‘Clueless’. That’s how the financial press is summing up our politicians’ understanding of financial markets.
The ignorance of most politicians about the basics of financial markets was cruelly exposed, say both IFR and Euroweek (two of the City’s leading organs), by the furore in the Houses of Parliament over the fact that Northern Rock had securitized around 40% of its mortgages in an off-balance sheet special purpose vehicle called Granite.
David Cameron has confronted Gordon Brown with the existence of Granite, as if it was some dark and terrible secret which has only just come to light. He said: “We found out at 10 minutes to midnight that half of the mortgages, the best half, are owned by somebody else [Granite]. Why are you covering it up?” The media have been equally sensationalist. The Guardian claimed to have ‘exposed’ the existence of Granite in a front-page ‘investigation’. Patrick Wintour et al informed us that: “The existence of Granite was first brought to public attention by the Guardian last November.”
These ‘revelations’ come as a big surprise to the financial press, who have been writing about the existence of Granite for several years. It is one of the best known issuers in the securitization market, and its existence is openly acknowledged in Northern Rock’s accounts, and is registered with the SEC.
The worry in the City is that the House of Parliament’s ignorance about securitization is going to make them grab the mortgages in Granite, thereby breaking the contract which Northern Rock made with the bondholders who bought bonds in Granite.
If this happened, says Euroweek’s lead-page editorial, “the fallout for the City would be volcanic. In comparison, the furore over non-domicile taxation would be like being hit by a few grains of rice”.
The City is now trying to gather its wits to protect the trillion-dollar securitization market before clumsy regulators destroy it.
And yet Euroweek and IFR lament the fact that no one in the City will step forward to defend securitization. Funny that…
While senior figures in Parliament should certainly be able to understand the basic principles of securitization (even I can, and I’m a hippy English graduate) , we could also say that the City press, those best placed to understand CDOs and securitization, should perhaps have seen this crisis coming and warned us.
But I don’t remember reading many articles warning of the coming securitization meltdown. Why? Because the City press relies on the banks for advertizing.
