Goldman's Rock Gambit
Northern Rock was laid low in September by its excessive dependence on wholesale money markets, especially the securitised mortgage market, for the financing of its lending.
So it is either apt or appalling – depending on your bent – that Goldman Sach’s solution to the Rock’s current plight would be to securitise the taxpayers’ emergency loans to the Rock.
The £26bn odd that has been lent to the Rock by all of us would be repackaged into bonds, for sale over time to investors.
But in order to make them sellable, these new Rock bonds would need a triple-A credit rating.
And that would require them to be guaranteed – or “wrapped”, to use the jargon – by the government.
In other words they would be the equivalent of gilt-edged stock.
“What on earth’s the point of all that?” you might well ask. “Surely they would remain a public-sector risk. We would all still be on the hook to the Rock’s plight, as exposed as we ever were.”
And you would be right.
What’s more, the Eurocrats in Brussels would doubtless see such a deal as state aid, and therefore illegal.
So this deal will only fly if Goldman can find some other “wrap artists” (ha ha).
It needs to persuade financial institutions called reinsurers to take over some or all of the Government guarantee.
In theory this is do-able.
Reinsurers – such as the one run by Warren Buffett, the world’s most successful investor – still have immensely deep pockets, even after the credit crunch.
But they would charge for taking on the Rock risk from the government, for providing the cherished triple-A rating.
And the big questions, which Goldman has not yet answered, is whether the re-insurers can do this at a price that isn’t excessive and in a way that placates the Eurocrats.
To be clear, this is not some intellectually fascinating bit of obstruse financial engineering.
Goldman’s success or failure in securitising this debt will decide the very future of the Rock.
If the securitisation can be done on sensible terms, it means that a rescue deal with the consortium led by Virgin or with Olivant (or, as a very long shot, the Gooding/Five Mile group) may yet happen.
Virgin – which yesterday gave an update to the Rock’s board – remains remarkably bullish about its prospects.
Which is a bit odd, since the big shareholders in the Rock tell me they are profoundly uninterested in what Virgin has to offer – and those shareholders have the power of veto (much to the chagrin of the Treasury).
The other generic option is partial nationalisation.
Full nationalisation seems to have been more-or-less ruled out.
Instead the Treasury’s fallback plan would effectively be the status quo, except that new senior management would be parachuted into the Rock and the Treasury would take a minority stake in the business (possibly via a warrant or share-option arrangement).
A lot of preparation has been made for this partial nationalisation. A senior banker has been lined up as a possible new chief executive.
For the Treasury, it’s an insurance policy – since a private-sector rescue may turn out to be impossible.
And it’s a realistic option, because retail depositors have at last stopped withdrawing their funds from the Rock: retail deposits have stabilised at something over £9bn, which reinvents Northern Rock as a small-to-medium bank.
Many taxpayers may take the view that a partial nationalisation would make the best of a bad job.
What I mean by that is that we’re all exposed to the Rock to the magnificent tune of £57bn through direct loans and guarantees for other lenders.
Under none of the available options – those proposed by Virgin, Olivant, or the Gooding/Five Mile group – would this taxpayer support fall to some minimal level in the coming weeks and months.
Taxpayers would continue to prop up the Rock for a considerable period.
The big point is that if there is a profitable future for the Rock, it would only exist because we as taxpayers prevented the Rock from collapsing.
But – at the moment – there is no proper reward for taxpayers for all this succour.
And the one benefit of a partial nationalisation is that it would give to the government and taxpayers a slice of any future capital gains generated if the Rock were to become a thriving going concern again one day.
There is therefore an argument that a tweaked, semi-nationalised version of the status quo – which would endure only till markets recovered sufficiently to permit a full privatisation – is the best of the lousy options available to the Rock and the Treasury.