On the Rocks

Storm clouds are gathering over a highly technical -- but potentially very important -- aspect of Northern Rock's nationalisation which could throw Alistair Darling's plan seriously off course.

Shortly before midnight in the Commons chamber, it emerged that the legislation to nationalise the stricken bank excluded the offshore company, Granite, which controls £40 billion of the bank's mortgages. Opposition parties say these are some of the bank's most secure assets. This has allowed Vince Cable to say that Northern Rock has been left with "rubbish" assets and he is now threatening to withdraw his support for the bill pending further clarifications from the Treasury.

This could be problematic politically: any alliance between the Lib Dems and Tories in the Lords has the potential to delay the bill and force big amendments. It is also a possible financial problem: Granite, which repackages mortgages into bonds and sells them on, relies on millions of pounds a year from Northern Rock to service them. What happens if Northern Rock is run down and unable to supply this money, however?

Even basic facts are murky. My eagle-eyed colleague Peter Riddell has pointed out seemingly basic contradictions: Yvette Cooper last night in the Commons said Granite is not covered by government guarantees. "It is not being taken into public ownership and it is not, in fact, owned by Northern Rock, so it is not part of the taxpayer's exposure and he has never been so." Yet a Treasury press release from December said the government guarantees were extended to "all obligations of Northern Rock plc to make payments on the repurchase of mortgages under the documentation for the "Granite" securitisation programme." There may be answeres to these questions, but they need to come quickly.

In plain English, this may mean the public is exposed to even greater liability, and could delay the government's timetable


Courtesy of the excellent "Red Box" in the Times