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Parliament is dangerously naïve about securitisation: A Northern Rock special

The UK parliament and media do not understand structured finance. In one lawyer's words, "securitisation is being subjected to tabloid journalism."

(This article appears courtesy of International Financial Law Review, sign up for a free trial on their site

by Rachel Evans

Granite – Northern Rock's master trust – has been mislabelled a tax dodge, an asset stripper and a threat to taxpayers. Such statements are inaccurate, naïve and dangerous.

In a late Commons reading of the Banking (Special Provisions) Bill – the government's emergency legislation to nationalise UK mortgage lender Northern Rock – on Wednesday February 20, Members of Parliament expressed concern about the bank's master trust securitisations, but failed to ask the right questions.

"The best mortgages of the bank are wrapped up in the Granite vehicle... an asset-stripping operation," said Vince Cable MP, deputy leader of the Liberal Democrats, clearly unaware that the FSA forbids firms from cherry-picking assets to put into a securitisation.

Northern Rock has set up a prime-mortgage master trust, so sub-prime mortgages cannot enter the pool, and it must have a weighted LTV (loan-to-value) ratio across the portfolio. Such eligibility criteria apply to all securitisations and certainly do not entail asset stripping or mean that Granite has better mortgages than Northern Rock.

Philip Dunne MP expressed concerns that Granite "will have the ability to take what other good assets remain in Northern Rock."

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