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The Rock is not an island

A long-term government guarantee of Northern Rock’s wholesale funding might prompt other mortgage lenders to demand similar treatment even if they are not in financial difficulty.

How not to stop a Rock rolling

Goldman Sachs’s plan to sort out Northern Rock’s securitization-dependency problem by securitizing more of its debt does have a certain irony. The mortgage lender needs to deal with its emergency funding from the Bank of England if any sort of private sector sale can take place – and securitizing it seems to be the answer.

By guaranteeing bonds backed by £24 billion of Bank of England loans, the UK government can remove the big stumbling block for any buyer of the stricken lender. There is no suggestion that there will be any attempt to recharacterize these bonds as off-balance-sheet for Eurostat purposes, and even if there were, the chances of success would be pretty much zero. State support regulations are being addressed by the payment of a fee by Northern Rock – rumoured to be £400 million to £500 million ($975 million).

Although Northern Rock relied on the wholesale funding markets to a catastrophic degree, other UK lenders have also been dependent on securitization for significant chunks of their funding. More than 20% of Abbey National’s total loan book is securitized, with Bradford & Bingley on 20%, HBOS at more than 10% and Alliance & Leicester on 10%.

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