Saturday, January 19, 2008

We Pay For Brown's Crock Fudge

You've got to hand it to the guy

As feared, Bottler's going to fudge the Crock nationalisation. He's reportedly decided to make taxpayers keep all NR's liabilities, while giving any unencumbered assets and all future profits to Branson and the existing shareholders.

Rather than getting himself branded with the N word, spineless dithering Bottler would rather leave the rest of us exposed to a tanking property market and Branson's well known appetite for public cash.

Let's just recap on what we know so far:

1. Taxpayers currently on the hook for around £60bn of Crock liabilities.

Just before Christmas the Treasury widened the taxpayer guarantee to cover a broader range of liabilities. The Governor of the Bank of England told the Treasury Select Committee:

"Essentially, this does widen the scope of the guarantee to pretty much the whole balance sheet excluding the capital and the Granite securitisation."

He went on to say that about 40 per cent of Northern Rock's £114bn balance sheet related to the Granite programme, a third was deposits and other liabilities covered by the extended HMT guarantee, and 25 per cent was Bank of England and Treasury loans, "leaving a very small residual that is essentially capital".

In terms of money, we reckoned that meant we'd lent c £29bn directly to NR (equals 25% of £114bn), and guaranteed a further c £38bn (equals 33% of £114bn). Which totalled c £67bn, some small part of which has apparently been repaid (see this blog). So let's call it £60bn still outstanding.

(Remember too that the c£46bn outstanding under the Granite securitisation programme - despite having its own ring-fenced asset backing - could still come back and bite taxpayers: see this blog).

2. Taxpayer loan will remain in place

Originally, Branson promised to repay £11bn of the £25bn or so of HMT loans immediately (see this blog). Now, it looks like he'll repay nothing. NOTHING.

Instead, the whole £25bn will be relabelled as bonds. They will remain on the government's balance sheet (blowing Bottler's so-called Sustainable Investment Rule), until they can be sold off to private investors, when and if demand materialises.

But note this key point: even when the bonds are sold off, they will reportedly remain fully guaranteed by taxpayers. So even if they then move off the public balance sheet, the economic risk remains with us.

It's yet more of the Enron-style financial fiddling for which Bottler is notorious.

3. Deposit guarantee will remain in place

Despite all the puffing about how much punters trust the Virgin brand, Branson knows the truth: they don't trust it enough to deposit their money with a Virgin labelled Crock. So he's made it very clear his bid depends on HMT continuing their deposit guarantee (eg see here).

As we've blogged many times, the moment HMG's deposit guarantee goes, so does Mrs T's deposit. Along with a whole lot of others.

Without the guarantee, it's ludicrous to suppose Branson could possibly secure 25% of the new retail deposit market, as his plan assumes. Just as a reminder, here's the breakdown of the retail deposit market pre-crisis, with NR on a 3% (now probably half that):

Conclusions

With the taxpayer loan remaining in place, and with the deposit guarantee remaining in place, you may be asking what Branson is bringing to the table. If the property market goes down the plughole, we're still the ones taking the hit. What exactly does Branson bring?

True, there's that £650m of new capital he promised (see this blog). But you know, even if he comes up with it (and believe that when you see it), £650m is not that much to pay.

Not only does he get the upside should he actually manage to grow the Crock, but he gets a £90bn mortgage book to "re-engineer", £25bn of indefinite taxpayer loans, an open-ended and free taxpayer guarantee to help attract deposits, and the possibility of further taxpayer subsidies to come (Virgin Rail gets well over £1bn pa of taxpayer subs). Meanwhile he's charging NR £5m to mount the bid, and will take £10m pa for use of the Virgin brand.

Even more than in the British Energy bail out (see this blog), in order to cover their own political embarrassment, our gutless clothead rulers are lumbering us with the downside and giving the upside away.

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