Time To Visit Northern Rock's Offshore Pirate Cove

Illustration by Heath Robinson, 1902
November 23, 2007

Elaine Meinel Supkis

The banking crisis continues so it is time to fly with Peter Pan off to England to visit the Jersey pirate cove where Northern Rock has hidden its true nature. The economic situation in the US is deteriorating and England, always loyal, has decided to fall off the same cliff with us. Unfortunately, we will probably crash like Wendy did the first time she flew. The banking mess won't be fixed by any small tricks. What is wrong is systematic and part of the 'new way of doing business' which has not stopped even though Europe has halted the sales of mortgage bonds due to them going into free fall!

Alarm at rising US car loan defaults

US car loan delinquencies have climbed markedly, raising another potential red flag for financial institutions and the automotive industry.

“We are beginning to see deterioration in auto asset-backed securities (ABS) credit conditions,” Lehman Brothers said in a report on Monday, drawing on data from two of the US’s biggest car finance companies – GMAC, 49 per cent owned by General Motors, and Ford Credit.

Delinquency rates on two GMAC ABS issues from this year reached about 0.75 per cent and 0.6 per cent in September and October, far above the rates on similar securities issued in earlier years.

The problems with the bottom end of the loan process continues to worsen. The stock market went all happy-happy tail wagging today because people went shopping. This sort of very short-term, short-sighted silliness is characteristic of our culture. Even knowing the malls, in desperation, were ruthlessly cutting profits by trying to sell whatever they could, this didn't matter so long as Americans spend money as fast as humanly possible.

Just like with house sales, as things deteriorated, the sales continued using more and more bizarre forms of debt and clearly unethical deal making like not verifying incomes or lending to people with bad credit histories, for example. With auto sales, they have gone nuts trying to move cars off of lots. I just got yet another letter from my dealer offering me a new car if I turn in my older car which isn't that old. They will give me 100% of the value of the 2 year old car I own. The new car would be 0% financing if I get a loan from GM. But if I pay cash, I get up to $4000 off.

This means the 0% loan isn't 0% at all. It is very much part of the price. If they have two different prices for cash versus 0% financing, this means the interest rate overhead is up to $4000 and the 0% loan isn't 0% at all. I find this very deceptive of them and it works. More than one person has been fooled into imagining they are getting super-cheap loans! This is quite characteristic of today's economic way of buying and selling.

Just like home buyers colluding with real estate agents and sellers of homes by lying about the important down payment for a house. Instead of proving they have a stake in the house of at least 10% [in previous eras, this was 20%] the home buyers would be given a temporary loan by the sellers which would be taken out of the price of the house at closing because the house was over-assessed. Banks would then be paying 100% the cost of the value of the house! On top of this, desperate banks ended up offering up to 125% of the value of the house during the worst of the housing bubble. This madness is part of why our banking system is collapsing from within.

Leap Avoids Possible Default on $1.09 Billion in Debt

Leap Wireless International Inc., the operator of the Cricket and Jump mobile-phone services, got waivers from creditors to avoid triggering a default on $1.09 billion in debt after it delayed filing third-quarter results.

Leap postponed the filing because it needed more time to complete earnings restatements going back to 2004. The company has said it counted extra months of sales from clients who ended their service and booked some revenue and costs over the wrong periods. Last month's Southern California wildfires delayed the restatements, San Diego-based Leap said.

This sort of funny bookkeeping is also part of the present banking mess. Like Enron, they count things that are no longer valid. This tendency showed up in all the major investment houses when they refused to recognize the decline in value of their holdings when the market for CDOs began to collapse. Everyone wants to have no accounting, if possible. Once the lenders or investors detect this, they pack their bags like a girl who found lipstick kisses on her boyfriend's neck. Everyone is now quite skitterish. Indeed, the stock markets, the last bastion of any positive news at all, has been gliding downards with small upticks over every joyous possibility.

But the price of oil continues it ominous rise. This should surprise no one. The US has strong armed Europe and Japan into boycotting Iran. So there is less oil to buy in the open markets and ergo, the price goes up. Since this tidbit of vital information is hidden from the American People, they have no idea that our own actions are causing our own agony. I marvel at this sort of self-abuse. The lack of curiosity about cause and effect lies at the heart of our present problems. Many people are kept in the dark by people at the top and there is little desire to discover what is really going on.

In my own community, when people around me complain about the high cost of energy, I ask them about the boycott of Iran. They simple stare at me incredulously. After all, none of the yapping faces on TV ever mentions this! So the barrier to understanding is a very tall wall. But this is driving all other things under. The frantic shopping for bargains for Xmas is just another sign that oil is biting consumers very hard. Perhaps they hope for a mild winter and thus, no heating bills? Who knows? Hope springs ever eternal.

Certainly, there is this death knell for savings.

Europe Suspends Mortgage Bond Trading Between Banks

European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders.

The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today.

Yet another sign that the US/EU/UK banking system is still in a grave crisis. Every week, after emergency funds, emergency infusions and reckless rate cutting despite these nations creating record amounts of M0 and M3 money, things continue to deteriorate. We can safely say, this will be recorded as one of the greates banking crisis events in 100 years, probably next to the Great Depression. I am very unhappy to see that Europe had to completely suspend trade in mortgage debts. This means there was a total rout, a complete panic. Central authorities don't totally shut down any trading in any system unless there is a very bad threat, it will collapse to near zero.

Shadow Mortgage Bailout Already in Progress

As of September 30, Fannie Mae had $40 billion in capital. The company also had exposure to $196 billion in Alt-A loans and $74 billion in subprime loans (loans with a FICO score under 620). Altogether, Fannie holds $2.7 trillion worth of mortgages. If a high percentage of the risky loans go bad - and there is no reason to think they won't - Fannie Mae could quickly lose the capital they have and be left without a financial leg to stand on.

Although neither Fannie Mae nor Freddie Mac are technically government agencies, it is a given that the government (i.e. taxpayers) would bail out both companies out if necessary. The potential cost could range into the hundreds of billions of dollars according to a recent Senate report.

In the US, the value of these mortgage bonds has been hauled upwards by harnessing quasi-government agencies into the markets to purchase obvious turkeys that will die of SARS as soon as winter hits. Here is a chart from eFinance that clearly shows how Fannie Mae and Freddie Mac have been force-fed these lousy mortgages no one else wants to touch with a 10' pole.

$200 billion Alt-A loans? Whew. No one wants those babies! No one. And note the reserves: less than $50 billion. This is causing the stocks of these corporate entities to drop like a rock. The subprime loans they were forced to pick up are more than the capital set up for bad times. We already know that many families are struggling with larger and larger credit card bills, car repros are increasing and now defaults on mortgages are rising relentlessly. So where will the consumers be this winter? I wince when I buy gas these days and I drive gas misers!

Another result of mortgage mess: Slimy pools

Chula Vista, a city of about 175,000, has hundreds of homes in foreclosure, so, for now, the city has been fixing what has to be fixed, “having to put the money up front we really don’t have,” said Leeper.

Efforts to quash green pools got a boost earlier this year when California’s Gov. Arnold Schwarzenegger declared a state of emergency, providing about $6 million for mosquito control, surveillance — including flyovers to look for the telltale signs of oblong and kidney-shaped brown blotches — and information campaigns urging neighbors to report neglected pools. The state has a hot line, 1-877-WNV-BIRD, for reporting possible signs of trouble such as green pools or dead birds. (Birds host and transmit West Nile virus.)

I have a neighbor who, like increasingly many others in NY, has abandoned his home. He had two children and an above-ground pool. They are gone but the pool sits there, fed by frequent rains so it never dries up. It turned green a year ago and now is a fine summer habitat for nasty insects. This is going on all over America. Swimming pools do not add value to a house because they cost a lot of money or effort to maintain. When that slips, they become fetid swamps. Water moccasins, frogs, Canadian geese, bears, moose---yes, up here we get bears and moose moving into swimming pools---all move in.

What's next? Wharf rats? Actually, back when NYC was going bankrupt, we were flooded with wharf rats, nasty, big, ill-tempered rodents. I killed more than one of these. One even jumped out of a neighbor's oven when she was baking and she ran out of her home, screaming. So, add these hazards to the housing mess. A fetid pool is an appropriate icon.

Time to visit that fetid swamp in England, Northern Rock and talk about Darling, the appropriately named head of the banking system in England. I will remind new readers that the boys and Wendy who flew off with Peter Pan were the offspring of Mr. Darling, the banker of London 100 years ago.

New fears over Northern Rock debts

There were renewed fears over lender Northern Rock's ability to repay its £24 billion taxpayer debts after a newspaper raised doubts about its mortgage assets.

More than 70% - or £53 billion - of the beleaguered firm's mortgages are owned by a Jersey-based offshore company, The Guardian said.

The Newcastle-based lender uses a web of offshore companies under the Granite name for fundraising based on its mortgages, with the Bank of England's emergency lending also secured against its home loans.

To put things in perspective, the total amount that Northern Rock owes for Darling's rescue operation is about the same amount our own Fannie and Freddie funds have in their reserves. Now, the taxpayers in England discover, this bank is mostly a front office for a bunch of...PIRATES. Operating offshore in one of Queen Elizabeth's free-booty islands. England doesn't control this island, the isle of Jersey. So the banks can set up whatever stupid funds they wish and no one can stop them. Or tax them. Or regulate them.

Revealed: massive hole in Northern Rock's assets

A Guardian examination of Northern Rock's books has found that £53bn of mortgages - over 70% of its mortgage portfolio - is not owned by the beleaguered bank, but by a separate offshore company.
*snip*
The mortgages are now owned by a Jersey-based trust company and have been used to underpin a series of bond issues to raise cash for Northern Rock. It means the pool of assets available to provide collateral for Northern Rock's creditors, including the Bank of England, is dramatically reduced, calling into question government claims that taxpayers' money is safe.

This story goes into details about this tavern which flies the Jolly Roger flag and has wenches serving beer to a bunch of drunken bankers from London who come there to transact business. Yo-ho-hiccup. Of course, no money from either governments or private individuals or even pension funds are safe in a tavern run for and by pirates seeking loot! The article I published this morning about the M0 and M3 funds growing like monsters in Europe, USA and Japan included information about England. England has been creating money out of thin air, not to the tune of the Japanese who have created a massive amount, but it is #5, right behind China in this regard. England has, for many years, bled itself white, first with massive wars and a futile attempt at keeping its empire no matter how bloody, then allowing and encouraging a host of tiny colonies of the Crown to redesign their modus operandi and become tax havens. This has been a very stupid policy and will bit England very hard in the end.

Northern Rock should not have been saved by the government! The government should have arrested the top officers and seized all the paperwork and files in Jersey and it should have warned all the pirates operating off-shore, Parliament will not tolerate this sort of mess. If they want to be saved, they are to be taken over, not nursed along so they can continue to operate offshore.

*Mortgage loans of over 90% of the purchase price of a house have soared to £16bn, from £2.7bn, in the space of three years.

* Loans have exceeded the value of the property on nearly 2,500 mortgages, with a value of £263m. Three years ago, the figure was just £13m on 158 properties.

The US was not alone in making stupid mortgages available to people who were clearly out of their depth for such debts. What a difference over three years! Rising $250 billion? Wow. Well, note how the West has, along with Japan, created massive rises in money in circulation! And then there is the $500 trillion, yes, trillion, hanging over the world's head. And you can bet, a much of that was generated offshore, too.

There is a double-whammy at work here, too. The higher people bid the price of housing, the more it bit them in the wallet and the more it cost the lenders in risk. Note that the lenders didn't risk any REAL money, it is all future expectation that someone, somewhere, will make 'real' money and send it back to them. But this is all a gamble. And time for us to look at some of the paperwork submitted to the government back in 2005, when things were at their highest and best for Northern Rock!

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This lists their notes they were selling back then, seeking money for funding loans. They needed some cash in hand in order to get past the guardians of the national vaults, people like Darling. Note the years these bonds come due: 2054. Talk about wishful thinking here. This prospectus, if you click on the site, is very long, almost 200 pages.

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Note the familiar names here. All of them in the news lately because of selling crummy bonds as AAA or urging customers to disregard the BBB rating because they had better 'returns'. These banks are a who's whoopsie in today's financial news. Some of them may go under by next year thanks to all this. By the way, if we need a clue as to why Darling was forced to save Northern Rock, not arrest everyone and throw the book at them, here it is! These big shots, these big guys demanded he save Northern Rock or else.

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Here is proof back in 2005, long before the British housing bubble reached its peak, home buyers were stretching things grotesquely in order to buy houses. Note that a mere 8 years ago, the ratio of housing to income was only just reaching 4X. So if you made £50,000 a year, you could buy a nice house for £200,000. But look at 2004: the same income bought a £300,000 house. This extra loan amount didn't buy bigger or better houses, this is what was needed to buy a house that cost £200,000 ten years earlier. I will also note that the prospectus mentions second incomes making things OK. This is not OK.

I know that in the past, banks will consider only one income when assessing a mortgage offer. This is because of death or divorce, the two big 'D's in life. In an emergency, a second income can take over. But if both incomes barely clear the hurdles, this means any disaster of any sort is total.

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Here is a fun part of this prospectus: it explains how this shell game is run! The bank, Northern Rock is really a sand dune. It fronts for the Granite Group, the offshore entity. It sells its own paperwork of dubious quality to this pirate organization. It then passes through several hands within the organization with some side issues which are quite mysterious. Are these the trashy tranche operations? Is the box titled 'Funding 2' with the three purple side boxes in dotted lines, the place where these bonds are chopped up like when a Mafioso crime organization processes illegal drugs or chops up cars for parts?

I colored in the 'Issuer swaps' box in red because it looked suspicious. It sits to one side of the Master box that takes something from this mysterious and I think, nasty box and mixes it in with other stuff on the left side in purple. I assume the 'issuer reserve fund' is some small amount from Northern Rock's savings. Then this is peddled in the bottom boxes to the public.

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Towards the end of this long document explaining this business, they warn everyone that if the mortgage holders don't pay up, the INVESTOR loses, not Northern Rock. Supposedly, Norther Rock has these reserves which, of course, they did not. But the main thing is, they had to admit there is a way of losing money here and buyer beware.

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Funding 2, the middle box, isn't responsible for the boxes at the bottom. Seems this chart is how money flows here: down and out. It can't, like a toilet, back upwards. Also, the AAA ratings can drop to -CCC and the investors have absolutely no recourse, no say in matter. The whole sales pitch here was, 'Property values NEVER drop for very long, if at all.'

Of course, history tells a different story. Which is why they only point to some recent past event and not dare look at the Great Depression, for example.
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This gives us a thumbnail sketch of the history of Northern Rock which was not a bank at all not very long ago. It rapidly morphed into something else just like Countrywide over here in America, or ETrade or a host of other newcomers. The major banks who used to be the ones generating these things long ago abandoned this and played a secondary role as middle men rather than originators. And the market vacuum was filled with these poorly-funded newcomers who now have collapsed, one by one. This should have been controlled better by the regulators, of course.

Paulson Finds Bush's Treasury No Career Enhancer Like Goldman

As of late-November, the superfund Paulson helped conceive had not yet begun buying up SIV assets, though bankers working on M-LEC at Bank of America's New York offices had settled on a structure for the superfund, according to a person familiar with the talks. Meanwhile, the SIVs were losing value.

There are 30 SIVs that held securities worth $400 billion when the mortgage meltdown began in July, according to Moody's Investors Service. Their net asset value fell more than 30 percent from July to mid-November. As of the first week of November, SIVs had been forced to sell at least $75 billion of assets as investors retreated from all but the safest bets.

Paulson, 61, has tried to be reassuring. ``I view the housing and mortgage market decline as the most significant current risk to our economy,'' he told reporters in Washington on Oct. 31. ``Even so, we have a healthy, diversified economy that will continue to grow.''

Pure lunacy. Note that the latest attempt at saving the many loan sharking operations which lurk offshore, the US is creating goofy funding pools that are more like the fetid pools in the earlier story here. The SIVs are losing value and the superfund does not have $50 trillion dollars so as they slide downhill and accelerate rapidly, Paulson, like Darling, has to pretend this tiny program that is less than 10% of the value of the mess, nay, 1% of it, will fix things. For what they want is just to have people believe. They see that stock buyers are still easily fooled. But even this pool of investors aren't brain dead enough to fall for anything generated by the mortgage sellers.

And poor Paulson has to still pretend the economy will expand.

Paulson started preparing for market gyrations on the day he moved to Washington from Wall Street, colleagues say. ``He began working on financial preparedness from the start,'' says Robert Steel, the Treasury's undersecretary for domestic finance. ``And he decided early on that a key mechanism for doing that was the President's Working Group.''

Nicknamed the Plunge Protection Team, the group brings together officials from the Commodity Futures Trading Commission, Federal Reserve, Securities and Exchange Commission and Treasury Department for what have become regular meetings.

When the markets began to shudder in July, Paulson used the address book he had built up during 32 years at Goldman Sachs to seek information and advice from Wall Street's elite. Among those he called, people familiar with his handling of the crisis say, were former Treasury Secretary and Goldman alumnus Robert Rubin, now chairman of Citigroup, and Jamie Dimon, CEO of JPMorgan Chase.

Note how this article casually mentions the Ruling Elites. A guy who is at the top naturally consults with his fellow PIRATES who then RIG THINGS so the markets are fooled, of course. They coordinate their actions so people gambling in stocks or other paper things will reap great profits...NO MATTER HOW BAD THINGS REALLY ARE.

Never do they worry a minute about the little guys. They want to protect themselves! And so all their lousy solutions usually make things much worse. They never, ever bite the bullet. They want us to die in their battles over who gets 90% of the loot. One kind reader sent me a copy of the Kiplinger Letter forecast. It says quite clearly, 'Upper incomers remain in good shape.' It also admits that 'mortgage woes will hit MAINLY LOWER INCOMERS.' And admits this is due to energy biting the rich hardly at all while it hammers people on fixed incomes and the lower levels of workers who have had pay cuts rather than raises. It also says, smugly, that the upper 20% buys 60% of what is sold in the USA. So, hahaha.

It also notes that America's biggest export market is selling weapons. Especially to Pakistan, where we had another coup which Bush praised. And India. Who hates Pakistan a great deal. And these wars are connected with our high energy prices. For we also arm Israel and Saudi Arabia and others in that hot tempered mess over there, where the oil is. All things are connected. In sometimes awful ways.

Do note that all the things I reported on in this article, not one of them is in China's control. We must remember, we are the authors of our own messes, the US as well as England.

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Comments

[blues]

I have seen so much of this stuff at the ground level. I have this cousin, who is not a bad person (has some inconvenient quirks), started up this largish house painting business. He bought up some acreage in one of the very most expensive spots in Connecticut, and built a mini-mcmansion, mostly with his own hands (I did the wiring). So he lived like a king there for about 30 years. He had all the toys! But he was constantly besieged by these strange bank officers, always having to juggle mortgages. Then he got sick, and they just took it all back.

Me, on the other hand, well I had this crazy affliction. Seems I was pretty autistic into my early 20s, and nobody bothered to figure that out. I only found this out by looking at my old medical files from clinics I was sent to as a child! (They didn't know about the various forms of developmental conditions, so they called it all kinds of strange things, of course). Thing was, I was left with this hellacious motor dyspraxia syndrome, but people could no longer tell that I was (much) different from them! It was not like I was trying to deceive anyone, but I always knew for sure that I was running a very different operating system under the "graphics interface." This led to a very strange life. Because of the motor dyspraxia, I could seldom hold any job for long. (Technically, I never made it past 4th grade in school.) But I could (and did) just pick up books about things like differential equations and learn it alone. This actually evolved into a mystical journey (with a little help from mescaline). But the relevant thing here is, since I never held a job for long, I was never able to borrow money.

So. I would go over to my cousin's mini-mcmansion for Thanksgiving and such, and I always felt like kind of an outsider. (More than once, people who've known me well would ask "how does the world look from the outside?") I was perceived as being somehow "of lower rank," generally. But I had long since learned to never compare myself with the alien humans anyway, so I didn't care.

Here's a funny thing: My (now) poor cousin had to go into a sort of exile when he lost the big house (yes, with a huge, lavish, in-ground swimming pool), but I can still call him, I guess because he knows that I am basically outside of society anyway. But I was never able to get any loan at all. And as far as I can tell, I may be among about 5% of those around me who never did. I always was acutely aware that my cousin was in a kind of trap anyway. It really does seem that if you owe on a big loan, you've taken the big cheese, and are really in a trap. All these people tried to "better" themselves, only to find themselves in an awful trap. Well, that's how it looks to me.

[Nammusa]

The UK housing market started to decline in 2005 but of course no one wanted to talk about this, it might effect 'confidence' (as in con). Most people with a brain know that the UK rides on waves of property bubbles every 15-20 years or so. Unfortunately the current one coincides with the entire industrial base having been gutted. Even the call centres set up to replace them have now been exported to India etal. Even the bank helplines are now manned by beautifully polite but clueless Indians.

[PFO]

Blue,

You are not alone. Out here on the 'left coast' in the Great Pacific Northwest I and dozens of my friends and family have had lives similar if not identical to yours.

Naturally, I thought and was often told by some of my relatives; that my failure to participate in the capitalist system ['satanic money culture of death'] was all my fault!

Then I lived in Europe for a number of years and discovered family oriented cultures [Bosnia & Herzegovina Italy, Ireland, Portugal, rural France] that included masses of peole who would never have a loan, muchless care.

I realized then that the satanic money culture of death that our hostess so humurously writes about is effective in only a very few countries of the world. Unfortunately, the USSA is one of them.

Very fortunately, that will change in the extremely near future. Thereafter, people like us with intuition and morals will have a voice and the culture will be very gentle and just with all of us.

Kindest regards,
PFO

[Elaine Supkis]

Hope springs ever eternal! And we can't be gloomy about things like this, there are worse things afoot in the universe! After all, we are being dragged towards the Great Attractor that grinds away, millions of light years away, we are DOOMED.

Then, the universe will end, more or less. So I content myself with worrying about small things. Like, where did I put my sun glasses? I can't find them at all. Annoying, isn't it?

[notgonnatellya]

t

[blues]

Astrophysics is in a state of extreme flux, of late. I know of one university physicist who believes the time dimension is just like the other three, except it's expanding at the speed of light. This means any object "at rest" is moving through time at the speed of light. So if an object moves through the other dimensions at half the speed of light, it can only move through time at half that speed, since its vector always has a speed-of-light velocity.

Then these folks doing computer modeling inadvertently discovered that the inside of a five dimensional black hole would have exactly the characteristics of our own universe. And now, some are wondering if gravity is just like magnetism, except it's weaker because part of it extends into a fifth dimension.

Stay tuned!

[Al]

Blues,
I did a little of that Mystical Journeying myself. Killed off what brain cells the Los Angeles Unified School District had left me. Sounds like you self-educated yourself just fine, although it must have been a tough road.

[Elaine Supkis]

Black holes are the Outer Darkness. Up is down and inside is out. Time stops and eternity is a minute. Then it all explodes.