It’s been three weeks since I posted the last one. The past weeks have seen lull in capital markets In India followed by a slight rally. The budget is a bit of red herring really; I am still punting on a non-populist budget; (there is another one next year before the Country goes to polls, I reckon the populism would be saved for then!)
Across the frontiers, the world of finance especially Banking is passing through quite a turbulent time; what with trouble brewing both sides of English Channel!
On the English side the saga seems to be nearing completion with the Chancellor taking the decision to nationalize the troubled Rock.
Such nationalization is quite rare in England that has taken pride in its Darwinian traditions and in the past has let the most prestigious symbols of British finance to die when it became clear that their death would not have any systemic effects; (remember Barings). Two issues need to be high lighted.
Firstly does Northern Rock have a claim over the assets it hived off to Granite via a securitisation deal?
While nationalization undoubtedly hurts the shareholders ( it should), if the nationalized institution does not have strong portfolio, it pinches the tax payer as well. (In the case of Northern Rock, the Government is all along maintaining that the mortgage lender has a strong asset base- A Claim that might not stand scrutiny. In fact, the bank has hived off its best assets to SPV Granite through securitisation. Which means that entity is bankruptcy remote and it cannot be affected by the bankruptcy of Northern Rock, the originator). If its a true sale, (such transactions generally are) the entire port folio is lost; although technically, the SPV has no assets to manage and is a mere conduit. Equitable doctrines might thus fetch Northern Rock its strongest portfolio.
There is an additional perspective to State intervention, the one having anti trust implications- If Northern Rock is going to run by the state, this acts as an incentive for the depositors to park the funds with it. This has anti competitive effects and tends to create a monopoly for the bank as the “ State Run” tag acts as an implicit Credit enhancement. Clearly other mortgage lenders are not amused. To my mind, it does look that the Authorities might find themselves foul of the “Promote Competition” covenant of EU law.
Clearly we are not through yet. Watch this Space!