Northern Rock - the bank that likes to say NO

It’s the bank that likes to say ‘No’. Newly nationalised Northern Rock has adopted a highly original marketing strategy . The bank of you and me has written to mortgage customers saying: 'We are unable to offer you a competitive deal at this time, therefore we suggest you contact an independent financial adviser who will be able to help you find the best deal available” In other words, don’t do any business with us unless you want to pay way over the odds for your mortgage.

Now, to those of us who aren’t bankers, this doesn’t sound like a terribly sound business plan. Not the kind of proposal that would get them opening their wallets on Dragons Den. Northern Rock appears to have turned into a kind of anti-bank, trying not to lend. Since it got into difficulties for handing 125% mortgages out as if they were love hearts, that’s perhaps no bad thing. However, it doesn’t give you a lot of confidence for the future of the £110 billion we are all now owed by Northern Rock since it was nationalised last week.

Nor does inspire confidence to learn that Northern Rock doesn’t actually own most of its mortgages. £45 billion were hived off to separate investment vehicle based in Jersey called Granite, which - incredibly - has not been taken into public ownership. Granite is a shell company, a shadow bank, which has no employees. However, Granite is - intriguingly - a registered charity which was set up by Northern Rock in 1999 allegedly to raise cash for Down’s Syndrome. It does not actually raise money for charity. Welcome to the wonderful world of international high finance.

I hope someone in government understands all this, but I wouldn’t bet your house on it. It’s clear that the directors of Northern Rock understood little of what they were doing, which was why the bank collapsed last September ( though they were smart enough to pay themselves mega bonuses and sell their shares just before they collapsed in value) Question now is whether the Rock is going to take Gordon Brown’s battered government down with it. Could this be the first ever case of the rock hitting the sinking ship?

Just stand back a second and review what has happened this first week of public ownership. We learned that the new boss of Northern Rock, Ron Sandler, is a non-domiciled tax exile who doesn’t pay income tax here on his foreign earnings. He is being paid £90,000 A MONTH to turn the remains of the Rock into a business that turns away customers. His deputy, is also a non-dom based in Switzerland.

The bank is going to be exempt from the freedom of information act, so we will never learn exactly what Mr Sandler is doing - or not doing - with our money. All we do know is that the government has taken on some of the dodgiest mortgages in the history of home lending,sold to low-income first-time buyers at the top of the market. And on top of all that, 140,000 dispossessed shareholders are pooling their pennies for the mother of all lawsuits against the government, trying to get their money back.

Now, you might have thought that buying shares in a bank which had just been through the first bank run in over a hundred years, might have involved just a hint of risk. But not the hedge fund RAB, which is squealing for state cash in compensation for shares it bought after the bank got into trouble in September. They want four quid a share, when the last known price for Northern Crock was 50p - which was optimistic. No doubt the government will pay up, after spending the usual fortune on legal fees. After all, it doesn’t want to appear to be anti-business, even though Northern Rock is turning itself into an anti-business.

But what is going to happen now? Now that the government is the proud owner of one of the largest collections of sub-prime mortgages in the world? We pride ourselves on not having had a sub-prime problem on this side of the pond. No “NINJA” loans to people with no income no jobs. Perhaps, but not even at the height of the mortgage madness did US banks lend at 125% loan-to-value. That is instant negative equity.

The newly-nationalised Northern Rock - like other banks - has announced that it is no longer handing out 125% mortgages - which is a start. But what about the 200,000 Northern Rockers who already have them? They’re not called “suicide loans” for nothing. When these people ask for a remortgage, after their introductory rates expire, they are going to get a very nasty surprise. These mortgages were sub-prime by another name since they were given to people who couldn’t afford a deposit, largely on the basis of “self-certified” income statements. In other words, many were “liar loans” .

So we have a nationalised bank, with huge sub-prime exposure, which doesn’t even own most of its good mortgages, and is trying to run down its business. And to make matters worse, it’s now under the charge of Alistair Darling - an unpopular rookie Chancellor who has already been rolled by the non-doms and private equity people, as this column examined last week. Doesn’t exactly fill you with confidence. If I could get the £3.500 I notionally have invested in the publicly-owned Northern Rock, I’d grab it now and run.

There is nowhere for this venture to go now but down. Northern Rock is shaping up to be the biggest public-private financial disaster in modern British history. There has never been anything like it. The government is now up to its neck in financial quicksand with £110 billion of public money at risk. Having lost the opportunity to let Northern Rock expire as nature intended last September, the government is now locked into the fate of one of the most toxic financial brands in the world.

A bank which cannot be saved, which is sitting on a heap of stinking mortgage debt, on the eve of a property slump which will hit thousands of its mortgage holders. Every case of negative equity will be laid at the government’s door; every repossession; every sob-story; every missold mortgage. Instead of taking it into public ownership, the government should have called in the administrators, and then the fraud squad, to investigate insider share dealing, conspiracy to defraud and criminal negligence. That’s what the Americans would have done, as they showed after the Enron debacle.

But Gordon Brown’s government has been bought and sold by the big banks - like Goldman Sachs - who are now practically an arm of government. Like JP Morgan, who give compliant politicians like Tony Blair £2m sinecures when they stand down. Brown’s advisors told him that Northern Rock was too big to fail; that the entire British banking sector would be damaged if the Rock went under. He believed them. God help the PM now - his banker friends certainly won’t.