Britain: Vast frauds at Northern Rock

It emerges from the Parliamentary debate on the nationalisation of Northern Rock that billions of pounds are to be diverted away from the intended purpose of preventing a banking collapse, into the pockets of the Rock's management.

The directors set up a financial institution called Granite. The alleged purpose of Granite was to fund a charity for handicapped children in the north-east. Not a single handicapped child has seen the colour of their money.

People queuing outside a branch to withdraw their savings

The real purpose of Granite was to act as a scam for tax-dodging. It was registered in Jersey. As we know, Jersey is a tax haven. It is also part of the UK, and its status as a sunny place for shady people could be ended by the British government with the stroke of a pen.

The soundest mortgages on the Rock's books have been transferred to Granite. It is believed to hold £44 billion in mortgages (it might be higher than that). As we know Northern Rock had a reckless business plan. The 125% mortgages and other dodgy deals remain on the books of the Rock as a little present to the taxpayer to sort out. The good stuff is out of our grasp, cherry-picked for Granite.

Is Granite part of Northern Rock or not? The accountants' or magicians' answer seems to be, ‘now you see it, now you don't.' If the Granite mortgages are dodgy, then responsibility for deficits would be the Rock's. If they're OK (and most of them are very sound) they belong to Granite and we can't use them to offset the losses at the Rock. They achieve this by waving a magic wand called ‘securitisation' - in other words they turned the mortgages into bonds. They should not be allowed to get away with this racket.

Granite is not part of New Labour's nationalisation plan. We are taking over the losses and leaving the juicy bits in private hands! The Rock has been and is being asset-stripped, and the government is letting them get away with it. As LibDem Vince Cable comments, "it is clear that an Exocet has landed somewhere in the middle of the government's proposals." As you see from the transcript of the parliamentary debate below, the minister responsible physically fled from the debate in the House of Commons as the scale of New Labour's stupidity and incompetence became clear.

The bloke the government has put in charge of northern Rock to handle the loss-making stuff is a ‘non-dom'. That means he pays no tax in Britain. What a splendid example to the rest of us! New Labour seems to live in a culture where ‘only little people pay taxes' - and they pay so the government can give their money away to the rich.

The biggest robbery in Britain is said to be the Brinks Mat heist in 1983. The gang got away with £26 million. Organiser McAvoy got twenty-five years. This lot are set to walk off with £44 billion or more of our money. They'll probably all get knighthoods. Don't let them get away with it.

Here are extracts from the debate:

John McDonnell (Hayes and Harlington) (Lab): I first wish to make it clear that I welcome the Bill. In fact, with the greatest respect to the hon. Member for Twickenham (Dr. Cable), I think that I was the first MP to call for nationalisation, although that is hardly surprising because I have been calling for the nationalisation of the financial sector for 30 years or more. However, I was astounded when my right hon. Friend the Chancellor said on Second Reading that the Granite operation was not included in the legislation.

From my reading of the Treasury Committee's brief reference to Granite and the advice received from accountants in the tax justice campaign, my understanding of the scheme - even its name suggests that it was a great wheeze - is that several of the directors at Northern Rock established an offshore vehicle to avoid tax. It was still on the balance sheet of Northern Rock and they securitised a large percentage of their assets in it and received about 50 per cent of their funding from it. As a result and as far as I am concerned, Granite is a creature of Northern Rock and therefore is part of the asset base of the bank and its operations.

Mr. Alan Beith (Berwick-upon-Tweed) (LD): It should not go without mention that one feature of the arrangement was a purported benefit to a charity for handicapped children in the north-east, which has so far received no money from it whatever.

John McDonnell: I understand the issue that the right hon. Gentleman raises, and I have seen reports about it. It is an issue that needs to be exposed and examined, but my concern is the greater issue. Those who took that decision will be exempted from their responsibilities as a result of this legislation. They deliberately undertook an exercise of tax avoidance and tried to maximise the profits for their company. As a result, they enhanced their own benefits in salaries and bonuses through a scheme that is completely exempt from the Bill. The taxpayer and the community will pick up some of the liabilities from that exercise and those who have profiteered through Granite will be completely exempt of liabilities. They will walk away with their profits secure, while others suffer. Some of the constituents of my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) may lose their jobs and some people may have their homes repossessed.

Yet the Granite scheme has enabled those people to walk away scot-free. I tell my right hon. Friend the Chief Secretary that when there are discussions in the future about further legislation and regulation, we will need to take into account what happened with regard to Granite. We will need to consider how to prevent tax exemption and tax avoidance regimes being used in such a way at the cost of the long-term interest of the workers involved and of those people who are dependent on mortgages from a company such as Northern Rock. If there is any way in which Granite can be brought within the ambit of future legislation, the Government should examine that matter...

John McDonnell: I support the legislation, but I believe that we have missed an opportunity to nail down one of the devices that has been used by Northern Rock and its directors to avoid their long-term responsibilities to its work force, to those who have borrowed from the company and to this country and its taxpayers. I regret that such a measure was not contained actively in the Bill.

Dr. Cable: I had not intended to speak at length at all, having made my points, but I am prompted to by the important speech that we have just heard from the hon. Member for Hayes and Harlington (John McDonnell). Alarm bells rang slightly for me when I heard the mention of Granite on Second Reading, but its full significance did not dawn on me at the time. I do not think that the problem is quite that identified in the hon. Gentleman's point about tax status. The problem is that Granite is a separate institution that, as I understand it, securitises the best assets of the bank. The best mortgages of the bank are wrapped up in the Granite vehicle. We are being told that in some way that is being hived off to the benefit of person or persons unknown, apparently, to the Minister.

What is going on here appears to be not the public ownership of Northern Rock but an asset-stripping operation designed to benefit Someone - we do not know who. That is a serious development, and unless we get a proper explanation by tomorrow morning of what exactly is going on-...

Dr. Cable: I am trying to absorb the hon. Gentleman's analysis, and I hope that he will repeat it at greater length. My understanding is that the remainder of the assets of Northern Rock, outside Granite, consist of unsecured mortgages and the so-called Together mortgages - those at 125 per cent of value - or, in other words, the rubbish. That is what the Government have acquired. We now need a rapid and thorough explanation of exactly what has gone on, as otherwise the Bill can be stopped in the other place(the House Of Lords)...

Dr. Cable: We are all getting a rapid education. Perhaps the hon. Member for Hayes and Harlington can tell us more.

John McDonnell: I may not have explained the point that I was trying to make well enough. My view is that the motivation was a tax avoidance dodge, but the problem is that the liability, which is on a significant scale, now rests with the public purse. As a result, the people who will gain are the participants in Granite. The ones who will lose, and who are in jeopardy, are those who retain an interest in Northern Rock-that is, the taxpayer, and the workers who may lose their jobs.

Dr. Cable: These are big questions, and we are not getting any answers. I see that the Minister has fled the Chamber to get an urgent briefing from the Treasury. Unless the Paymaster General can give us a proper explanation, it is clear that an Exocet has landed somewhere in the middle of the Government's proposals. The Government need to come up with some proper explanations overnight, as otherwise they will be in serious difficulty in the other place tomorrow.

I could make many other points but I shall restrict myself to two, as I think that we have highlighted a critical issue that we need to focus on.

• Britain: Nationalise the banks! by Mick Brooks (January 22, 2008)