The Northern Rock rescue
£110 billion is an awful lot of money. £110 billion is also the amount of public money the UK government is using to "bail out" Northern Rock plc (the UK's fifth largest mortgage lender) according to news reports. That's £1,800 (about $3,600) straight out of the pocket of every man, woman and child in the UK. It is more than the UK government spends in one year on the entire National Health Service.
So why is the UK government doing this and where is the money going? I decided to try to find out, and started by downloading Northern Rock's most recent interim report for the period ending 30th June 2007 .
Northern Rock - assets and liabilities
The report tells us that Northern Rocks total assets at the end June 2007, 3 months before the UK government stepped in to rescue the bank, were £113 billion, of which 91% were residential mortgages. In other words, the bank has lent £103 billion to people to buy their homes and the bank holds those homes as security for the loans. If the rescue is really going to cost £110 billion then the bankers are telling the government that Northern Rock is 'bankrupt' and all those homes are worthless - think about that. UK bankers advising the UK government think that homes purchased for over £103 billion are worthless - do they know something we don't?
The principle sources of debt financing these assets were:
- £24 billion deposits from retail customers (private individuals)That means that at the end of June 2007 private individual customers of Northern Rock had loaned Northern Rock £24 billion. Those individuals are voters so there would seem to be at least a political expedient in the UK government wanting to protect them. But what about the other £81 billion, who is lending that money to Northern Rock? This is where the water gets murky as we can't tell from the accounts of Northern Rock. What we can discern is that £27 billion has been lent directly while £54 billion has been through "securitized notes" and "covered bonds".
- £27 billion from "non-retail" (ie. from banks, other professional investors and funds)
- £46 billion in securitized notes (banks, other professional investors and funds own the notes) and
- £8 billion in covered bonds (banks, other professional investors and funds own the notes)).
Banks, by definition, trade on their ability to (i) lend to customers at rates higher than they borrow at from sources such as the ones listed above and (ii) lend to customers on a long term basis while funding themselves on a short term basis. The methods of funding have become increasingly complex as banks have sought to make as much money as quickly as possible.
Securitization is one such method, and a favourite of the management at Northern Rock who used it to turn what should have been a very conservative business into a staggeringly fast growing and seemingly glitzy one.
The "securitization" method used by Northern Rock was to have their lawyers establish a complex series of Jersey (one of the UK Channel Islands) companies many of which bear the name "Granite". None of these companies are owned by Northern Rock, the top company in the structure being owned by a UK charity, not out of the goodness of the Northern Rock management's heart but so as to keep the group of Granite companies "off balance sheet" i.e. off Northern Rock's books.
Northern Rock would sell mortgages that it owned (i.e. the right to receive the mortgage payments to be paid by its borrowing customers over time and the security it held on those people's homes) to Granite. Granite would then borrow money from the international markets through a form of loan called a "Note". The Notes are referred to a "Mortgaged Backed Securities" and are part of the same type of arrangements that caused the US Sub-prime mortgage crisis.
The way these Notes were structured meant that Granite had to pay very low interest on them - for example 0.09% over the inter-bank money market rate for 5 years. This compares with the rate the mortgage borrowers were paying of typically 1.5% above the same rate, a gap of 1.41%
Granite was set up in such a way that Northern Rock still had the risk if any of the mortgages defaulted but was able to keep most of the massive 1.41% profit. This was one of the key reasons that Northern Rock was able to grow at over 20% per year over the last few years.
So who owns the Notes and the other loans made to Northern Rock? Again it is impossible for us to tell but we can see who is able to own them. We all know banks and other professional investors can own them but not many people know that the mutual funds and pension funds in which people entrust their life savings and retirement savings can also own them.
The Granite Notes were listed on the London and New York Stock Exchanges which means that they are legally defined as "listed securities", as a result of which they can be bought by mutual and pension funds. The rules governing what your mutual fund or your pension fund can buy with your retirement money sound pretty strict (if you've ever taken the time to look at them) and one such criterion is that they may only buy "listed securities". Most people think that term means that they can only buy "good" investments - that is things that are real, like lending to big companies that will always pay their debts, or investing in shares in companies that have real businesses - not cleverly packaged up mortgages where your savings funds get paid 0.09% over the bank lending rate while the mortgage bank (like Northern Rock) gets 1.5% from the borrower and makes a 1.41% profit by using this clever financing technique.
Not many people know that their savings and pensions are very likely being lent to other people to buy houses at immensely inflated prices.
Apart from the handsome profits involved in this "securitizing" of mortgages into "Mortgaged Backed Securities", there are additional benefits due to how banks are regulated and how they are assessed by ratings agencies (private companies that publish reports and rankings on how good a borrower such as Northern Rock or Granite are likely to be at repaying their debt). The way securitization is treated by both regulators and ratings agencies allows banks to grow faster than they otherwise would be able to "in the old days".
Even with this use of securitization, Northern Rock got to the position in 2005 where it couldn't keep growing as fast as the management wanted as both regulators and ratings agencies were getting to the limit of what they would accept. So along came another fine "innovation " from Northern Rock, this time called Whinstone. Needless to say, Whinstone is another Jersey company also not owned by Northern Rock. The reason it is important is that it was meant to take 80% of the risk of default of all those mortgages sold to Granite which Northern Rock still had and sell them to professional investors, again through selling Notes. This time the Notes were not listed because they are regarded as being too risky for anybody other than the most sophisticated investors to buy.
Using Whinstone got the Northern Rock management off the hook and they were able to continue to grow the bank at over 25% per annum in 2006 and 2007, for which they were no doubt handsomely rewarded.
A recent credit report by Standard & Poors rating agency on Granite, quoted by icc Credit , stated:
".....while there has been some worsening of the credit quality of Granite's collateral over the last few months of 2007, it has not been material enough to warrant a rating action."In layman's terms this means that there is nothing wrong with the mortgages held by Granite.
So we have Granite with it's £45 billion of loans ("securitized Notes") which are either held by banks and other professional investors whose very business it is to lend money or are held by mutual and pension funds who it is highly debatable whether they should ever invested in these Notes in the first place. So the UK government's bail-out is either bailing out banks and professional investors, which is criminal, or it is covering the backsides of those same banks who immorally invested your money in these Notes and don't want to have to confess to the confidence trick they've been playing on you all along.
So is your money, or that of the banks and professional investors, at risk of being lost? On the face of it the answer is NO:
- £45.7 billion of securitized debt financed via Granite which is doing just fine and even if it wasn't only £18 billion of this would fall on Northern Rock, the rest of the risk supposedly being carried by the professional investors who own the Whinstone Notes.That makes £54 billion of debt that is not in default and is not envisaged to default any time soon.
- £8 billion of covered bonds which are still performing
There's about £24 billion of customer deposits which as a matter of political expedient one could envisage the government wishing to protect - after all retail customers are voters. But that is a long way short of £110 billion.
So the UK government has been persuaded by somebody that it needs to shell out the remaining £83 billion to investors and lenders whose business it is to take financial risks or to protect the banks and fund managers who have been diverting your savings where they shouldn't. That's like you and me going along to the government and saying, "Hey, I screwed up. I lost money at the casino, so did my friends, we bought some bad investments, you know how it goes, so can you refund me please so I can keep playing? Oh, and by the way, we lost a bunch of other people's money and we don't want to tell them so can you give that back too?"
The logical deduction from all of this is that the people that Northern Rock lent to in the first place aren't able to pay their mortgages. Again, this isn't the case.
As at June 2007 we find that Northern Rock had total "loan loss impairment" provisions (ie. amounts set aside to cover mortgages and other assets of the bank that the borrowers are unable to repay) amounted to £120 million which appear to be reasonable provisions at that time .
After all these details we can now conclude that there is absolutely no reason why Northern Rock could not be managed into an orderly liquidation. Banks and professional investors might lose a bit of money and they would likely have to confess to us what they have been doing with our money.
Lastly, the UK government is proposing (Banking Bill in the House of Commons on 20th February) to nationalize Northern Rock but not Granite or Whinstone despite the fact that they are deeply integrated. There is something terribly wrong with this whole picture; something we should be seeking out and paying attention to. All is far from well in the world's financial system.
So what happened to cause the dramatic collapse?
We are consistently told that it was due to the US Sub-prime crisis. Yet Northern Rock held no US assets whatsoever and certainly no US Sub-prime mortgage assets; its financing structures are intact and working as before, it was not suffering from material losses.
So why the massive bail out?
The issue is one of confidence in the banking system which can reasonably be measured by the willingness and ability of banks to lend to each other. The fact is that in September 2007 the banks simply stopped lending to each other. In plain English the banking system stopped and very nearly collapsed. It was this fact and no other that led the UK government to step in and rescue Northern Rock.
No doubt they were persuaded that it was a fine idea by the coterie of bankers that stepped forward to advise them. Bankers who had everything to lose if the government did not step in where the UK and international banking system was unable and/or unwilling to lend to Northern Rock directly or at least without a direct government guarantee.
This begs the question of what was wrong with the UK and international banking system in September 2007 and has anything changed?
The Global situation
The Sub-prime crisis originated in the US, its contagion spreading through the global financial system. Despite what the mass media has to say on the topic the real issue isn't whether poor Americans are defaulting on their mortgages; the issue is the pyramid of structured financing companies, repackaging companies and their plethora of bonds, notes and other financial instruments, not to mention the vast array of structured derivatives that make it nigh impossible for anybody to assess the real financial performance of those entities, securities and derivatives.
In a nutshell none of the banks know just how broke the others are.
The fact is that the Federal Reserve assisted by other central banks including the Bank of England and the European Central Bank deliberately engineered the greatest expansion of credit in history by pumping vast sums of money into the banking system.
To compound the effect of this extraordinary expansion, auditors, regulators and ratings agencies allowed banks to engage in the what is best described as "compounded financial engineering", the layering of financial instruments upon each other so that today it is literally impossible to track what is behind many of these complex instruments. What started out as a Mortgaged Back Security (a tradable loan secured on a bundle of mortgages themselves secured on homes) has been so reconfigured that the final instrument is unrecognizable. The reason is simple - every time instruments are "repackaged" the investment banks that specialize in this activity make a profit and usually a very handsome one at that.
The craze did not stop at Mortgaged Back Securities. Almost every possible financial instrument in issue has been the subject of one form or another of this repackaging process. The banks made out like bandits, literally.
Financial regulation is meant to prevent banks from over lending and should have prevented the scenario described above. However, the deliberate policy of the Federal Reserve was to cause the situation we have today so all efforts were made to ensure that the regulatory environment accommodated pretty much whatever the investment banks asked for.
A bank's ability to lend is restricted by the amount of capital it has. Historically this capital was real equity, money paid for shares by shareholders. However, the rules on what banks could count as capital were relaxed by the Bank of International Settlements (the central bankers bank) starting in 1988. By the time Bush became President of the US the market in new capital instruments was booming. These instruments are actually debt but are structured so that banks can treat them as capital. This allowed the banks to do more business with pretty much the same real capital. As more business meant more profit while using the same real capital, the shareholders - and the bankers they employed - got rich.
However, this wasn't enough, the banks and the central banks wanted the system to truly boom. There is nothing like unfettered greed to drive bankers forward. Banks began securitizing their assets - that is selling assets (mortgages, loans, bonds and other financial instruments) to newly established companies which financed the purchase through borrowing in the international capital markets. There were a few bumps along the way but where it ended up was that banks could make it appear that they has removed the risk of these instruments from their books (balance sheets), resulting in no need to use their precious capital to support the risks associated with those assets, while reaping the profits associated with them. They could really "have their cake and eat it".
The game could continue, like musical chairs, until something caused the music to stop. Except, unlike musical chairs where one person doesn't have a chair, in this game almost nobody has a chair and the players know it. The Sub-prime crisis caused the music to falter and the players ran for their chairs.
The banks got caught in the trap of their own and the regulator's making. They have had to bring the value of many of these complex financial instruments back on to their books, prop up their offshore structure investment vehicles and make substantial provisions for the most obvious losses. The reason it became a crisis is that the banks stopped lending to each other and the system relies on them doing that.
Why did they stop lending to each other?
Because they each know how bankrupt the system is and how the game has been played and they are desperately trying to make sure they get one of the few chairs if the music stops completely. They panicked and the system shuddered.
At this point the regulators stepped in and basically wrote blank cheques to keep the banks afloat. It is the desperation of this central bank support that we are seeing in the Northern Rock case.
The Federal Reserve, however, seems to have done some thinking ahead.
What's in statistics?
On 10th November 2005 the Federal Reserve announced that it would cease to publish the M3 monetary aggregate on March 23rd 2006. M3 is a measure of what is referred to as "broad money" and is published by every major economy in the world.
Cutting through the jargon the key information that ceased to be available to the public as of 23rd March 2006 are the details on Repurchase Agreements and Eurodollars. It is Repurchase Agreements (or Repos as they are often termed) that caught my eye. But before looking at Repos let us just check whether M3 is an important statistic.
On 9th March 2006 the Federal Reserve stated : "M3 does not appear to convey any additional information about economic activity that is not already embodied in M2". Based on the Fed's own data "Non-M2 M3" (ie. money that is in M3 and not in M2 or any other money supply statistic) rose from $1,946 billion in January 2000 to $3,608 billion in March 2006. That seems like a substantial sum of money if you ask me. I know it's only a bit above the amount that Donald Rumsfeld said that the Pentagon managed to lose all trace of, but it's still a worthwhile amount of money.
Back to Repos, the Fed provides a summary of what Repos are and how they work on their website :-
"The Fed uses repurchase agreements...to make ... loans to [banks].... The Fed uses these ... types of transactions to offset temporary swings in bank reserves; a repo .... adds reserve balances to the banking system.."Now, I fully admit that I may be joining dots that really aren't connected but it does seem remarkably prescient that the Fed just happens to stop providing statistics on a money supply number of $3.6 trillion that just happens to be related in part to Mortgaged-Back Securities and it just happens to be Mortgaged-Back Securities that cause a near financial melt down 18 month later.
"....the mechanics of a repo involve buying and then reselling securities at a set price and a set time..."
"The ... types of general collateral...the Fed accepts are ..... certain agency "pass-throughs" (or Mortgage Backed Securities, often called MBS)."
It also just so happens that the rules governing this form of back door financing of banks allow for these very same Mortgaged-Backed Securities to be sold by the banks holding them to the Federal Reserve, no questions asked.
In addition, there is a potentially very significant accounting advantage to be obtained by banks entering into repos over Mortgaged-Back Securities with the Federal Reserve. In the absence of any such repos the banks would be forced to write in their accounts the value of these securities, and all securities linked to these securities, to their market value which, in the current absence of any meaningful market is arguably zero. Should this happen then many banks would wipe out their capital and be forced to declare bankruptcy, this would cause a run on the entire system and most likely result in a total collapse of the international banking system.
This can be avoided if the banks can demonstrate that an unconnected third party, the Federal Reserve, is prepared to buy these securities at their face value under a repo. Hey Presto - problem solved. The music doesn't stop........yet.
It would seem that the Federal Reserve has created for itself and its banking collaborators a means of secretly supporting banks that are in fact insolvent. This is immoral but absolutely necessary if the international banking system is to be kept alive.
I'd now like to examine more closely this massive, Central Bank engineered, expansion of credit.
Central Banks literally create money, fiat currency, at their whim. When they do this the supply of money goes up. If this supply mirrors the real activity in an economy such as the production of gold, other metals and commodities, the construction of real property etc., then the expansion in "money supply" equals the expansion in "assets". On this basis the price of those assets would remain level as a new dollar would only be created to match the creation of a new dollar's worth of something.
As we can all vouch this has not been the case, the price of almost everything has risen dramatically. Nowhere has this been more apparent than the stupendous inflation in house and commodity (metals, oil, grain, rice etc.) prices. In day to day terms this means that the price of the things we must have (homes, transport, communication, energy, food, medicine) have risen substantially. This has been due to this fact that far more money has been created than the value of real things produced. More money chasing relatively few goods and assets results in inflation.
The US is the most extreme example but the UK, Australia, Canada, other western economies and the Asian "tiger" economies have not been far behind. In these economies there has been so much new money floating around that property prices have risen to insanely high levels and the cost of living has skyrocketed. All the while average wages have only moved up sluggishly if at all.
There is no point looking at the inflation statistics as they are so engineered as to be meaningless. Just look at your own finances and you know that there is no way inflation has been around 2% to 3% these last five years.
All this is a deliberate policy. If you stand back it's all rather obvious:
- bankers create new money out of thin airThe end result is that we are effectively slaves; not bound by chains and shackles but by debt. Debts of money that the system has created out of nowhere but we have to pay back with our very real labour. The legal system, credit card system, banking system - the whole system - is set up to enforce this form of indenture, this form of servitude.
- it's essentially valueless but we all use it and have no choice
- we provide our REAL labour in exchange for this valueless "money"
- we enter into binding legal contracts to pay for "life" by borrowing large amounts of this "money". In effect we agree to provide our future labour in exchange for more of their "money". We have to do this to buy our homes, our cars, our foods, everything
- By making the "money" worth less and less the bankers force us to provide even more of our real labour to get the same things that cost us less labour in the past. In effect they push down the value of our labour without our consent
- The quality of what we buy goes down so that nothing lasts and we have to keep replacing it; hence demanding even more of our labour.
- However, we acquiesce as we believe we have no choice.
We are serfs in the New Feudal World Order.
Not many people recognize it for what it is yet. But they will do very soon, it is to this that we should now turn.
Banking system collapse
When banks collapse, as they did in 1929, the entire economy collapses with them. Savings are lost (money becomes worthless), jobs are lost and only those things that are essential to survival become important and even they can become impossible to obtain and people starve. However, pay attention here: two things do not change, 1) the debts that are owed remain and 2) the assets they financed, for the most part, remain. To the extent that debt was used not to buy real things but rather for financing a certain "lifestyle", then just the debt remains with no assets connected to that debt.
These debts are legally enforceable and are historically enforced by the full weight of the law; truncheon, taser, 9mm and all. That means that you lose everything - all your assets, everything - to repay loans for money created by bankers, worth nothing in reality, but used by you to finance a certain "lifestyle" (buying an overpriced house or vehicle, take vacations, send the kids to private schools, dance lessons, etc) or perhaps just to survive.
When banks collapse, at the extreme, there is no money available. This was deliberately engineered by the Federal Reserve in 1929 as they withdrew huge sums from the banking system and only partially reversed under the New Deal. In 1929, with less money and fewer jobs even those still in employment were paid less and less until the banks seized the assets that the debt was secured on. Homes, farms, businesses, all were seized by the banks. Even seemingly large companies were bankrupted and seized by the bankers and their friends,
It is my conjecture based on the data I have collected that we are being set up for a total financial system collapse. The UK government has been persuaded by bankers to keep the system alive for a while longer, an act of great folly but one so well engineered that no politician could fail to fall into the trap.
The Federal Reserve would seem to be illegally and secretly supporting the US banks in a similar way.
The rich are getting richer not through the rise in value of their assets but because they are pulling vast amounts of cash out of the system and using it to buy more and more real assets while the poor are getting poorer and everyday more people join their ranks as they desperately struggle to maintain a quality of life that is advertised via the media as the "right" of all.
Certainly, one would not consider owning a home, a car, or feeding one's family a "quality of life" but the elite do. From the elite's point of view, all the masses deserve is a hovel and rags, just as long as you can work.
When the system is finally allowed to collapse we will all find ourselves stripped of those things we thought we owned. We will lose our homes, our savings (if we even have any), our jobs (in the most part) and much else besides. The money system will collapse.
At this point we will be offered a deal:
- You can remain in your house but it will be owned by a central housing company.You will be a serf in a new feudal society. In the immortal words of Tennessee Ernie Ford:
- Your will work at a designated job and credits for that work will be used to pay the housing company for you accommodation.
- You will travel by company owned transport within your local area only.
- You may not travel nationally or internationally unless you have enough credits and are approved by the system.
- Your children will be educated in company controlled schools the way we want them to be educated.
- You will eat food that the company will provide you with using your credits regardless of whether or not this is the diet you prefer.
- You may not question the content of your food; we will add as many chemicals as we see fit to ensure the shelf life of the food.
- You will get what healthcare is available to you depending upon your credits and your behaviour. If you do not behave as we tell you to, you will get no healthcare.
- Nobody will survive outside this system.
You load sixteen tons, what do you get?You may think this is too much, that I've gone nuts, but think about it for a while; most feudal societies ended up with the serfs taking their pitchforks, raiding the lord's castle and lynching him. Could we do that in the society of today?
Another day older and deeper in debt.
Saint Peter, don't you call me, 'cause I can't go;
I owe my soul to the company store...
I doubt it. With no ability to buy anything without "credits", no independent food supply, all your communications monitored whether by telephone or internet, all your movements monitored via RFID chip, GPS or CCTV and your thinking dictated by corporately controlled media not to mention the widespread use of secret prisons, torture, wars for profit and terrorism to keep you sufficiently fearful, repressed and impotent, you can do nothing.
We're slaves already, but the news in the banking system suggests that we're not far from having it shoved in our faces.
In short, you already are a number, and soon you'll be presented with undeniable proof of that fact.