil Kinnock, and Labour will just scrape in at the next general election amid concerns over his competence despite popular loathing for the incumbent party, but it’s more likely based on last night’s results that the Tories will win next time.

…which brings me to my main point: Gordon Brown’s worst political move, both in terms of the Labour Party and his own legacy, was calling off the snap election last autumn. Even at the time, it was clear that he had a chance of winning – but it’s become clear since that losing would have also been a better option that what really happened.

Imagine if a minority Tory government, with limited and unofficial Lib Dem backing, had just taken power to be battered by the credit crunch, Northern Rock, rising fuel bills and House Price Carnage. Labour could have confidently and straight-facedly played the “if only the people who knew what they were doing, and who gave you 10 years of prosperity and good times were in charge” card. It would have worked, even if the Tories had only floundered as much on NR as Labour actually did (i.e. for a couple of months before doing the right thing).

With an inexperienced, toff-ish team trying to battle against a worsening global economy, with Labour attacking them on everything they did, with some of the press still vaguely on the Labour side (remember, nine months ago every commentator in the press didn’t hate Gordon Brown), with flaky Liberal support and with the Old Tory / New Tory divide re-emerging, the chances of lasting out for a five year term would be pretty damn limited. The prospects for an old hand coming back to take charge of Labour at the emergency post-collapse general election (Jack Straw PM, anyone?) would be looking pretty bright…

Instead, we’ve got two years of collapsing farce followed by five – probably ten – years of Tory misrule to look forward to. Luckily, I’m just about eligible as a skilled migrant under New Zealand’s point-based immigration scheme …

According to hard-left MP John McDonnell, Granite “holds approximately 40% of Northern Rock’s assets, around £40bn… where Northern Rock’s best assets sit outside the reach of taxpayers. So the bill to nationalise Northern Rock will, in fact, be nationalising only dodgy debt“.

The good folk of Commentisfree have gone even further to town, uniting socialist idiots and right-wing idiots alike in a chorus of “someone somewhere has carried out a rather large fraud and I would like that someone prosecuted“-type comments.

There’s only one tiny problem with this kind of commentary: it’s bollocks. The mortgages in Granite are exactly the same quality as the mortgages that stayed in NR, nothing untoward took place anywhere along the line (well, not involving SPVs), and NR isn’t liable for Granite’s debts.

We’ll buy, you’ll sell

At the beginning of 2007, the Granite companies owned £42 billion worth of mortgages managed by, and originally sold by, Northern Rock. Granite paid Northern Rock for these mortgages using £39 billion worth of bonds, which it sold to third-party investors for cash. This began in 1999 and was a deliberate strategy to allow Northern Rock to grow, not as some kind of sudden “quick, let’s hide the money!” racket.

The reason for selling mortgages to SPVs is that it means Northern Rock is no longer responsible for them. If the holders of mortgages that are owned by Granite can’t pay the loans back, then Northern Rock is under no obligation to compensate the investors in Granite bonds out of the rest of its assets. Therefore, the loans don’t count against NR’s capital for regulatory purposes (they do appear on its published financial statements, for reasons too dull to go into).

The assets that are purchased by the SPV are whole mortgages, not complex tranches of low-risk-ness versus high-risk-ness. Note also that the condition attached to the loans in the SPV – i.e. maximum 95% LTV, lower for higher-value loans, and can be varied at NR’s discretion – is exactly the same as for the mortgages that were kept in-house. In other words, concerns that the SPVs have cherry-picked NR’s finest mortgages and left it with the dross are complete nonsense [the linked document is just the most recent of NR's securitisations - here's more detail than anyone would ever need to know about the whole lot of them. If it transpires the conditions in any of these are materially different in a few of these from the random sample I've looked at, mine's a hat sandwich...]

SIVilisation

Using SPVs was a sensible way for a bank to protect its shareholders and depositors, at least as long as people were willing to invest in new SPVs (which they aren’t, any more, but that’s not a problem for the existing loans – Northern Rock isn’t financially liable for the Granite bonds, and they don’t fall due for another 20 years [***]).

The tax and charity issues are an utter red herring: barring exceptional circumstances, the SPV won’t incur any tax liability and won’t make a net return to be paid out to anyone. The charitable trust thing is simply because someone needs to be the legal beneficiary, even though it is structured so that no actual benefits will ensue, and if that beneficiary were the arranging bank rather than an arbitrary charity then there is a small chance it could make things (even) more complicated.

Northern Rock’s collapse had nothing to do with Granite – rather, the mortgages that it did still have in-house, and hence were still a risk to its shareholders and depositors, were funded by short-term commercial borrowing. When this source of funding dried up during the credit crunch, NR had no way of paying back its lenders.

Nothing to see here

While the use of SPVs means that you need to have some knowledge of finance to understand what’s happening in NR, the net result is not to defraud the taxpayer or to lose everyone money.

Everyone who bought NR shares or bonds knew the structure, as it was explained in some detail inthe annual report and in momentuous amounts of detail in the SPV prospectuses that NR also made available on its website. So did the BoE, FSA and regulators – in short, all the conspiracy theorists are simply talking gibberish.

The reason Northern Rock collapsed is because it borrowed too short and lent too long. That is all. The trappings associated with being a 21st-century financial services institution make the details harder to grasp, and create scope to see malice and fraud where there is none, but they don’t change the underlying story in the slightest.

Update: as might be expected, blogland’s biggest idiot has entered the fray with more cluelessness. HMG has guaranteed NR’s limited buyback obligations to Granite; it has not guaranteed Granite’s debt. This is simple stuff…

[*] Thanks to Andy in comments for pointing out that an SPV is not the same as an SIV. SIVs are the things which went bust in the US; SPVs are a general term for ‘off balance sheet’ (although literally, they tend to go on the balance sheet these days) financing

[**] Some of the companies were registered offshore, although most were registered in England and Wales

[***] Technically, there’s a five-year ‘expected maturity’. However, legal maturity isn’t for 25-30 years from loan tate (with the earliest 30-year loans from 1999 falling due in 22 years or so), and that’s the only point when Northern Rock is expected to bail out bondholders if things have gone terribly wrong – except that by then, all the mortgages will have been paid back or written off. The five year ‘expected maturity’ merely means that Northern Rock has to pay trivial (by comparison with asset size) penalties and annoy Granite bondholders a bit – it cannot be compelled to buy the bonds back. This FT blog explains exactly what NR’s residual liabilities to Granite are.

According to the Merril/Citi/Blackstone plan to sell Northern Rock in October 2007 (which was leaked by Bad People, and which certainly can’t be found anywhere on the Internet these days), the bank had mortgage assets in October 2007 of just over £100bn, and liabilities to retail depositors, commercial lenders and the UK government of just under £100bn, giving the company shareholders’ equity of somewhere well south of £5bn (based on its balance sheet, not on share prices).

…but answer came there none

It’s clear from the events of the last few months that there is no private investor out there who is willing to purchase Northern Rock as a going concern, or to purchase its mortgage assets at book price: if there were, then said investor would be doing precisely that right now. Why not? Well, there are two possibilities:

1) people with access to £100bn cash-money are a bit thin on the ground at the moment;

2) spending £100bn on UK residential mortgages is a terrible idea even if you do have that kind of money lying around.

If 2, then that’s a bit of a bummer for UK taxpayers; if 1, then it’s possible that in the style of Continental Illinois, we could end up making a net profit on the deal once markets recover.

Either way, it’s clear that Northern Rock is not capable of running as a going concern without taxpayer aid, and that Northern Rock’s assets are not capable of being realised at their book value [or, given the professed impossibility of valuing residential property assets accurately at present, anywhere close] – the only debate is whether, with the bank’s bust status a given, the government have just done something clever or something disastrous.

Northern Widget

Now let’s turn to Dave, who runs a widget factory. According to the books, Dave’s widget machine is worth £103 [*]; unfortunately, he owes the bank £98, he only has a fiver of cash, the bank has just revoked his overdraft, and none of the other banks are willing to lend him any more money. Oh, and while I’d very much like to buy Dave’s widget machine, I’m only willing to pay £90 for it (nobody else can afford it at all). In short, his company is not capable of running as a going concern, and its assets aren’t capable of being realised at book value.

What happens to Dave? Well, his company goes into administration. The administrators will try and sell the company itself to start with – but if their only offers are insultingly low, then they’ll try and realise the value of his machine instead. So they’ll sell me the widget machine for £90, pay back the bank at 91p in the pound, and Dave will lose his fiver.

However, the government thinks Dave’s company is dead important and shouldn’t be allowed to fail – so instead of allowing the administrators to break it up and sell the machinery, they nationalise the company and allow it to borrow money directly from the government. Under this scenario, the bank gets paid back at full wack and the widget machine goes onto the government’s books at £103.

Should Dave:
a) get his fiver back from the government, because that’s the value of his original stake based on the company’s balance sheet;
b) get roundly told to sod off, because his company’s already bust and he’d not have seen a penny if the government hadn’t intervened?

In the case of Dave, it’s pretty hard to opt for anything other than b. So I’m slightly confused on why some people seem to believe that Northern Rock shareholders should get a different treatment…

[*] this is its fair value based on estimated future revenues, as signed off by Dave’s accountant