Rock Pool: re-floating Northern Wreck

By Chris Cook

The Guardian reports today that:

“A tug of war has begun at the top of the government over the future of Northern Rock as senior figures argue that the Treasury’s planned sell-off should be stopped so that the ailing bank can instead be turned into a building society owned by its customers. The move would mean forgoing a potential £11bn windfall for taxpayers but some cabinet ministers and No 10 officials believe this option is preferable to selling the bank to a rival or re-floating on the stock market since it would leave the bank less prone to instability and financial risk.”

Most people who have read my posts on LabourList will know that I believe that the use of a partnership-based legal framework for productive assets is probably superior to either conventional route: Public = State and Private = Limited Liability Company.

Now, they say that to a man with a hammer, everything looks like a nail. I applied Cook’s Hammer to the Northern Rock nail at the time it all went ‘pear-shaped’ last year. While I managed to meet the CEO of the Northern Rock Foundation for a couple of hours concerning my proposal, and she was deeply interested in it, she was at that fraught time unable to get anybody’s attention.

So let’s have another crack at the Northern Rock nail now that things are simpler.

Northern Rock Partnership
The proposed structure is very simple, and the stakeholder members of the ‘master partnership’ framework agreement – not an organisation – are as follows:

* Custodian – holds all of Northern Rock’s assets.

* Manager – the staff and management of Northern Rock.

* Investor – the government (although the former shareholders would say they, too, remain investors).

The income received by Northern Rock comprises the difference between the interest income they receive from borrowers, and the interest they pay to depositors, and by far the largest depositor is that of the Bank of England as ‘lender of last resort’.

My proposal is firstly that all of the assets of Northern Rock Plc – including both fixed assets, and the many billions in secured and unsecured loans – should be transferred to the Northern Rock Foundation as Custodian.

Secondly, all the shares in Northern Rock Plc should be transferred – John Lewis-style to the management and staff both of the existing plc, and also the staff of the Foundation, who would transfer to the Plc.

Then Northern Rock’s net income would be divided proportionally as between the government – ie the Investor – and the Manager ie the staff/management co-operative in the same proportion as they are now.

Losses incurred from defaults by Northern Rock borrowers would be absorbed by the ‘cushion’ of Northern Rock capital, which would comprise both the capital of the existing shareholders appropriated by the government, and new capital invested by the government.

Any efficiency savings made by the Manager would be shared with the Investor, probably in the same proportions as the initial agreed revenue share. Staff and management would cease to be a ‘cost’ and would become partners, and they would agree among themselves a reasonable split as between management and staff, which would avoid the usual grotesque management fat-cattery.

Finally, it would be possible to allocate some of the income stream to the beneficiaries of the Northern Rock Foundation, in order to continue its good work, and possibly even part to the Northern Rock staff/management pension fund, although that might require a change in tax law.

Toxic Waste
The key problem of Northern Rock is the toxic nature of their mortgage book, where they were responsible for some of the wildest excesses of the Credit Crunch. So discussions at the Treasury also concern how best to partition all of the toxic waste into a Bad Bank remaining in public ownership, with a “Good Bank” then floated off on the stock exchange with all the good (at least until the next wave of the credit crunch) assets, management incentives all round, and phenomenal fees for the Usual Suspects.

The Good Bank would then create new mortgage loans – based upon its fresh new capital base – and attract deposits, if it could, in the normal way.

The other – human – side of Northern Rock’s toxic waste is of course desperation, repossessions, and an increasing number – estimated to be well over 25% – of Northern Rock mortgagees who are essentially unable to move because they are either in negative equity, or have insufficient to buy anywhere else after transaction costs and/or because they lack the prudent deposits now needed.

As I have out-lined here, there is in fact a solution to this problem – a debt/equity swap – just not equity as we know it.

A Debt/Equity Swap
The solution is simply for the mortgagees to transfer their properties at an agreed valuation to the Custodian and to then pay an agreed affordable, but index-linked – rental and a maintenance/ depreciation charge. These rentals are then pooled into a Northern Rock Rental Pool, and investors, such as pension funds would be invited to acquire proportional Units (Equity Shares eg billionths). The proceeds of these secure index-linked investments would be used to repay the government’s loans.

The occupier becomes a ‘co-owner’ and an member of the new Occupier stakeholder group of the Northern Rock Partnership. Anything he pays more than his affordable rental buys him Units, and if he does the maintenance himself he is also credited with Units. If he wishes to move, then Northern Rock could acquire the property he has in mind and assimilate into into the Rental Pool, provided of course he is able to afford the rental for the property. A new occupier would then be found for the empty property – a function for an estate agent as service provider – who would then become the new ‘co-owner’.

Over the years the Northern Rock Pool of properties would gradually be converted into a simple but radical new form of investment trust, and occupiers would free themselves from mortgage slavery. If widely implemented, property bubbles would become a thing of the past.

Most distressed borrowers, or those with minimal equity, would probably opt for co-ownership, and the other major selling point for Northern Rock’s marketing staff would be the facts that Co-ownership wipes the floor with any other form of equity release product, and is also Sharia’h compliant in a way that conventional Islamic finance can never be.

As this transitional process continues, and is adopted by other banks, then much of the UK’s National Debt would gradually evolve over time into a National Equity, based upon the value of UK land.

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