Monday, December 10, 2007

The Field Of The Crock Of Gold

The story so far: during the dark days of Bad King Bean The Bad and his nincompoop henchman Chancellor Fumble, the good taxpayers of Sherwood have been forced to loan £25bn to a notoriously half-arsed money-lender known as the Crock; they've also been saddled with guaranteeing around £15bn of the Crock's retail deposits and several billions more of his non-collateralised wholesale deposits (see previous blogs here, here, and here, and this Treasury statement); with total taxpayer commitment now well north of £40bn, two distinctly off-white knights gallop into the lists to joust for the supreme prize- unfettered access to the public purse for many years to come. Now read on...

Sir Branston steadied his mighty steed Costalot, beamed toothily, and raised aloft the Glittering Halbard of St Publicist:

"Now, let it be proclaimed throughout the land, that I, Sir Branston, the People's true and trusty friend, do swear that I will rescue the Crock! Yea, and by my faith, there shall be succour for all: not just shareholders, but taxpayers, customers, employees, and, yea, even the Crock Foundation for the sick and tired- all shall be remembered."

He punched the air, and there was a mighty roar from the multitude. Beaming some more, he deftly extracted a wiry beard hair from between his teeth. "As a token of good faith, i'faith, I will stump up £200m of mine own dosh to get the ball rolling. And what's more, I will take No Payment for my travails. Save only for a nominal £5m to victual my scribes, and a notional £10m pa in alms for usage of the armorial bearings of St Virginnimus."

This last was too much for Sir Luqozade, who drew the mighty Sword of Truth and spurred his mount forward. "Heedeth not the idolatrous blandishments of St Virginnimus! The wages of idolatry is a much smaller slice for existing shareholders! I will so manage the Crock we shall have no need of false vestments. By God's grace, the name of Crock will be born anew!"

A huge cheer rang out from the assembled shareholders, and the two titans closed for combat.

But just as the mighty Sword of Truth was about to smash against the Glittering Halbard of St Publicist, the flap of the Big Gold Tent of State drew back. It was Chancellor Fumble himself, blinking into the light as if wakened from a deep sleep. The crowd groaned.

"Ah," he said. "Ah. Umm... the way to settle this is for one of you to return that £25 bill. You see, it only ever got lent to the Crock in the first place by accident. Just a simple accident! And we sort of need it back... if you see what I mean. Oh yes, and we need to remove that deposit guarantee as well..."

Sir Branston and Sir Luqo stared at him in a most warlike and intimidating manner.

He haltingly walked a few steps towards them. "The thing is, it was only ever a temporary arrangement, you see. Hah, hah. Just while we waited for something to turn up. Hah, hah, hah. I mean, good God, it's not as if the Crock isn't good for the money, is it? Why, according to the royal Fiscal Scrivener Arsehead, the Crock's underlying assets are as solid as a... er... well... look, I'd take a cheque."

There was an uneasy silence, punctuated only by Sir Branston's mount breaking wind. Its rider eventually spoke: "What are you on, pal? The Crock is a pile of horse manure. Jeeps, I'm doing you a favour even coming here. Assuming my guys don't find anything too toxic, I might give you back £11 bill. We keep the other £14 bill, plus the deposit guarantee, and we'll see how it goes. Best I can do."

Fumble tried to smile dismissively, but his lips had painfully stuck to his teeth.

Sir Luqo rode up to him. "Don't listen to that pickle brain," he roared. "I can save the Crock. And what's more, I can let you have much more of your cash back. Much more!"

"Much more?"

"Much more." He glanced back at Branston and lowered his voice. "Well, depending, obviously."

"Depending? Depending on what?"

"Well... all sorts of things. Like whether I can find anyone else stupid enough to lend to the Crock in your place."


So in terms of taxpayers getting out of this mess, what do we actually know about the Branson (see this blog) and Luqman Arnold bids (see here)? The short answer is precious little.

What we have been told is that neither is offering to repay anything like the whole £25bn we're owed on Day One. Branson has offered £11bn, and Arnold £10-£15bn, but since neither seems to have entirely tied up the commercial banks to provide the money, there ain't a whole lot to choose between them. They are both planning to keep £10-£15bn of our cash to be repaid at some stage over the next few years, effectively on a best endeavours basis. And that in an environment where house prices may well be sogging drastically.

And taxpayers need to remember a very important point- our loan to the Crock is in two parts. Around £11bn seems to be secured against mortgage assets. But the rest- the bulk- is unsecured. And this being the real world, we can be pretty sure that both Branson and Arnold are proposing to repay the secured debt first. By "unencumbering" £11bn of mortgage assets in that way they will be be able to reuse them to secure more borrowing from commerical banks.

Unfortunately, that leaves taxpayers standing in line with all the other unsecured creditors for repayment of the other £15bn. And according to that leaked NR sales memorandum (see this blog), £74bn of the Crock's £90bn mortgage assets are already "encumbered" (ie pledged as security to existing lenders). So the unsecured lenders are pretty thinly covered.

In reality, we will only get our unsecured loans back anytime soon if NR's retail deposits base can be rebuilt, with fresh deposits being used to repay us. But is that in any way feasible? And more specifically, is it feasible without a continuation of the government deposit guarantee?

Both bids seem to envisage keeping that guarantee in place for "a period". Darling's plan had been to step away under cover of an increase in the general bank deposit guarantee up to £100,000. But that's now being opposed by the commerical banks on cost grounds (see here), so it looks very much like taxpayers will be staying on the hook.

True, Branson's bid does look the likelier of the two to survive without the guarantee. Whatever the City may think, many members of the public do seem to trust him, and since he launched his bid, NR's loss of deposits has reportedly dropped from about £200m per day to roughly zero. Arnold has no such credibility, and his intention to stick with the busted Crock brand looks nuts (reality check: whatever happens, as soon as that HMG guarantee goes, Mrs T's Northern Rock Silver Saver account gets closed- along with a load of others we presume).

And even with the Branson bid, does anyone seriously imagine Virgin could capture a quarter of all new UK retail deposits, as apparently envisaged in their plan? Just take a look at the deposit market breakdown pre-crisis, with NR on just a 3% share:

Source: British Bankers Association

As we've said many times before, it's very difficult to imagine taxpayers escaping intact from this fiasco. And at the end of the day, it may very well be that nationalisation and an orderly run-off is the best we can expect.

But what we should not accept is a deal where we continue to underwrite the bank while existing shareholders retain a stake. As we've said before, if the bank can't survive without state support, it's effectively bust, and shareholders must lose everything. Taxpayers should never be forced to bail out shareholders.

These two bidders should be asked to reshape their bids so that taxpayers are taken out whole soonest- no continuing loans, and no continuing guarantees. If they can't do so, then Kaletsky nationalisation is the least worst option: the government gives notice that all loans must be repaid in full by end-February (including rolled up interest); failure to do so means Northern Rock will be nationalised for £1, depositors paid out, the assets sold off over a period of time, and the entire operation closed down.


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